Publ

i
cfi
nance&t
axat
ion

CHAPTERONE
NATUREANDSCOPEOFPUBLI
CFI
NANCE

1.
1. Ov
erv
iewofPubl
i
cFi
nance

Governments,al
lovertheworldhavestar
tednumberofpubl i
cpr oject
s,suchassocialsecuri
ty,
prot
ecti
on and otherservi
cesofpublicutili
ti
eslike el
ectr
ici
ty,watersuppl
y,rai
lways,heavy
el
ectri
cit
y,atomicenergy,etc.To pr
ov i
de soci
alameniti
esi nt he for
m ofeducation,heal
th
andsanitat
ionfacil
it
iesandpublicut
il
iti
es,
thegovernmentrequiresadequat
erev
enue.

Publ i
c Fi nance,t her efore,deal s wi t
ht he i ncome and expendi ture ofpubl i
caut horities.It
deal swi tht he f inanci aloper ationsorf inancesoft he gov ernment.Cent ral
,st ate and l ocal
gov ernmentr aisesr ev enuesf rom varioust axsour cesandnon- t
axsour ces,suchasr evenue
from gener al,admi nistrati
veandeconomi cser v
ices,bor r
owi ngs f rom i ndivi
duals,
corpor ati
ons andf riendl yforeigncount ri
es.The gov ernmentr ai
ses r evenue from i nternalas
wel lasext ernal sour cest oi ncurhugeexpendi tureonv ari
ousf unctionst hegov ernmenthas
toper form.Thei mpor t
antonesbei ngmai ntenanceofl aw andor der,def ense,socio-economi c
dev el
opment ,et c..
.Publ icf inance i st hus concer ned wi tht he use andaccompl ishmentof
essent ialmonet aryr esources oft he gov ernment .I nfact ,publicfinancedeal swi t hhowand
throughwhatdi fferentsour cest hegov ernmentget si ncome,howi tspendsi tandhowi tcont rol
s
andadmi ni
stersi tsi ncomesandexpendi tures.Theset woa cti
vi
ti
es,i.
e.Rai singofr ev
e nuet hrough
t
a xati
ona ndot hersour ces,andspendi ngi tonv ariousser vicespl usbor r
owi ngsfrom i nternalas
wel lasext ernalsour ces,t oget herc onst
it
ut
e“ PublicFi nance. ”Ther efor
e,t hesubj ect mat ter of
publ
i
cfi
nancedeal
swi
thpubl
i
crevenue,publ
i
cexpendi
tur
e,andpubl
i
cdebt
.

1.
2. Def
ini
ti
onandScopeofPubl
i
cFi
nance

Publ
i
cfi
nancei
saveryoldscienceanddi
ffer
enteconomist
shav
edefi
nedi
tinthei
rownway
s.
Someoft
heimpor
tantdefi
nit
ionsofpubl
i
cf i
nanceareshowni
nfol
l
owingbox.

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Page Haw assa university,Schoolofm anagem entand Accounting
 Publ
i
cfi
nance&t
axat
ion

1.
2.1.Def
ini
ti
onsofPubl
i
cFi
nance

1.“ Publ
icfinance i
s concer
ned wit
ht he i
ncome and expendi
tur
e ofpubli
c
authori
ti
esandwi t
htheadjust
mentofonetotheother
.”HugeDalt
on
2.“Publi
cfi
nancedeal swiththepr
ovi
sioncustodyanddisbur
sementofresour
ces
neededforconductofpubli
corgover
nmentfuncti
ons.
”Lutz

3.“Public finance is a sci ence whi ch deal s wi th the act

ivi
ty of t
he
statement i nobt ai
ning and appl y
ing t he mat erialmeans necessaryf or
fulfi
lli
ngthepr operfunct
ionsoft hestate.”CarlPlehn
4.“ Publicf i
nancei st hestudyoft hepr i
ncipl
esunder l
yingthespendi
ngand
rai
si ngoffundsofpubl icauthorit
ies.
”FindleyShirras
5.“Thegov ernment,consideredasauni t,maybedef inedasthesubj
ectofst
udyof
publ icfi
nance.Mor especifi
cally,publi
cf inancest udiestheeconomicacti
v i
tyof
gov ernmentasauni t
.”Buchanan

