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Public finance is the study of the role of the
government A government is the system or group of people governing an organized community, generally a state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Departmen ...

government
in the
economy An economy (; ) is an area of the production Production may be: Economics and business * Production (economics) * Production, the act of manufacturing goods * Production, in the outline of industrial organization, the act of making products ( ...

economy
. It is the branch of
economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plant life and a bran ...

economics
that assesses the
government revenue Government revenue or National revenue is money received by a government A government is the system or group of people governing an organized community, generally a State (polity), state. In the case of its broad associative definitio ...
and
government expenditure Public expenditure is spending made by the government of a country on collective needs and wants, such as pension, provisions (which includes State school, education, Publicly funded health care, healthcare and Public housing, housing), security, ...
of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones. The purview of public finance is considered to be threefold, consisting of governmental effects on: # The efficient allocation of available resources; # The
distribution of incomeIn economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and ...
among citizens; and # The
stability Stability may refer to: Mathematics *Stability theory, the study of the stability of solutions to differential equations and dynamical systems **Asymptotic stability **Linear stability **Lyapunov stability **Orbital stability **Structural stability ...
of the economy. Economist Jonathan Gruber has put forth a framework to assess the broad field of public finance. Gruber suggests public finance should be thought of in terms of four central questions: # When should the government intervene in the economy? To which there are two central motivations for government intervention,
Market failure In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indivi ...
and
redistribution of income and wealth Redistribution of income and wealth is the transfer of income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms.Smith's financial dictionary. Smith, ...
. # How might the government intervene? Once the decision is made to intervene the government must choose the specific tool or policy choice to carry out the intervention (for example public provision, taxation, or subsidization). # What is the effect of those interventions on economic outcomes? A question to assess the empirical direct and indirect effects of specific government intervention. # And finally, why do governments choose to intervene in the way that they do? This question is centrally concerned with the study of
political economy Political economy is the study of production Production may be: Economics and business * Production (economics) * Production, the act of manufacturing goods * Production, in the outline of industrial organization, the act of making products (g ...
, theorizing how governments make public policy.


Overview

The proper role of government provides a starting point for the analysis o
public finance
In theory, under certain circumstances, private markets will allocate goods and services among individuals efficiently (in the sense that no waste occurs and that individual tastes are matching with the economy's productive abilities). If private markets were able to provide efficient outcomes and if the distribution of income were socially acceptable, then there would be little or no scope for government. In many cases, however, conditions for private market efficiency are violated. For example, if many people can enjoy the same good (the moment that good was produced and sold, it starts to give its utility to every one for free) at the same time (non-rival, non-excludable consumption), then private markets may supply too little of that good. National defense is one example of non-rival consumption, or of a public good. "
Market failure In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indivi ...
" occurs when private markets do not allocate goods or services efficiently. The existence of market failure provides an efficiency-based rationale for collective or governmental provision of goods and services.
Externalities In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
, public goods, informational advantages, strong economies of scale, and network effects can cause market failures. Public provision via a government or a voluntary association, however, is subject to other inefficiencies, termed "
government failure Government failure, in the context of public economics Public economics (or economics of the public sector) is the study of government policy through the lens of economic efficiencyIn microeconomics, economic efficiency is, roughly speaking, a sit ...
." Under broad assumptions, government decisions about the efficient scope and level of activities can be efficiently separated from decisions about the design of taxation systems (Diamond-Mirrlees separation). In this view,
public sector The public sector (also called the state sector) is the part of the economy composed of both public service A public service is a service Service may refer to: Activities :''(See the Religion section for religious activities)'' * Administr ...
programs should be designed to maximize social benefits minus costs ( cost-benefit analysis), and then revenues needed to pay for those expenditures should be raised through a
tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act accord ...
ation system that creates the fewest efficiency losses caused by
distortion Distortion is the alteration of the original shape (or other characteristic) of something. In communications Communication (from Latin ''communicare'', meaning "to share" or "to be in relation with") is "an apparent answer to the painful di ...
of economic activity as possible. In practice, government
budgeting A budget is a financial plan for a defined accounting period, period, often one year. It may also include planned sales volumes and revenues, resource quantities, costs and expenses, assets, Liability (financial accounting), liabilities and cash ...
or
public budgeting Public budgeting is a field of public administration Public administration is the implementation of government policy Public policy is a course of action created and/or enacted, typically by a government A government is the system o ...
is substantially more complicated and often results in inefficient practices. Government can pay for spending by borrowing (for example, with
government bond A government bond or sovereign bond is an debt obligation issued by a national government to support government spending. It generally includes a commitment to pay periodic interest, called ''coupon payments,'' and to repay the face value on t ...
s), although borrowing is a method of distributing tax burdens through time rather than a replacement for taxes. A deficit is the difference between government spending and revenues. The accumulation of deficits over time is the total public
debt Debt is an obligation that requires one party, the debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to ...

