What are public finances?

The public finances are the management of a country's revenues. The importance of public finance cannot be overemphasized. Primarily, it analyzes the impact of financial activities taken by the government on individuals and legal entities.

It is the branch of economics that evaluates government revenues and expenditures and the adjustment of either to achieve desirable effects and avoid undesirable ones. They are another area of Finance just like personal finance. This article gives you an overview of public finance management, importance, scope of public finance, objectives and types of public finance.

🥀 What is Public Finance?

Public finance can be defined as the study of government activities, which may include expenditures, deficits and taxation. The goals of public finance are to recognize when, how, and why government should intervene in the current economy. In addition, it seeks to understand the possible outcomes of changes in the market. Public finance may involve issues outside of the economy, including accounting, law, and public financial management. Understanding the role of government and how changes can affect the economy are some important aspects of public finance professionals.

When government intervenes and acts within the economy, the results fall into one of three categories: economic efficiency, income distribution ou macroeconomic stabilization.

✔️ Economic efficiency

Economic efficiency is the standard used by economists to evaluate a variety of resources. Typically, efficiency can be determined by a general formula of ratios and their generated results.

The difference between technical efficiency and economic efficiency is the relationship of the values ​​that people place on things. Technical efficiency values ​​can be subjective from person to person. Economic efficiency focuses on eliminating waste to provide the most value possible. Technical efficiency seeks to maximize value, while sacrificing as much as necessary to create the best initiative.

✔️ Salary distribution

Income distribution is the calculation of a nation's wealth and income when divided by its total population. The overall distribution can be assessed through a series of statistical studies. Wealth and income are two separate entities.

Wealth is the aggregate value of a population's physical possessions and financial assets. Income is the exact monetary value of a population's net income over a given period of time. Information gathered from a country's wealth and income can be a valuable resource to help answer a variety of political, social, and economic questions.

✔️ Macroeconomic stabilization

Macroeconomic stabilization is a process by which the stabilization and growth of the economy are controlled through the development of fiscal and monetary policies, laws and regulations. It is the foundation of economic growth. Without stabilization, the economy is doomed to collapse.

To achieve a stable macroeconomic environment, a balance is necessary between government budgeting, domestic trade, banking, international trade and governing institutions. In order to maintain continued macroeconomic stabilization and an optimal level of economic efficiency, the market must be managed in a way that ensures that interest rates, business cycles and demand within the economy remain stable.

🥀 Components of public finances

The main components of public finances include activities related to collecting tax revenues, making expenditures to support society, and implementing a financing strategy (such as issuing public debt). The main components include:

✔️ Tax collection. Tax collection is the main source of revenue for governments. Examples of taxes collected by governments include value added tax, corporate tax, personal income tax, inheritance tax, property tax, etc. Other types of revenue in this category include duties and tariffs on imports and revenue from any type of public services that are not free.

✔️ The budget. The budget is a plan of what the government intends to spend during a fiscal year. Here is a guide that allows you easily establish your family budget in a few minutes.

✔️ Expenses. Expenditures are anything a government actually spends money on, such as social programs, education, and infrastructure. Much government spending is a form of redistribution of income or wealth, intended to benefit society as a whole. Actual spending may be more or less than budgeted.

✔️ Deficit/Surplus. If the government spends more than it collects in revenue, there is a deficit that year. Otherwise, there is a surplus. Below is a list of some of the most common revenues and expenditures in the world of government finance.

🥀Some sources of income/Taxes

The state generates revenue and collects taxes from various sources to finance its public activities and services. Here are some of the main sources of state revenue and taxes

Income taxes

Individuals are subject to income tax based on their income bracket. Tax rates generally vary based on income level, with higher rates for higher income brackets.

Society taxes

Companies are required to pay tax on profits made. The corporate tax rate may vary depending on the jurisdiction and type of business.

VAT (Value Added Tax)

VAT is an indirect tax levied on the value added at each stage of the production and distribution of a good or service. VAT rates may vary by country and product.

Tariffs

Customs duties are taxes imposed on imported or exported goods. They can be based on a percentage of the property value or on specific pricing.

Property taxes

Property owners must pay property taxes on their real estate. The amount of property tax is typically determined based on the value of the property and local tax rates.

