A Government Finance or a Public finance is the study of the role of the government in the economy. It is the branch of economics which assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones.

A Government Expenditure includes all government consumption, investment, and transfer payments.

The government usually prepares its budget of expenditure and then searches wherefrom it can raise the required funds to meet the expenditures.

Thus, expenditure is the crucial determinant of public budget. In view of this, it is said that in government or public finance– the size of the coat is determined first and then the authorities set out to gather the necessary cloth (through taxation, borrowing and deficit financing). But when government expenditure exceeds government revenue, government borrows money. Or it may cut expenditure when its excepted revenue falls short of the target.

Government Expenditures are primarily financed through 3 sources:

How a government chooses to finance its activities can have important effects on the distribution of income and wealth and on the efficiency of markets. The issue of how taxes affect income distribution is closely related to tax incidence, which examines the distribution of tax burdens after-market adjustments are taken into account. Public finance research also analyzes effects of the various types of taxes and types of borrowing as well as administrative concerns, such as tax enforcement.:

• Taxation

Taxation is that central part of modern public finance. Its significance arises not solely from the actual fact that it’s the foremost vital of all revenues however additionally due to the gravity of the issues created by the current day tax burden. The main objective of taxation is raising revenue. A high level of taxation is important for a welfare state to meet its obligations. Taxation is employed as an instrument of accomplishing certain social objectives i.e. as a means of redistribution of wealth and thereby reducing inequalities. Taxation in a modern Government is thus needed not merely to raise the revenue required to meet its ever-growing expenditure on administration and social services but also to reduce the inequalities of income and wealth. Taxation is additionally required to draw away money that will otherwise get in consumption and cause inflation to rise.

A tax can be defined as a “pecuniary burden set upon people or property to support the govt [….] a payment exacted by legislative authority.” A tax “is not a voluntary payment or donation, however an implemented contribution exacted pursuant to legislative authority” and is “any contribution obligatory by government […..] whether below the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name.”

• Borrowings or Government Debt

Governments, like all different legal entity, will take away loans, issue bonds and create monetary investments. Government debt (also referred to as debt or national debt) is money (or credit) owed by any level of government; either central or federal, state government or authorities. Some local governments issue bonds on the basis of their taxing authority, like tax increment bonds or revenue bonds.

As the government represents the individuals, government debt may be seen as an indirect debt of the taxpayers. Government debt may be categorised as internal debt, owed to lenders inside the country, and external debt, owed to foreign lenders. Governments typically borrow by issuance of securities like government bonds and bills. Less trusty countries generally borrow directly from industrial banks or international institutions like the International monetary fund or the world Bank.

Most government budgets are calculated on a cash basis, which means that revenues are recognized once collected and outlays are recognized once paid. Some contemplate all government liabilities, as well as future pension payments and payments for merchandise and services the govt has contracted for but not yet paid, as government debt. This approach is termed accrual accounting, which means that obligations are recognized after they are acquired, or accrued, rather than when they are paid. This constitutes public debt.

• Seigniorage

Seigniorage is that the net revenue derived from the issuance of currency. It arises from the difference between the face value of a coin or bank note and the cost of producing, distributing and eventually retiring it from circulation. Seigniorage is an important source of revenue for a few national banks, though it provides a very little proportion of revenue for advanced industrial countries.

• Public Finance through State Enterprise

Public finance in centrally planned economies has differed in basic ways from that in market economies. Some state-owned enterprises generated profits that helped finance government activities. The government entities that operate for profit are typically producing and monetary institutions, services like nationalized health care don’t operate for a profit to keep prices low for customers. The USSR relied heavily on turnover taxes on retail sales. Sale of natural resources, and particularly crude oil product, were a crucial source of revenue for the USSR.

In market-oriented economies with substantial state enterprise, like in Venezuela, the state-run company PSDVA provides revenue for the govt. to fund its operations and programs that might otherwise be profit for private owners. In numerous mixed economies, the revenue generated by state-run or state-owned enterprises are used for numerous state endeavors; usually the revenue generated by state and government agencies goes into a sovereign wealth fund. An example of this is often the Alaska Permanent Fund and Singapore’s Temasek Holdings. Various market socialist systems or proposals utilize revenue generated by state-run enterprises to fund social dividends, eliminating the necessity for taxation altogether.