debt
. Deficit finance allows governments to smooth tax burdens over time and gives governments an important
fiscal policy In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plan ...

fiscal policy
tool. Deficits can also narrow the options of successor governments. There is also a difference between public and private finance, in public finance the source of income is indirect, e.g., various taxes (specific taxes, value added taxes), but in private finance sources of income is direct.


Public finance management

Collection of sufficient resources from the economy in an appropriate manner along with allocating and use of these resources efficiently and effectively constitute good financial management. Resource generation, resource allocation, and expenditure management (resource utilization) are the essential components of a public financial management system. The following subdivisions form the subject matter of public finance. # Public expenditure # Public revenue # Public debt # Financial administration # Federal finance


Government expenditures

Economists classify government expenditures into three main types. Government purchases of goods and services for current use are classed as government consumption. Government purchases of goods and services intended to create future benefits – such as infrastructure investment or research spending – are classed as government investment. Government expenditures that are not purchases of goods and services, and instead just represent transfers of money – such as social security payments – are called
transfer paymentIn macroeconomics Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics Economics () is the social science that studies how people interact with value; in particular, the Production (eco ...
s.


Government operations

Government operations are those activities involved in the running of a
state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Department of State * The State (newspaper), ''The State'' (newspaper), a daily newspaper in Columbia, South Carolina, Un ...
or a functional equivalent of a state (for example,
tribe The term tribe is used in many different contexts to refer to a category of human social group. The predominant usage of the term is in the discipline of anthropology. The definition is contested, in part due to conflicting theoretical understa ...

tribe
s,
secessionist Secession is the withdrawal of a group from a larger entity, especially a political entity, but also from any organization, union or military alliance. Some of the most famous and significant secessions have been: the former Soviet republics leavi ...
movements or
revolutionary A revolutionary is a person who either participates in, or advocates a revolution. Also, when used as an adjective, the term ''revolutionary'' refers to something that has a major, sudden impact on society or on some aspect of human endeavor. D ...
movements) for the purpose of producing
value Value or values may refer to: * Value (ethics) In ethics Ethics or moral philosophy is a branch of philosophy Philosophy (from , ) is the study of general and fundamental questions, such as those about Metaphysics, existence, reason, E ...
for the
citizen Citizenship is a relationship between an individual and a state to which the individual owes allegiance and in turn is entitled to its protection. Each state determines the conditions under which it will recognize persons as its citizens, and th ...

citizen
s. Government operations have the power to make, and the authority to enforce rules and laws within a civil,
corporate A corporation is an organization—usually a group of people or a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal ...

corporate
,
religious Religion is a social Social organisms, including humans, live collectively in interacting populations. This interaction is considered social whether they are aware of it or not, and whether the exchange is voluntary/involuntary. Etymology ...
,
academic An academy (Attic Greek: Ἀκαδήμεια; Koine Greek Ἀκαδημία) is an institution of secondary education, secondary or tertiary education, tertiary higher education, higher learning, research, or honorary membership. Academia is the ...

academic
, or other
organization An organization, or organisation (Commonwealth English The use of the English language English is a of the , originally spoken by the inhabitants of . It is named after the , one of the ancient that migrated from , a peninsu ...

organization
or group.Columbia Encyclopedia, ''Government'


Income distribution

*
Income distributionIn economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and ...
 – Some forms of government expenditure are specifically intended to transfer income from some groups to others. For example, governments sometimes transfer income to people that have suffered a loss due to natural disaster. Likewise, public
pension A pension (, from Latin Latin (, or , ) is a classical language A classical language is a language A language is a structured system of communication Communication (from Latin ''communicare'', meaning "to share" or "to be ...

pension
programs transfer wealth from the young to the old. Other forms of government expenditure that represent purchases of goods and services also have the effect of changing the income distribution. For example, engaging in a
war War is an intense armed conflict between states State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Department of State * The State (newspaper), ''The State'' (new ...