6.“Publicfi
nancedeal swit
hexpendi tureandincomeofpubl i
caut hori
ti
esoft he
state and theirmut ualrelati
ons as also witht he fi
nancialadmi ni
strat
ion
andcont rol
.”Bastabl
e
Allofthem sayt hati
tisast udyofincomea ndexpendi t
ur eofthecent ral
,state,
a nd loca l governments. Gover nment per f
or ms ma ny funct i
ons whi ch
theindivi
dua l can not or do not per f
orm. Ther efore,r i
sing of f unds
for t heexpendi t
urea ndtheirdisbursementconst i
tut
est hesubj ectofPubl i
c
fi
na nce.
Source:Gupta( 2001)

1.
2.2.ScopeofPubl
i
cFi
nance

Thecontentsoft hesci enceofpubl i

cfinancearedi
vi
dedi
ntof
ivecat
egor
iesof
fi
nanci
alact
ivi
ti
esofthegov er
nment:
1.PublicRevenue,
2.PublicExpenditure,
3.PublicDebt,
4.Financi
alAdmi nistr
ati
onandControl
,and
5.Economi cStabili
tyandGrowth.

(
1)Publ
i
cRev
enue

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Page Haw assa university,Schoolofm anagem entand Accounting
 Publ
i
cfi
nance&t
axat
ion

Rev enueincl
udesal li
ncomesi r
respect
iveoft hesour cetheyareobtainedf r
om.
Thus,i nthewidersense,wecani ncl
udetaxesaswel lasborrowingsunderpubl i
c
revenue.Buti nt he inter
estoft he cl
ari
ty,we studysuch i ncomes separately.
Hence,i npubli
cr evenue,weincludeonlyt hoseincomeswhi chdonotcar rywi th
them t heobl
i
gationofr epaymentforthestate.Thus,publi
crevenueimpli
esraising
i
ncomebywayoft axat
ion.
(2)Publ
icExpendi ture

Expenditur
ei st he end and ai m of t he collect
ion of revenues.I n publ i
c
expenditur
e,wear econcer nedwi t
ht heprincipl
esandpr oblemsr elat
ingt othe
expenditur
eofpublicfunds.West udythef undamentaldoctr
inet hatgov ernsthe
dist
ri
butionoftheexpendi tur
eamongv ari
ousheads.Aspubl i
cexpendi tureisan
i
mpor tantcomponentofpubl icfi
nance,ther
eforeweal sostudyv ariousef fectsof
publi
cexpendit
ureont otalemployment,t
otalincome,aggregat
einv estment ,output,
dist
ri
butionandgeneralpri
celevelet
c.

Throughpubl
icexpendi
ture,t
hegover
nmentcont
ri
butestot hefi
nanci
alf
lowsofthe
economyandconditi
onsthedemandandsupplypatt
erns.Publi
cexpendi
tur
eis al
so
used asa toolforimplementi
ng wel
far
e,gr
owth,stabil
i
zati
on and ot
herpol
i
cies,
bythegover
nment.

(
3)Publ
i
cDebt

Apublicauthori
tycanobtaini ncomet hroughloansandpublicbor
rowings.Theloans
rai
sedinapar ti
cul
aryearconst it
utereceipt
sf ort
hatyear.I
tisanincomeofacapi tal
natur
e,whiletheprovi
sionforr epaymentoft hecapit
alsum fort
hey earconst
it
utes
expendi
tureofacapit
alnature.Thest udypublicdebtal
soincl
udes:
(i
) Met hodsandobj ectivesofpublicborr
owings;
(i
i) Managementofpubl icdebt;and
(i
ii
) Burdenofpubli
c-internalandexter
nal

Methods ofpubl i
cdebtar eani mportanti
nstruments ofnotonl yrai
singf undsbut
al
sof ormeeti
ngi ncr
easinggov er
nmentexpendi tur
e,forsecuri
ngeconomi cstabil
i
ty,
i
ncreasi
ng publi
c bor rowings duri
ng t he peri
ods of inflat
ion andliquidati
onof
publ
icdebtdur
ingthe per i
odofdepression,bor
rowingsfr
om thepeopleduringinfl
ati
on
andborr
owingsfrom banksduringdepressi
onandsoon.

