Public finance is involved with the study of the way government finance its activities for the benefit of general public. The money is generated from tax paid by citizens which is calculated as a percentage of the total income earned. The government can also generate funds from issuing bond and investment in income generating activities such as manufacturing industries. The government ensures that the money that is invested generates revenue high than the costs incurred so that it can profit from the investment. The government funds should be monitored so that the activities carried out is beneficial to the public.
Definition of public finance
Public finance studies government finance, which includes the way public bodies spend money, taxation imposed by the government based on amount of income generated by citizens, where those with high income pay more taxes and the ones who are low income earners pay less. Public finance is also the income generated from government properties, amount of money borrowed and debt other people owe the government. Public finance as a field of economics has the duty of paying for government activities in UK, design and administration of those activities. Public finance explains what the UK government is doing, what other collective organizations do, are doing and the way those activities are paid. (Jones, 2005 pp23-24)
Purpose of public finance
The government is the starting point in analyzing public finance because if private markets are able to allocate goods among individual in an efficient manner so that there would be no waste, then, government would have little work to do. Government in the UK has the purpose of ensuring that markets conditions are not violated, consumers enjoy the goods available without being exploited and the market is free from rivalry.
UK public finance ensures there is no market failure because goods and services are allocated efficiently and if market failure occurs, there is a rationale that allows the government to provide for goods and services. (Jones, 2005 pp25-26)
Public finance maximizes social benefits where the government ensures that the revenue generated from its activities is more that the costs incurred in establishing those activities. Government raises money for financing its expenditure through taxation and public finance ensures that, economic activities in the country are not distorted and budgeting is done properly so that income and expenditure in the budget are balanced to avoid budget deficit. Public finance helps the government to finance its deficit through borrowing which allows tax burden to be distributed over a given period of time and guides the government on the tool of fiscal policy that can be applied. (Jones, 2005 pp27-28)
Public finance plays the purpose of social equity and distribution of income where the government through transfer payments reallocates its income and designs tax systems that has different treatments for low and high income earners. Public finance in the UK helps the government to buy goods for consumption, investment for future benefit and transfer payments in paying for social security. Government involves itself in activities for running the state so that the citizens can benefit. This is done through rules within religious, civil and organizations in order to supervise people in a group. Public finance is involved in distribution of income where government expenditure transfers income from a certain group of people to others. For example, income is transferred to people who are involved in natural disaster leading to loss and pension programs transfer money from young to old people. (Beattie 2004 pp45-46)
How public finance is controlled
The framework of public spending in UK ensures there is consistency and transparency in management of public finance. The success of public finance is determined by outcome rather than the resources that are used. There are strong incentives in delivery of services to various departments and partners who are well planned to offer cost effective public services. Capital assets are managed properly to ensure public investment has the required incentives. Policy is set by the UK government in order to meet fiscal rules where Golden rule require the government to borrow funds for investment but not financing current spending. The rule of sustainable investment holds that, public debt, taken as proportion of gross domestic product should be distributed over economic cycle at a prudent and stable level. (Beattie 2004 pp45-46)
Assessment is done on what has been achieved in spending and delivery of services to the public in order to set objectives for decades that would follow. Trends in the long-run are examined and challenges help to shape next trend due to economic, environmental, technological and global change in order to know the way public services will respond. Public finance is controlled through releasing resources that help to secure value of money used for public sending. Efficiency programs help government spending in United Kingdom to increase its savings that can be used for planning departmental expenditure. (Heeks, 1999 pp11-12)
Public service introduced agreements in 1998 where agreed target were set giving details of what was to be delivered by the departments using the resources that were allocated. The spending regime emphasizes on outcome from the set targets such as providing quality goods and services. The government monitors the progress of the set targets and gives detailed report twice every year in the departmental reports for the public and parliament to get regular updates on how the set targets are performing. There are also technical notes with explanation on how the targets are measured throughout financial year. Long term strategy helps to generate large income from available assets and new investment so that valuable investment decisions on how public finances are invested so that misuse of public funds is controlled. Investment plans ensure there is enough capital for the department to meet its objectives and finance its programs effectively without encountering financial deficit. (Heeks, 1999 pp13-14)
Sources of funding
UK government obtains funds from taxes as a levy that is paid by individuals, legal entity by state or a financial charge. There is direct or indirect tax which is paid in form of money or labor. Tax is taken to be pecuniary burden to individuals in order to support government or payment that is made to legislative authority in form of subsidy, aid, supply, custom, impost or tribute. UK government carries out financial investments and issue bonds to raise money for financing its activities. The government has debt in form of internal debt that lenders are owed and external debt. Borrowing is made through issue of securities such as bills and government bonds. Direct borrowing from commercial bank, World Bank and International Monetary Funds act as sources of funding for public finance. UK government gets revenue from issue of currency which is as a result cost of producing bank note and coin being lower that face value of the money. Enterprises owned by the government generate profits for financing government activities such as financial institutions, manufacturing institutions and services like nationalized healthcare. (Wildavsky, 2006 pp24-25)
Government ‘spending’ department and its specific spending objectives
Revenue and customs department has agreement of public service with the treasury and states what it would deliver after being funded. The specific spending objectives gives support to strategic direction where customers are given the first priority in all what is done by understanding what they need and giving response to the way they behave and their expectations. The department intends to support people, their businesses, assisting them pay the funds they owe other people and receive their dues. Customers are protected from exploitation by businessmen who charge higher prices for commodities than what is expected. There are performance indicators for demonstrating and assessing that key objectives of the department are met so that the businesses can be managed effectively during the time when spending is reviewed.