war
may transfer wealth to certain sectors of society.
Public education State schools (in England, Wales, and New Zealand) or public schools (Scottish English Scottish English ( gd, Beurla Albannach) is the set of varieties Variety may refer to: Science and technology Mathematics * Algebraic variety, th ...
transfers wealth to families with children in these schools. Public
road construction A road is a wide way leading from one place to another, typically one with a specially prepared surface which vehicles and bikes can use. Roads consist of one or two roadway A carriageway (British English British English (BrE) is the ...

road construction
transfers wealth from people that do not use the roads to those people that do (and to those that build the roads). * Income Security * Employment insurance *
Health Care Healthcare is the maintenance or improvement of health Health, according to the , is "a state of complete physical, and social and not merely the absence of and ".. (2006)''Constitution of the World Health Organization''– ''Basic Docume ...

Health Care
*
Public financing of campaigns Campaign finance, also known as election finance or political donations, refers to the funds raised to promote candidate A candidate, or nominee, is the prospective recipient of an award or honor, or a person seeking or being considered for som ...


Financing of government expenditures

Government expenditures are financed primarily in three ways: *
Government revenue Government revenue or National revenue is money received by a government A government is the system or group of people governing an organized community, generally a State (polity), state. In the case of its broad associative definitio ...
**
Tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act accord ...
es **
Non-tax revenue Non-tax revenue or non-tax receipts are government revenue not generated from tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law, a legal person is any person ...
(revenue from
government-owned corporation A state-owned enterprise (SOE) or government-owned enterprise (GOE) is a business enterprise Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simp ...
s,
sovereign wealth fund A sovereign wealth fund (SWF), sovereign investment fund, or social wealth fund is a state-owned investment fund that invests in real and financial assets such as stocks, Bond (finance), bonds, real estate, precious metals, or in alternative inve ...
s, sales of assets, or
seigniorage Seigniorage , also spelled seignorage or seigneurage (from the Old French ''seigneuriage'', "right of the lord (''seigneur'') to mint money"), is the difference between the value of money and the cost to produce and distribute it. The term can be ap ...
) *
Government borrowing Government debt, also known as public interest, public debt, national debt and sovereign debt, is the total amount of debt owed at a point in time by a government or state to lenders. Government debt can be owed to lenders within the country (also ...
*
Money creation Money creation, or money issuance, is the process by which the money supply In macroeconomics, the money supply (or money stock) refers to the total volume of money held by the public at a particular point in time in an economy. There are ...
How a government chooses to finance its activities can have important effects on the distribution of income and wealth (
income redistribution Redistribution of income and wealth is the transfer of income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms.Smith's financial dictionary. Smith, H ...
) and on the efficiency of markets ( effect of taxes on market prices and efficiency). The issue of how taxes affect income distribution is closely related to
tax incidence In economics Economics () is a social science Social science is the Branches of science, branch of science devoted to the study of society, societies and the Social relation, relationships among individuals within those societies. T ...
, 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.


Taxes

Taxation is the central part of modern public finance. Its significance arises not only from the fact that it is by far the most important of all revenues but also because of the gravity of the problems created by the present day tax burden. The main objective of taxation is raising revenue. A high level of taxation is necessary in a welfare State to fulfill its obligations. Taxation is used as an instrument of attaining 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 expenditure on administration and social services, but also to reduce the inequalities of income and wealth. Taxation might also be needed to draw away money that would otherwise go into consumption and cause inflation to rise. A tax is a financial charge or other levy imposed on an individual or a
legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its environment, is described by ...
by a
state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Department of State * The State (newspaper), ''The State'' (newspaper), a daily newspaper in Columbia, South Carolina, Un ...
or a functional equivalent of a state (for example,
tribe The term tribe is used in many different contexts to refer to a category of human social group. The predominant usage of the term is in the discipline of anthropology. The definition is contested, in part due to conflicting theoretical understa ...

tribe
s,
secessionist Secession is the withdrawal of a group from a larger entity, especially a political entity, but also from any organization, union or military alliance. Some of the most famous and significant secessions have been: the former Soviet republics leavi ...
movements or
revolutionary A revolutionary is a person who either participates in, or advocates a revolution. Also, when used as an adjective, the term ''revolutionary'' refers to something that has a major, sudden impact on society or on some aspect of human endeavor. D ...
movements). Taxes could also be imposed by a
subnational entity Administrative division, administrative unitArticle 3(1). , country subdivision, administrative region, subnational entity, first-level subdivision, as well as many similar terms, are generic names for geographical areas into which a particular, ...
. Taxes consist of
direct tax Though the actual definitions vary between jurisdictions, in general, a direct tax is a tax imposed upon a person or property as distinct from a tax imposed upon a transaction, which is described as an indirect tax. The term may be used in econo ...
or
indirect tax An indirect tax (such as sales tax A sales tax is a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of In ...
, and may be paid in
money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The main functions of money are distinguished as: a ...