(
4)Fi
nanci
alAdmi
nist
rat
ionandCont
rol

The scope ofpubl

i
cfi
nance i
s notconf
ined onl
yto publ
i
crev
enue,publ
i
c

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Page Haw assa university,Schoolofm anagem entand Accounting
 Publ
i
cfi
nance&t
axat
ion

expendit
ureandpubl i
c debt.Wehav etoexami nethemechanism bywhi
chthe
abovepr ocessesare carr
ied on. Wi t
houtast udyofrelevantdi
mensi
onsof
fi
nancialadmini
str
ati
onthesubj
ectofpubl
icfi
nanceremai
nsincomplet
e.

Thusf
inanci
aladmi
nist
rat
ionandcont
rol
incl
udet
hef
oll
owi
ng:

i. Studyofbudget sandtheirpr
ocedure.
i
i. Budgetasai nst r
umentofsecur i
ngcer tainobjecti
ves,suchaspr omoti
onof
employ ment ,economi cgrowthwi t
hst abil
ity
,welfareoft heweakersect ions,
i
nfrastruct
ur al
dev el
opmentforpromotingpr i
vatei
nvestments,etc.
i
i
i. Financial and phy sical contr
ols t hrough di f
ferent fiscal tools f or
controll
ing pri
vate expendit
ureint he economyt o avoidthe effect
sinfl
ati
on
defl
ation,recessionetc.

(
5)Economi
cSt
abi
l
ityandGr
owt
h

Thestudyofpubl
i
cf i
nanceincl
udesfi
sca
lpoli
cyofthegovernmentindeal
ingwi
th
i
nfl
ati
onary and defl
ati
onarysi
tuat
ions,i
nstabi
l
ityofthepr i
celev
el,
promoti
on
off
ullemploy
ment,growthofeconomy,welfar
eoft hepeople,et
c.

Economicstabi
li
zati
onisofr ecentor
igi
n.I
thasawi descopetoplayespeci
all
y
i
nt helessdevel
opedcount r
ies.Themaintaskofthissecti
onistof r
ameand
l
ookaf t
ertheimplementat
ionofv ari
ouspol
i
ci
esr
equ
ir
edforec
onomi
csta
bil
i
zat
i
onand
growth.

1.
3.Di
ff
erencebet
weenPubl
i
cFi
nanceandPr
iv
a t
eFi
nance

Financeingener almeanspubl i
caswel laspr i
vatef i
nance.Publi
cfi
nancer el
at esto
themoney- rai
singand i ncome- expendi
ture f uncti
onsoft he gov er nment.
Privatefinanceref er
stothei ncomeexpendi turephenomenonofani ndi
v i
dualor
privatebusinessfirm.Bypriv
atefinanceweme a nthefi
nanci
alpr
obl
emsa ndpoliciesof
an i ndi
vi
dualeconomi c unit
.I tis a convent i
on tol ook int
o simil
ariti
es and
dissimil
arit
iesbet weenthet wosoast opr ovideananal yti
calfoundati
onf orthe
decisionmaki ngaspectsofpublicfi
nance

Si
mil
ari
ti
es

(
1)Sat
isf
act
ionofHumanWant
s

Bot
hthepubl
i
candpr
ivat
efi
nancehav
ethesameobj
ect
ive,i
.e.
,thesat
isf
act
ionof

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Page Haw assa university,Schoolofm anagem entand Accounting
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i
cfi
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axat
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human wants.Publi
cf inance i
s concer
ned wi
ththe sat
isf
acti
on ofsocialor
col
lect
ivewants,whereaspr i
vat
ef i
nanceisconcer
ned wi
tht hesati
sfact
ion of
per
sonalori
ndi
v i
dual
want s.

2)Maxi
mum Adv
a nt
age

Botht hepubl
icfi
nanceandpr i
vatefi
nancet r
ytosecuremaximum advant
ageor
maxi mum benef
it
.Anindi
vidualoracorporat
ionorapr i
vat
ebusi
nessfi
rmt r
iest
o
obt
ainmaxi
muma d
vant
agefr
om hi sexpendit
ure.Simil
arl
y,t
hego
ver
nmen
tal
sot r
iest
o
obtainmaximum goodofthepeoplebyincurr
ingexpendi
tur
eonthesoci
ety.

(
3)Bor
rowi
ngs

Anothersimil
ari
tybetweenthepubli
candpr i
vat
ef i
nanceisthatmanyt i
mes
bothhavet o be obtained f
rom the market i
nt he for
m of borrowings
whenevert heexpendit
ure ofeit
herthe gover
nmentorany i ndi
vi
dualor
fi
rm exceedstheiri
ncome/rev
enue.

