FISCAL POLICY/PUBLIC FINANCE
PUBLIC FINANCE
Public finance is defined as the study of methods employed by government to raise revenue and how it spends the revenue and manages national debt. In other words, it deals with government revenue collection, its disbursement and detailed account of the money spent on behalf of the country as well as how the national debt is managed.
FISCAL POLICY
Fiscal policy refers to the collection of government revenue and its disbursement usually aimed at achieving certain economic objectives. In other words, it involves the use of government income and expenditure instruments to regulate the economy.
USES OF FISCAL POLICY
Fiscal policy is used to achieve certain objectives which are beneficial to the economy in the followings ways:
1. INFLATION: If there is inflation in the country, fiscal policy instruments (such as
increased taxation on personal income, increased borrowing from public, reduced
government spending) are used by government to reduce the quantity of money in
circulation and consequently the level of prices of goods and services would fall.
2. LOW LEVEL OF PRODUCTIVITY: If there is a low level of productivity in the
economy, the government could reverse the situation with the aid of fiscal policy
instruments such as reduction on company profit taxes, grant tax concessions to
pioneer industries, grant subsidies to agricultural and industrial producers and
increased the size of government investment in agricultural, industrial and
commercial sectors.
3. DEFLATION: If there is a deflation or recession in the economy, the fiscal policy instruments can be applied by government to change the situation. Such instruments involves the reduction of personal income taxes and an increase in the level of government expenditure. These efforts are aimed at increasing the level of demand and prices to desirable levels.
4. INCREASE IN THE LEVEL OF UNEMPLOYMENT: If there is an increase in the level of unemployment in a country such as Nigeria, the fiscal policy instruments can be applied to reduce it to the barest minimum. The instruments used is that the government will increase expenditure generating ventures which require more labour for production purposes. Eg. Investment on industries, educational institutions, commerce etc.
OBJECTIVES OF PUBLIC FINANCE
Government perform various functions and to be able to this effectively, they require a lot of budgetary allocations. Government therefore spend money in the following ways which are mainly peculiar to a mixed economy.
1. ECONOMIC SERVICES
Government provides some economic services like transportation and communication, trade and industry, agricultural product, fuel and power, buildings and roads. These are economic services since government aims at making profits or at least break even (cover cost).
Government also make investment in mining. Example: drilling of petroleum from more than eight states of the federation; tin and columbite from plateau state, coal from Enugu state, etc. The notable eight states where drilling of petroleum is in progress include Delta, Edo, Bayelsa, Rivers, Cross River, Akwa-ibom, Imo and Abia States.
To increase production in agriculture and industry, government grant subsidies to the producers.
2. GENERAL ADMINISTRATION
Government also pay for the provision of services for the general administration of the country. Such services include the civil service responsible for the execution of government policies, foreign services, pension etc.
Money is also spent in maintaining the President, Vice President, Ministers, members of the National Assembly and advisers etc. Little revenue are earned from this services while their provision cost the government huge sum of money.
3. SOCIAL SERVICES
Another major objective of government revenue is the need for the provision of social service free of charge or at very little cost. Some of the social services include Water supply, Health service, Education, Welfare service, Fire protection, Sewage and refuse disposal, Public housing, Recreational centers, Old age allowances etc. Government aims at maintaining a minimum standard of living and providing greater equality of opportunities for all citizens.
4. ECONOMIC SECURITY AND PROGRESS
The government could achieve this objective in a number of ways. To protect individuals in their economic activities, government exercise control by setting up an agency which inspect factories to ensure good quality products.
Such agencies are called Standard Organization of Nigeria (SON), National Food and Drug Administration and Control (NAFDAC), and government spends money to maintain their services.
5. SERVICING OF NATIONAL DEBT
This involves the repayment of loans taking by the government and paying the occurring interest on such loans. Because of the increasing debt burden arising from borrowing to meet financial commitments, a lot of money is spent by the government on servicing debts.
6. DEFENCE/ NATIONAL SECURITY
Money is spent by the government in the training and maintenance of the armed forces the infantry, Navy and Air force. Money is spent on purchasing arms, ammunition and other equipment required. The maintenance of the armed forces is important since they defend the country from external aggression
7. MAINTENANCE OF INTERNAL LAW AND ORDER
The government spends money in maintaining a police force (which helps to keep internal law and order as well as to protect the citizens), Civil Defence (which help to keep law and protect government property), Road Safety (which help to enforce government law on use of highways), Customs (which help to enforce government policy on importation and exportation of goods), Immigration (which help to check illegal movement of people and goods in and out of the country through the borders). Fire service and Prisons. In addition, to maintain and dispense justice, courts are set up and magistrates, judges, etc. are employed.
8. MISCELLANEOUS OBJECTIVES
This include granting of aids and loans to local and state governments; grants and aids to other countries adversely affected by natural disaster such as earthquake, landslide, flood or disease like Ebola, Coronavirus etc
SOURCES OF GOVERNMENT REVENUE
The government derives its revenue from a member of sources which include the
following;-
1. TAXATION
This is the major sources of government revenue. Taxes includes direct and indirect taxes.
Direct taxes are taxes levied on income of individuals and firms and on their property.
Indirect taxes are taxes levied on goods and services.
2. FEES, LICENCES AND FINES
Government derived its income or revenue from fees, licenses, and fines. These include vehicle and motorcycle licenses, liquor licenses, fees and court fines, etc.
3. INTEREST, DIVIDENDS, PROFITS AND EARNINGS FROM GOVERNMENT
INVESTMENT
Another source of revenue to government is interest, dividend, profit and earnings from government investment.
4. BORROWING INVOLVING DOMESTIC AND FOREIGN LOANS
Government may obtain loans from individuals or institutions, firms within the country through sale of government security by central bank. Loans are also raised from foreign governments and from world financial institutions like the World Bank and International Monetary Fund (IMF).
5. ROYALTES AND RENT
Government also derive its revenue from royalties and rent.
Royalties are paid by the mining sectors of the economy while rent is paid on government land and buildings.
6. GRANTS, AIDS AND GIFTS
Government also derived its revenue from grants, aids and gifts. These may come from individuals, institutions at home and from foreign governments and international organizations.
7. SAVING:
Government can decide to save parts of its earnings to serve as source of income in future especially when a country has budget surplus.
Other sources through which government derive revenue include:
Sale of government assets. Example, NEPA
Money recovered from corrupt officials. Example, Abacha loot.
Profits from direct investments and public enterprises.