money
or as ''
corvée Corvée () is a form of unpaid, forced labour Unfree labour, or forced labour, is any work relation, especially in modern or early modern history, in which people are employed against their will with the threat of destitution, detention, ...

corvée
'' labor. A tax may be defined as a "pecuniary burden laid upon individuals or property to support the government nbsp;. . .a payment exacted by legislative authority." A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government nbsp;. . .whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name." * There are various types of taxes, broadly divided into two heads – direct (which is proportional) and indirect tax (which is differential in nature): *
Stamp duty Stamp duty is a tax that is levied on single property purchases or documents (including, historically, the majority of legal documents such as cheques, receipts, military commissions, marriage licences and land transactions). A physical revenu ...
, levied on documents *
Excise file:Lincoln Beer Stamp 1871.JPG, upright=1.2, 1871 U.S. Revenue stamp for 1/6 barrel of beer. Brewers would receive the stamp sheets, cut them into individual stamps, cancel them, and paste them over the bung of the beer barrel so when the barrel ...
tax (tax levied on production for sale, or sale, of a certain good) *
Sales tax A sales tax is a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelate ...
(tax on business transactions, especially the
sale
sale
of
goods and services Goods are items that are usually (but not always) tangible, such as pens, salt, apples, and hats. Services are activities provided by other people, who include doctors, lawn care workers, dentists, barbers, waiters, or online servers, a book, a ...
) **
Value added tax A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law L ...
(VAT) is a type of sales tax ** Services taxes on specific services *
Road tax Road tax, known by various names around the world, is a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Inte ...
;
Vehicle excise dutyVehicle Excise Duty (VED) (also known as "vehicle tax", "car tax", or often erroneously as "road tax Road tax, known by various names around the world, is a tax which has to be paid on, or included with, a wheeled vehicle to use it on a public road. ...
(UK), Registration Fee (USA), Regco (Australia), Vehicle Licensing Fee (Brazil) etc. *
Gift tax In economics, a gift tax is the tax on money or property that one living person gives to another. Items received upon the death of another are considered separately under the inheritance tax An inheritance tax is a tax paid by a person who inhe ...
*
Duties A duty (from "due" meaning "that which is owing"; fro, deu, did, past participle of ''devoir''; la, debere, debitum, whence "debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to anot ...
(taxes on importation, levied at
customs Customs is an authority In the fields of sociology Sociology is the study of society, human social behaviour, patterns of social relationships, social interaction, and culture that surrounds everyday life. It is a social science that u ...

customs
) *
Corporate income tax A corporate tax, also called corporation tax or company tax, is a direct tax Though the actual definitions vary between jurisdictions, in general, a direct tax is a tax imposed upon a person or property as distinct from a tax imposed upon a tra ...
on
corporations A corporation is an organization—usually a group of people or a company A company, abbreviated as co., is a legal entity In law, a legal person is any person A person (plural people or persons) is a being that has certain capa ...

corporations
(
incorporated Incorporated may refer to: * Incorporated community * Incorporated (Grip Inc. album), ''Incorporated'' (Grip Inc. album), 2004, by Grip Inc. * Incorporated (Legion of Doom album), ''Incorporated'' (Legion of Doom album), 2006 * Incorporated (TV seri ...
entities) *
Wealth tax A wealth tax (also called a capital tax or equity tax) is a tax on an entity's holdings of asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, an ...
*
Personal income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable incomeTaxable income refers to the base upon which an income tax An income tax is a tax imposed on ...
(may be levied on individuals, families such as the
Hindu joint family A joint family or undivided family is an extended family arrangement prevalent throughout the Indian subcontinent, particularly in India India (Hindi: ), officially the Republic of India (Hindi: ), is a country in South Asia. It is the ...
in India, unincorporated associations, etc.)