(
4)Engagementi
nSi
mil
arAct
iv
iti
es

Boththepr i
vateandpubl i
csectorsar eengagedi nact i
vit
iesthati
nvolv
elotsof
purchases,sal es and ot her t
ransactions.Si milar
ly,they are engaged in
production,exchange,sav i
ngcapi t
alaccumul at
ion,investment,andsoon.I n
ordertof i
nancet hese operat
ions,t he gov ernment,cr eates money ,rai
ses
l
oans and makespay ments et c. Si milarl
y, a pr i
vate economic unit
l
ends, bor r
ows, r ecei
vespayment s,andmakespay ment sandsoon.Inthese
respects,theref
ore,boththepublicandpr ivatefi
nancear equitesimi
lartoeach
other.

(
5)Scar
ci
tyofResour
ces

Thescar
cit
yofresour
cesisalsoanimp
o r
t
antfactorwhi
ch i
scommont
obot
h.
Theyhav
eunli
mit
edobject
ives,
wher
eastheresour
cesarel
imi
ted.

(
6)Pr
obl
em ofAdj
ust
mentofI
ncomeandExpendi
tur
e

Anot
hersimi
lari
tybetweenpubl
i
candpriv
atefi
nancei
sthatbot
hthepubl
icaswel
l
aspr
ivat
esectorsfacethepr
obl
em ofadj
ust
mentofincomeandexpendi
tur
e.

Di
ssi
mil
ari
ti
es

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Page Haw assa university,Schoolofm anagem entand Accounting
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i
cfi
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axat
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(
1)Mot
iv
e

Themoti
veofpri
vat
efinancei
spersonali
nterestorbenef
it
,wher
east
hemot
iveof
publ
i
cfi
nancei
ssocial
benefi
torpubl
icwel
fare.

(
2)Adj
ust
mentAppr
oachofI
ncomeandExpendi
tur
e

Anotherdi ssi
milar i
ty bet weent heindiv
idual’
spriv
atef i
nanceand t he
government ’
s publ i
cf inance ist hatev eryi ndi
vi
dualt ri
es as f
aras possi
ble
toadjusthisexpendi tur eto hisi ncomebecausehi sexpendit
uredependson
hisincome.Conv ersely,thegov ernmentf i
rstpreparesitsbudget
.Inot
herwords,
thegov er
nmentf irstdet erminesitsexpenditur
eandt hendevi
seswaysandmeans
toraisetherequisiterevenuet omeeti t
sexpenses.

(
3)Nat
ureofResour
ces

The resources (pri

vatefinance)ofan i ndi
vi
dualare mor e orless l
imit
ed,
whereas the resources oft he government( publ
icfi
nance)ar e enormous.
Governmentcanr ai
seresourcesf r
om t axsourcesaswellasnon- taxsour
ces.
Thegov er
nmentcanbor r
owf rom i
nternalaswellasext
ernalsources.

(
4)Coer
ci
veMet
hods

Ani ndiv
idual(
pri
vatefinance)cannotusecoercivemethodstoraisehisincome,
wher eas the government (publi
cf inance) can use forcef
ulmet hods t o
coll
ectrevenue.Inot herwor ds,tocoll
ectrevenue,thegov er
nmenti mposes
taxes atahi ghrateont hepeopleirr
especti
veoft hei
rcapacit
yt opay.Priv
ate
i
ndiv i
dualsorbodi
eshav enosuchpower s.

(
5)Secr
ecyofBudget

Publi
cfinanceisanopenaf f
airasthegover
nmentgivesutmostpublicityt
oi t
s
budgetbypubl ishingitinnewspapersandbyshowi ngitont el
evision.For
example,theEthiopiangov
ernmenttel
lst
othepubl
ictheyearl
yapprovedbudget
byparli
ament ,
wher easpri
vat
efin
anc
ei sasecretaff
air.Anindi
vi
dua
ltr
i
e stokeep
hisaccount ssecretashedoesnotwanthi scompet i
tor
st oknow hi sr eal
fi
nanci
al posi
ti
on.