Performance is build basing on stretching targets that spending review of the year 2004 set. Detailed work need to be done to get baselines and performance levels. (Wildavsky, 2006 pp26-28)
The creation of office agency and border agency of UK helps in service program in order to increase efficiency and high quality standards in offering services. This helps in budgeting based on priorities in order for expenditure to reduce by 4.9% every year as money initiative value for the government. Revenue and custom department ensure that harm caused by drugs and alcohol are reduced, ensure the people who operate businesses in UK are successful, reduce risks and uncertainties that arise when people are carrying out their businesses overseas and control migration for the public to be protected and ensure there is economic growth. (Ackerman, 2006 pp33-34)
The wellbeing and health of all people is promoted by ensuring that the goods and services offered for sale are of high quality and safe for consumption. The criminal justice system is effective, responsive and transparent so that they can deal with victims who engage in illegal business and ensure they are punished or disciplined in order to ensure ethical behavior is exercised all the time. Business environment in UK is improved so that businesses do not encounter administrative burdens. (Ackerman, 2006 pp36-37)
Principle expenditure programmes
Principle expenditure program help the department to allocate spending so that the money available is spent wisely in areas that need it most based on the priority so that no money is misused or spent more than what is budgeted. Financial statements are prepared so that at the end of every financial year, analysis is done to establish how the money was utilized and what remained. Data coverage helps to show expenses incurred in offering collective services so that spending is determined by the administrators. (Ackerman, 2006 pp38 par2-5)
The spending is made consistent in areas that have similar financial needs. This helps to ensure that money is spent wisely to cater for all the needs and money is given to the people who need it. The guidance given is in accordance to memorandum from the treasury on how funds are supposed to be utilized where principles on how public finance is spent are given. Revenue and customs department contacts the treasury if it needs further assistance on how to carry out its financial activities effectively. The expenditures allocated should assist the general public but not specific individuals and is assigned correctly after identification of particular areas that need it most. (Cerny, 1994 pp22 par1-3)
The department is required to provide a breakdown of how the money will be spent in various regions so that transparency is exercised in the way funds are issued. In situations where estimation techniques are used, specialists and statisticians are supposed to be involved so that they can see the data available and give quality assurance to what has been estimated. Detailed information is necessary for the assumptions made, methods used in making such assumptions and changes expected to be made so that treasury is able to understand and answer questions that might arise. (Cerny, 1994 pp23 par2-4)
How the department’s performance is monitored
Spending plan helps department in planning in advance to get a stable foundation to be able to manage public services. Current budgets and availability of capital ensure all investments are carried out smoothly without being squeezed by short-term pressures. Resource accounting improve control and planning of how spending is carried out in order to manage assets effectively and increase incentives. Agreements of the public service have objectives for ensuring money is spent wisely to ensure inputs used are able to produce outputs that generate huge amount of revenue. (Ackerman, 2006 pp35 par3-6)
Targets are set to provide clear statement to the public of what would be achieved by the government. This gives direction on how services are to be delivered wisely using the modern improved technology. Systems of managing performance help in monitoring what is feasible so that the good practice receives reward and solution is established for poor performance. For the public to get better accountability, regular reports are necessary to show the progress that have been made. The right target should be chosen with focus on outcome that is timed properly, achievable, specific, measurable and relevant. Targets are supposed to represent how success can be measured such as delivery of high quality services to the public. (Cerny, 1994 pp26 par3-6)
The department should know the value of money available so that they improve efficiency in the investment activities. Detailed statement of the person responsible to deliver the targets is necessary to know the sources of data for measuring progress and how to budget for those targets. Improvement in delivering services to the public need to be given priority and if extra resources are needed, treasury should be informed so that action can be taken accordingly. (Cerny, 1994 pp24-25)
Jones M. (2005): An Investigation of Leading UK and US Accounting and Finance: Blackwell Synergy pp.23-28.
Beattie V. (2004): the UK accounting and finance academic community: The British Accounting Review; Elsevier pp.45-48.
Heeks R. (1999): Reinventing Government in the Information Age: Harvard University press. Pp.11-14.
Wildavsky A. (2006): Budgeting and Governing: Transaction Pub pp.24-28.
Ackerman R. (2006): International Handbook on the Economics of Corruption: Oxford University Press pp33-38
Cerny P. (1994): Money and Finance in the International Political Economy: Review of International Political Economy pp.22-26.