Debt

Governments, like any other legal entity, can take out
loan In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money avai ...
s, issue bonds, and make
financial investments
financial investments
. Government debt (also known as public debt or national debt) is
money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The main functions of money are distinguished as: a ...

money
(or
credit px, Domestic credit to private sector in 2005 Credit (from Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, k ...
) owed by any level of
government A government is the system or group of people governing an organized community, generally a state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Departmen ...

government
; either central or federal government,
municipal government A municipality is usually a single administrative division having municipal corporation, corporate status and powers of self-government or jurisdiction as granted by national and regional laws to which it is subordinate. The term ''municipali ...

municipal government
, or
local government Local government is a generic term for the lowest tiers of public administration Public administration is the implementation of government policy Public policy is a course of action created and/or enacted, typically by a government ...
. Some local governments issue bonds based on their taxing authority, such as tax increment bonds or
revenue bond A revenue bond is a special type of municipal bond distinguished by its guarantee of repayment solely from revenues generated by a specified revenue-generating entity associated with the purpose of the bonds, rather than from a tax. Unlike general ...
s. As the government represents the people, government debt can be seen as an indirect debt of the
tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act accord ...
payers. Government debt can be categorized as internal debt, owed to lenders within the country, and
external debt In public finance, external debt (or foreign debt) is the component of the total government debt which is owed to foreign creditors; its complement is internal debt, which is owed to domestic lenders. The debtors can be the government, corporatio ...
, owed to foreign lenders. Governments usually borrow by issuing
securities A security is a tradable financial asset A financial asset is a non-physical asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication o ...
such as
government bond A government bond or sovereign bond is an debt obligation issued by a national government to support government spending. It generally includes a commitment to pay periodic interest, called ''coupon payments,'' and to repay the face value on t ...
s and bills. Less creditworthy countries sometimes borrow directly from
commercial bank A commercial bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity) ...
s or international institutions such as the International Monetary Fund or the World Bank. Most government budgets are calculated on a cash basis, meaning that revenues are recognized when collected and outlays are recognized when paid. Some consider all government liabilities, including future
pension A pension (, from Latin Latin (, or , ) is a classical language A classical language is a language A language is a structured system of communication Communication (from Latin ''communicare'', meaning "to share" or "to be ...

pension
payments and payments for goods and services the government has contracted for but not yet paid, as government debt. This approach is called accrual accounting, meaning that obligations are recognized when they are acquired, or accrued, rather than when they are paid. This constitutes public debt.


Seigniorage

Seigniorage is the net
revenue In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to comp ...
derived from the issuing of
currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the most specific sense is money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed t ...

currency
. It arises from the difference between the
face value The face value, sometimes called nominal value, is the value of a coin, Postage stamp, stamp or paper money as printed on the coin, stamp or bill itself by the issuing authority. The face value of coins, stamps, or bill is usually its legal value ...
of a
coin A coin is a small, flat, (usually, depending on the country or value) round piece of metal A metal (from Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hell ...

coin
or
banknote A banknote (often known as a bill (in the US and Canada), paper money, or simply a note) is a type of negotiable promissory note A promissory note, sometimes referred to as a note payable, is a legal instrument ''Legal instrument'' is a ...
and the cost of producing, distributing and eventually retiring it from circulation. Seigniorage is an important source of revenue for some
national banks
national banks
, although it provides a very small proportion of revenue for advanced industrial countries.


Public finance through state enterprise

Public finance in centrally planned economies has differed in fundamental ways from that in market economies. Some state-owned enterprises generated profits that helped finance government activities.. In various mixed economies, the revenue generated by state-owned enterprises is used for various state endeavors; typically the revenue generated by state and government agencies.


Government finance statistics and methodology

Macroeconomic data to support public finance economics are generally referred to as fiscal or government finance statistics (GFS)
''The Government Finance Statistics Manual 2001 (GFSM 2001)''
is the internationally accepted methodology for compiling fiscal data. It is consistent with regionally accepted methodologies such as th

and consistent with the methodology of th
''System of National Accounts (SNA1993)''
and broadly in line with its most recent update, th
''SNA2008''