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Page Haw assa university,Schoolofm anagem entand Accounting
 Publ
i
cfi
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axat
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(
6)Long/
Shor
t-
ter
m Consi
der
ati
on

Anotherpointofdiffer
encebetweenpr i
v at
eandpubli
cfi
nanceisthatt hepr i
v ate
i
ndivi
dualsincurexpenditurei
nthosear easofbusi
nesswhichgivequickr eturns.
They, as i ndi
viduals keep in v iew short-
ter
m consi der
ati
ons. On t he
contr
ary,gov er
nment i ncurs expenditur
e keepi
ng in v i
ew t he l ong-term
consider
ati
ons,such as const r
ucti
on ofdams,mul t
ipurpose hydro-elect ri
c
proj
ects,et
c.

(
7)El
ast
ici
tyofFi
nance

Publi
cfinanceisel
asti
cinnature-
ascompar edtopri
vatefi
nance.Publicf
inance
canbei ncr
eased byi mposingvari
oust axesaspubl i
cfinance i sopent o
drast
icchanges.Pr
ivat
ef i
nanceontheotherhand,cannotbeincreasedasthere
i
snotmuchscopef orchangesinpri
vat
efinance.

(
8)Del
i
ber
ati
oni
nExpendi
tur
e

Thepat ter
nofexpendi t
ureofani ndi
vidualisgovernedbyhabit
s,customs,
stat
us,personalneedsetc.Onthecontr
ary,t
hepatter
nofpubli
cexpendi
turei
s
governedandcontroll
edbydel
iber
ateeconomicpoli
cyoftheGover
nment

(
9)Ri
ghtt
oPr
intCur
rency

Thegover
nmenthasar i
ghttopri
ntcur
rencywhi
chi
slegal
,wher
easpr
ivat
e
i
ndi
vi
dualdoesnotenj
oysuchari
ght
.

1.
4.Economi
candSoci
alSi
gni
fi
canceofPubl
i
cFi
nance

1.
4.1.Economi
cSi
gni
fi
cance

Economi cStabi
l
ityandmai ntenanceoffullemploy mentaret hetwomai ngoalsof
publi
cf i
nanceinadv ancecount ri
esliket heU. K.andt heU. S.A.In developing
countri
es economi sts wer e of the view t hat the fiscal poli
ciesshouldbe
formulat
ed forther apid economi cdevelopment .Publi
cFi nanceoccupiesgr eat
signi
fi
cancei nanunderdev el
opedordev el
opingcount r
y. Accor ding t
o R. J.
Chell
iah,“Publi
c Fi nance has a posi t
ive andsi gni
fi
cantrolei nthecontextof
economi c dev elopment .” The i mportance of publ i
cf inance in an under

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Page Haw assa university,Schoolofm anagem entand Accounting
 Publ
i
cfi
nance&t
axat
ion

dev
eloped/
dev
elopi
ngcount
rydi
scussedasf
oll
ows:

(
1)Capi
tal
For
mat
ion

Since the economi c developmentoft he count

ry depends on t he rat
e of
capitalformul ati
on,t he fi
rstand the for
emostai m ofpubl icfinance i
st o
promot ecapi t
alformat i
on. I n a dev el
oping country,t he gov ernment’
s
economi cpol i
cyshoul dconcent r
ate on pr
oducti
on and fiscalpolicyshould
actasat oolofcapi t
alformati
on.Forrapi
dcapit
alformation,thegovernment
shouldi ncurexpendi tureont heestabli
shmentofbasi candheavyi ndustr
ies,
i
nf r
astructuraldevelopment ,suchaspowerpr oj
ect
s,transportsector
,meansof
communi cationsetc.

(
2)Economi
cSt
abi
l
izat
ion

Economi csta
bil
i
zat
i
oni syetanothereconomicallysigni
fi
cantr
esponsibil
it
yoft he
government.Thepr oblem ari
seswhenev erthereiseconomicinstabi
li
tysuchas
i
nflati
on,defl
ati
onandr ecessi
on.Publicfi
nance(revenueandexpendit
ureprocess
oft hegovernment)maybe,t heref
ore,usedt osecureeconomi cstabil
i
tyort o
remov eeconomicfluct
uationsi
ntheeconomy .

