Chapter- Six
Public Revenue and Public Expenditure
Public Revenue
Governments need to perform various functions in the field of political, social & economic
activities to maximize social and economic welfare. In order to perform these duties and
functions government require large amount of resources. These resources are called Public
Revenues.
Types of Public Revenue
Public revenue consists of taxes, revenue from administrative activities like fines, fees, gifts &
grants. Public revenue can be classified into two types.
Tax Revenue
Taxes are the first and foremost sources of public revenue. Taxes are compulsory payments to
government without expecting direct benefit or return by the tax payer. Taxes collected by
Government are used to provide common benefits to all mostly in form of public welfare
services. Taxes do not guarantee any direct benefit for person who pays the tax. It is not based on
direct quid pro quo principle.
Non-Tax Revenue
The revenue obtained by the government from sources other than tax is called Non-Tax
Revenue. The sources of non-tax revenue are:-
1. Fees: Fees are another important source of revenue for the government. A fee is charged by
public authorities for rendering a service to the citizens. Unlike tax, there is no compulsion
involved in case of fees. The government provides certain services and charges certain fees for
them. For example, fees are charged for issuing of passports, driving licenses, etc.
2. Fines or Penalties: Fines or penalties are imposed as a form of punishment for breach of law
or non fulfillment or certain conditions or for failure to observe some regulations. Like taxes,
fines are compulsory payments without quid pro quo. But while taxes are generally imposed to
collect revenue fines are imposed as a form of punishment or to prevent people from breaking
the law. They are not expected to be a major source of revenue to the government.
3. Surplus from Public Enterprises: The Government also gets revenue by way of surplus from
public enterprises. In India, the Government has set up several public sector enterprises to
provide public goods and services. Some of the public sector enterprises do make a good amount
of profits. The profits or dividends which the government gets can be utilized for public
expenditure.
4. Special assessment of betterment levy: It is a kind of special charge levied on certain
members of the community who are beneficiaries of certain government activities or public
projects. For example, due to a public park in a locality or due to the construction of a road,
people in that locality may experience an appreciation in the value of their property or land.
5. Grants and Gifts: Gifts are Voluntary contributions by individuals or institutions to the
government. Gifts are significant source of revenue during war and emergency. A grant from one
government to another is an important source of revenue in the modern days. The government at
the Centre provides grants to State governments and the State governments provide grants to the
local government to carry out their functions. Grants from foreign countries are known as
Foreign Aid. Developing countries receive military aid, food aid, technological aid, etc. from
developed countries.
6. Deficit Financing
Deficit means an excess of public expenditure over public revenue. This excess may be met by
borrowings from the market, borrowings from abroad, by the central bank creating currency. In
case of borrowing from abroad, there cannot be compulsion for the lenders, but in case of
internal borrowings there may be compulsion. The government may force various individuals,
firms and institutions to lend to it at a much lower rate than the market would have offered.
Public Expenditure
Public expenditure is spending made by the government of a country on collective needs and
wants such as pension, provision, infrastructure, etc
Public Expenditure’s Composition
First, public expenditure can be classified in terms of the kind of goods and services
bought, also with very general items:
1. Capital goods
2. Consumption goods
3. Personnel expenditure
Second, public expenditure can be classified according to the official body and
organization from which budget it is paid, as for example:
1. The central state and its ministries
2. Regional and local authorities
3. Separate public bodies
4. International organizations
Third, public expenditure can be classified according to the macro-function at which it
is directed:
1. Justice and public order
2. Infrastructure (roads, railways)
3. Military system
4. Education system
5. Environmental protection
6. Health care
7. Support for the poor, the old, the disadvantaged
8. Support for firms, export and production in general
9. Regional policies for rural and urban areas;
10. Special policy expenditure (foreign aid, integrated fight against drugs).
Three General Models to Correspond Public Expenditure:
In particular, as a very sketched framework, one may distinguish at least three general models of
state to which public expenditure corresponds:
1. The Minimal state, where only justice, public order, foreign policy and some other basic
functions should be carried out by the state, relying on private initiative for the others;
2. The Welfare state, where the State cares about the people's well-being directly, also
through expenditure in schooling, health, support for the poor, the old, the disadvantages;
3. The Developmental state, where the State takes the responsibility of fostering economic
development, also through expenditure in infrastructure, support for firms, innovation,
export and production in general.
Both the welfare and developmental state include the items of the minimal state. Military
expenditure and special policies are common traits of the three models, maybe in different
proportions. Comparing macro-function shares in public expenditure, one can get insights in the
kind of state under analysis. Needless to say, the State does not exert its influence on economy
and society through public expenditure only, but also for example through laws. By integrating
laws, public expenditure and the tax system (as well as other components) one put together
comprehensive policies.
In certain countries, public expenditure contains a wide arrays of waste and resource dissipation,
duplicative employment of low-productive bureaucrats, boosted quotations in tenders, leading to
super-normal profits of the few selected firms, which, if there is any lax legislation, practice and
enforcement, generate the incentive for corruption. Transparency and public monitoring of
prices of the goods purchased by public authorities can substantially increase the efficiency and
the consensus around public expenditure.
Determinants
Public expenditure is determined by:
Political will of the leading forces in the state: their priorities, their desired state model,
and their interpretation of current economic and political phase.
Past choices have relevant impact on public expenditure because of inertia and
instrumentalism.
Bureaucracy may play an important decision role for the actual expenditure.
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