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PUBLIC FINANCE
CHAPTER 1:
INTRODUCTION TO PUBLIC FINANCE

LESSON OUTLINES

i. Definition of Public Finance.


ii. The Components of Public Finance.
iii. The Scope/Activities of Public Finance.
iv. The Nature of Public Finance.
v. Role of Public Finance in social and
economic development.

Introduction to Public Finance

i. Functions of govt – micro and macro


economics.

ii. Government as a policy maker has an


important effects of resource allocation.

iii. Government exercises authority over


the actions of people, to provide and
finance essential services.

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Introduction to Public Finance

 Musgrave (1989) identifies 3 economic


justifications for having govt:

1. Allocation of goods and services.


2. Redistributing income.
3. Stabilizing the economy.

 Political ideology affects operations of PF.

Introduction to Public Finance

 Public Finance is the study of


Government activities and how the
Government finance those activities.

 Public finance is collection, allocation


and expenditure of public resources.

Definition of Public Finance


 Rosen (2005) – The field of economics
that analyses government taxation and
spending policies and their influence on
allocation of resources and distribution of
income.

 Hyman (2005) –The field of economics


that studies government activities and the
alternative means of financing government
expenditures.

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Definition of Public Finance

 Eckstein (1979) – study of revenue and


expenditure activities of government.

 Shoup (2006) – description and analysis of


govt services, subsidies, welfare payments
and methods the expenditures to these
ends are covered through taxation,
borrowing, foreign-aid and creation of new
money.

Definition of Public Finance

 Aronson (1985) – The study of the


financial activities of government and
public authorities. It is part of the study of
economics, border on the field of govt.
and political science and shares
techniques employed in corporate
finance.

To conclude the meaning of PF


 Government revenue (direct and indirect taxes;
public borrowings) and expenditures
(consumption, investment and transfer payment).

 It studies allocation of scarce resources.

 Efficient raising of resources, and wise and


accountable use of funds to achieve the highest
quality end products.

 Maximising the wealth of the nation.

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The Scope/Activities of Public
Finance
1. Taxation – compulsory charge by the
government.
2. Public borrowings and debt management –
public grants – by FC.
3. Accounting – recording, collecting &
disbursing of govt resources.
4. Auditing – review & examination of govt R &
E.
5. Budget – statement of R & E.
6. Procurement – purchasing of G & S.

Role of Public Finance in Social


and Economic Development
i. Provisions of governments goods and
services (shared by all and some are limited
to certain groups – Defense and Schooling).
Cannot easily available – law enforcement.
ii. Purchase by the government such as
productive resources – Purchase of
equipment to defend the country.
iii. Federal grant-in-aid to states and local
governments.

Role of Public Finance in Social


and Economic Development
iv. Redistribute income and economic
opportunity.
v. To stabilize economic fluctuations
through fiscal and monetary policy.
vi. To prevent the waste of unemployment
of productive resources and inflation.

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The Importance of Public Finance

• Avoid over spending – prevent extravagance


spending and ensuring public officials execute
duties in accordance to the rules and
regulations.
• Avoid fraud and misuse of fund.
• Meeting national objectives.
• Systematic financial statement.
• Efficiency and effectiveness.

Tutorial Questions

1. Public finance is not simply about taxing and spending activities


of government but rather the activities addressing fundamental
issue related to the use of real resources.

In relation to the statement, discuss the role of public finance for


socio-economic development.

2. Analyse the objectives & significance of public finance.

3. Discuss the components of public finance in Malaysian context.

4. Explain the differences between monetary & fiscal policy in


stabilizing the nation’s economy.