(
3)Ful
lEmpl
oyment

Publi
cf i
nanceal sopl aysani mport
antr olei nincreasi ngempl oyment .I
nan
underdevel
oped/developingc ount
ry,maj orpr oblem f acedbyt hepeopl eisthe
probl
em ofunempl oyment .Thisproblem l eadst olowst andar
dofl i
ving,pover
ty,
backwardness,ignoranceandabov eal lstarvati
on.I ti sthef unct
ionofpubl i
c
fi
nancetopr ovi
deempl oymentoppor tuniti
es.Ther efor e,expenditur
e should
beincurr
ed byt hegov ernmentf ori ncreasing empl oymentand f orachievi
ng
ful
lempl oyment .To gener ate empl oyment ,publ ic expendi t
ure should be
i
ncurredonset tingupnew i ndustr
ies,encour agingsmal l-
scaleandcot t
age
i
ndustri
esthroughf i
nancialsubsidi
es, expendit ur
eont raini
ngschemeset c.

(
4)Bal
ancedRegi
onal
Dev
elopment

For t he economic dev elopment of a count ry

, bal anced r egi
onal
devel
opmenti sver
y essent i
al.Balanced regi
onaldev elopmenti s possible
bysetti
nguppr i
vateindustr
iesinbackwar dareasinsteadofi nurbanar eas.
To encourage thi
sdi versi
on,the gov er
nmentshoul d provi
de fi
scalort ax
concessi
onsinthef orm of5 y ear tax holi
day, communi cati
on f aci
l
ities

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should also be provi

ded.Ifthepr
ivat
eindust
ri
esf
ailt
odi
ver
ttobackwar
d
regi
ons,shoul
dbet axedheav
il
y.

(
5)Reduct
ioni
nEconomi
cInequal
i
ties

One of t he maj or pr oblems of under developed count ri

es i s the
unequaldistri
butionofi ncomeandweal t
h.Therei sagapbet weent herichand
thepoor.Publ i
cf inance has an i mpor t
antr ol
et o playint his context.To
bri
ng aboutequi tabl
e di st
ri
bution ofi ncome and weal t
h,t he government
should follow t hesy stem of pr ogressi
ve t axati
on. Inot her words,t he
governmentshoul dimposeheavyt axesont her ichersectionofsociet y
,and
theamountr eal
izedf r
om t her i
chshoul dthenbespentont hepoorbywayof
provi
dingt hem soci alameni ti
essuchasf reeeducat i
on, medi cal facili
ti
es,
publi
cut i
li
tiesliker oad,wat erf aci
li
ty,r
ecreati
onf aci
li
tiesetc.

(
6)Mobi
l
izat
ionofResour
ces

Mobili
zation ofr esourcesisanot herimportantrol
e ofpubl icfinance.The
governmentcanmobi l
i
zeorr aiseresour
cesbyi mposingt axesont hepeopl e
andindust r
ies,byencouragi
ngsav i
ngsthroughvari
oussavingschemes, sur
plus
ofpubli
cent er
pri
sesandbor rowingsandmaki ngthem av
ailableforinvestment
fort
her apideconomi cdevel
opmentoft heunderdevel
opedcount r
y.

(
7)Opt
imum Ut
il
i
zat
ionofResour
ces

Opti
mum util
i
zati
onofscar cer esourcesisv eryessentialf ortheeconomi c
devel
opmentoftheunder developedcount ri
es.Inadev el
opi ngcountryi
tisnot
uncommon tofind non-ut
il
ization ordest ruction ofscar ce resour
ces.The
sol
uti
onofthi
sproblem l
iesint heoptimum ut il
izati
onofav ailabl
eresourcesby
meansofadopti
ngplannedmonet aryandpubl icf i
nancepolicies.Thestatecan
di
rectthef
low of consumpt ion,pr oduction and di str
ibution int he right
di
rect
ionbyadopti
ngbalancedbudget arypoli
cy.

1.
4.2.Soci
alSi
gni
fi
cance

Socialj ust
ice orequitabl
e distr
ibuti
on ofi ncome and weal thi s another
responsibil
i
tyoft hegov er
nmenti ni t
spublicf i
nanceoperati
ons.Asal r
eady
beendi scussed therei s unequaldi st
ri
buti
on of income and weal t
hi n
developingcountri
es.Therei s a wide gap between the r
ich and the poor.
Forexampl e accordi
ng to Fikr
eyesus (2006),the top 20 per centoft he

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populationhav econtr
olabout50per centoft heEt hi
opianeconomy .Thi
sgap
canbebr i
dgedbyadopt ingar at
ionalf
iscalpolicy
,suchast axat
ionandpubl i
c
expenditure.Inotherwordsl
uxuryitemspur chasedmai nl
ybytherichshoul
dbe
subjectedt ohigherr
atesoftaxati
on,andnecessar yit
emsshoul dbeexempt ed
fr
om t axat
ion.