Fuel taxes

Fuel taxes are levied on gasoline, diesel, and other fuels used in vehicles. These taxes are typically collected to fund road infrastructure and transportation-related projects.

Social contributions

Employers and employees contribute to social security systems through social security contributions. These contributions finance benefits such as health insurance, retirement pensions and family allowances. It should be noted that sources of income and taxes may vary from country to country, depending on the tax legislation in force in each country.

🥀 Some Sources of Government Spending

Public finances include all expenditure and revenue of the State and local authorities. They fulfill three essential missions. First, the optimal allocation of resources. Thanks to public investments in key sectors such as education, health or transport, public finances must allow an efficient allocation of national resources towards economic and social priorities.

Second objective: redistribution to correct income inequalities. In particular, through income tax and social transfers such as housing or family allowances, public finances aim to redistribute part of the wealth produced towards the most disadvantaged categories.

Third function finally : economic stabilization. By using countercyclical budgetary and fiscal levers (deficits, public debt, tax cuts), public finances must make it possible to regulate the economy, by stimulating activity in times of crisis and slowing it down during troubles. Ultimately, through their financial firepower and their large number of levers for action, public finances are an essential tool in the hands of the State to strategically guide the country's economic and social development.

✔️ The national debt

If the government runs a deficit (spending exceeds revenue), it will finance the difference by borrowing money and issuing national debt. Creditors can be domestic (debt borrowed from domestic lenders such as banks or financial institutions) and external (debt borrowed from international financial institutions and governments).

✔️ Financial administration

Financial administration is the part of public finance. It focuses on administrative control techniques and issues concerning budget preparation. It is a tool through which the financial operations of countries are carried out.

The subject of financial administration is: How is the budget prepared, adopted and executed? What are the elements taken into account when preparing the budget? How are taxes collected by the different authorities? Which departments are responsible for auditing and reporting public accounts?

🥀 Public finance objectives

Public finances include all expenditure and revenue of the State and local authorities. They fulfill three main objectives:

The first objective is the optimal allocation of resources. Through public spending in key sectors (education, health, transport, etc.), public finances aim for an efficient allocation of national resources towards future investments and priority needs.

Second objective: the redistribution of wealth. Through taxes and social transfers, a fraction of the resources collected is intended for the most disadvantaged members of society. The idea is to correct inequalities to ensure social cohesion.

Third function: Economic stabilization. Through public deficits, sovereign debt and tax variations, public finances play a role in economic regulation. The aim is to smooth economic cycles. Ultimately, public finances are a powerful instrument for strategically guiding the national economy and influencing collective well-being. Their control is essential for any government.

🥀 Need for effective management of public finances

State governments have witnessed permanent and continuous fiscal imbalances, financial failures due to underlying complex financial systems and products. Public finance institutions such as state and central governments, public funds, tax authorities, central banks, regulators, public auditors and rating agencies are planning numerous manipulations, amendments and reforms to manage public finances for the current and future welfare of the society.

In order to quickly correct the adverse event in times of stress, the well-being of society at present and that of existing members sometimes leads to fatal consequences. Mismanagement of public finances leads to digging much deeper holes in public financial accounts, such as:

• Balance the accounts with ad hoc corrections following an aggressive revenue and prudent spending policy.
• Ignore the long-term costs and consequences associated with ongoing actions.
• Maintain excess assets and funding as needed to a sustainable level.
• Exceed the surpluss current in the public finance accounts, rather than tracking a reserve for future deficits or investment needs.
• Ignoring or manipulating the funding status pensions or future investment obligations.
• Overestimating returns and allocating excess funds to discretionary projects without proper consensus and analysis of project benefits and opportunity costs.
• Skip continuous monitoring and control public finance accounts on an autonomous and consolidated basis.

🥀 Key trend in public finances

With the dominant and widely accepted means of digital transactions and information storage at the individual and collective levels, digitalization is essential to reshape public finances by improving government methods of collecting, processing, sharing and using information. A quality and well-managed information system helps to develop policies effective public finances. It also contributes to the ongoing management, administration and compliance of underlying public finance policies.

The government and public associations are required to create effective channels for updating and storing digital information and content in order to extract the potential benefits of storing, using and analyzing digital information in the field of public finance. The main underlying risks and challenges such as data security, privacy, fraud and evasion which limit capacity must be taken into account when going digital in public finances.

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