Socialjust
iceal
sorequi
resinvest
mentexpendi
tur
eont heest
abl
ishmentof
enterpr
isesint
hepubl
icsect
or.Bydoingso,t
hegov er
nmentwouldbeableto
producegoodsofmassconsumpt i
ontomakeav ai
labl
echeapgoodst othe
people.

1.
4.3.Sat
isf
act
ionofSoci
alWant
sandMer
itWant
s

Anothersigni
fi
cantpoi
ntofpubli
cf i
nance i
st he sat
isf
act
ion ofsoci
alor
col
lecti
vewantsandmer
itwant
s.Want
saredi
videdundert
hreeheads:

(
a) Pri
vateWants:
(
b) Soci
alWantsorCol
l
ect
iveWant
sand
(
c) MeritWant
s

(
a)Pr
iv
a t
eWant
s

Priv
atewantsar ethosewant swhi char esat i
sfi
edbyi ndi
vi
dualsaccordi
ngt o
thei
rpersonalincomes.Degr eeofsat i
sfact
iondependsupont heirrespect
ive
i
ncomes.Want sf orhouses,food,clothes,entert
ainmentorrec
reat
ionetc.Ar e
sati
sfi
edaccordingtoindi
vidualpr
eferences.

(
b)Soci
alWant
sorCol
l
ect
iv
eWant
s

Socialorcol lectivewant sr equirepubl i

cgoodswhi char edemandedbyal l
member sofsociet yequal l
ywhet herthepeoplehav ethecapaci tyt opayornot .
Want s like def ense, educat i
on, publ i
c health, fl
ood cont rol provi
sions,
weatherf orecasting bur eaus, research centers, police pr otecti
on, social
overhead capi t
all i
ke roads,br i
dges,et c.are collect
ive want s which must
be av ai
lablet o al lt hepeople,irrespecti
veofwhet hert heyar er i
chorpoor ,
whethert heycanaf fordtohav e t hem ornot .Inotherwor ds,consumeri s
supreme.Publ icexpendi tureontheseheadsi snecessaryt o sat i
sfysocialor
coll
ectiv
e want s.Si nce nobody i sready to pay fort hem,t herefor
e,taxes
arei mposed on t he peoplet o meetexpendi tureforthesat i
sf acti
onofthese

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i
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axat
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want
s.

(
c)Mer
itWant
s

Meritwantsa reessenti
alprivatesuchasf ood,cl othing,housingetc.,whichar e
sati
sfiedbyt hegov er
nmentatl ow pri
cesf orthepoorduet othei
rl ow lev
elof
i
ncome.Mer itwantsare,thus,providedbyt hegov ernmentf orthebenef i
toft he
poor.Thesewant sar esat isfi
ed byt hegov er
nmentf ortheupl i
ftmentand
progressoft hepoor.Suchwant sar efood,cl othing,low costhousi ng( eg.
condomi ni
um) ,fr
eenut ri
ti
ousmeanst oschoolchi l
dren,f r
eeeducat i
ont ot he
chil
drenoft hepoor ,l
ow pr iced mi lktot he poor ,ol d age pensi ons and
socialsecuritymeasur es,mat erni
tybenef i
ts etc.Sat i
sfact
ionofthesewant s
forthepoorincreasestheirproductivi
tyef
ficiencyandt herebythei
rincome.

1.
5.Fi
scal
Pol
i
cyt
oCur
borPr
eventUndesi
rabl
eWant
s

Anotherimpor tantaspectofpubl icf i

nance ist hatt he gov ernmentnotonl y
sati
sfi
essoci alwant sandmer itwants,butal sodi scour agesandcur bscertai
n
undesir
ablewant soft hepeopl
ef r
om thesocialpointofv i
ew.Undesi rabl
ewantsare
ci
garett
e-smoking,liquordri
nki
ng,chewingofopi um andtobaccoet c.Suchhar
mf ul
wantsar ediscouragedandcur bedbyi mposingheavyt axesandspendi ngl
arge
amountonpubl icit
y,healt
hmeasur esfortheaffectedpeopl e,etc.

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