Measuring the public sector

The size of governments, their institutional composition and complexity, their ability to carry out large and sophisticated operations, and their impact on the other sectors of the economy warrant a well-articulated system to measure government economic operations. The ''GFSM 2001'' addresses the institutional complexity of government by defining various levels of government. The main focus of the ''GFSM 2001'' is the general government sector defined as the group of entities capable of implementing public policy through the provision of primarily non market goods and services and the
redistribution of income and wealth Redistribution of income and wealth is the transfer of income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms.Smith's financial dictionary. Smith, ...
, with both activities supported mainly by compulsory levies on other sectors. The ''GFSM 2001'' disaggregates the general government into subsectors: central government, state government, and local government (See Figure 1). The concept of general government does not include
public corporations A public company, publicly traded company, publicly held company, publicly listed company, or public limited company A public limited company (legally abbreviated to PLC or plc) is a type of public company under United Kingdom company law, som ...
. The general government plus the public corporations comprise the public sector (See Figure 2). The general government sector of a nation includes all non-private sector institutions, organisations and activities. The general government sector, by convention, includes all the public corporations that are not able to cover at least 50% of their costs by sales, and, therefore, are considered non-market producers.General Government sector
Eurostat Eurostat (European Statistical Office) is a Directorate-General Within the European Union, directorates-general are departments of the European Union government with specific zones of responsibility, the equivalent of Ministry (government depar ...

Eurostat
glossary
In the European System of Accounts, the sector “general government” has been defined as containing: * “All institutional units which are other non-market producers whose output is intended for individual and collective consumption, and mainly financed by compulsory payments made by units belonging to other sectors, and/or all institutional units principally engaged in the redistribution of national income and wealth”. Therefore, the main functions of general government units are : * to organize or redirect the flows of money, goods and services, or other assets among corporations, among households, and between corporations and households; in the purpose of social justice, increased efficiency or other aims legitimized by the citizens -- examples are the redistribution of national income and wealth, the corporate income tax paid by companies to finance unemployment benefits, the social contributions paid by employees to finance the pension systems; * to produce goods and services to satisfy households' needs (e.g., state health care) or to collectively meet the needs of the whole community (e.g. defense, public order, and safety). The general government sector, in the European System of Accounts, has four sub-sectors: # central government # state government # local government # social security funds "Central government" consists of all administrative departments of the state and other central agencies whose responsibilities cover the whole economic territory of a country, except for the administration of social security funds. "State government" is defined as the separate institutional units that exercise some government functions below those units at central government level and above those units at local government level, excluding the administration of social security funds. "Local government" consists of all types of public administration whose responsibility covers only a local part of the economic territory, apart from local agencies of social security funds. "Social security fund" Social security fund
Eurostat glossary
is a central, state or local institutional unit whose main activity is to provide social benefits. It fulfils the two following criteria: * by law or regulation (except those about government employees), certain population groups must take part in the scheme and have to pay contributions; * general government is responsible for the management of the institutional unit, for the payment or approval of the level of the contributions and of the benefits, independent of its role as a supervisory body or employer. The ''GFSM 2001'' framework is similar to the financial accounting of businesses. For example, it recommends that governments produce a full set of financial statements including the statement of government operations (akin to the
income statement An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''statemen ...
), the
balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...

balance sheet
, and a
cash flow statement In financial accounting, a cash flow statement, also known as ''statement of cash flows'', is a financial statements, financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the a ...
. Two other similarities between the GFSM 2001 and business financial accounting are the recommended use of
accrual accountingAccrual (''accumulation'') of something is, in finance, the adding together of interest or different investments over a period of time. It holds specific meanings in accounting, where it can refer to accounts on a balance sheet that represent liabili ...
as the basis of recording and the presentations of stocks of assets and liabilities at
market value Market value or OMV (Open Market Valuation) is the price at which an asset would trade in a Market (economics), competitive auction setting. Market value is often used interchangeably with ''open market value'', ''fair value'' or ''fair market va ...
. It is an improvement on the prior methodology – ''Government Finance Statistics Manual 1986'' – based on cash flows and without a balance sheet statement.


Users of GFS

The ''GFSM 2001'' recommends standard tables including standard fiscal indicators that meet a broad group of users including policy makers, researchers, and investors in sovereign debt. Government finance statistics should offer data for topics such as the fiscal architecture, the measurement of the efficiency and effectiveness of government expenditures, the economics of taxation, and the structure of public financing. The ''GFSM 2001'' provides a blueprint for the compilation, recording, and presentation of revenues, expenditures, stocks of assets, and stocks of liabilities. The ''GFSM 2001'' also defines some indicators of effectiveness in government's expenditures, for example the compensation of employees as a percentage of expense. The ''GFSM 2001'' includes a functional classification of expense as defined by the Classification of Functions of Government (COFOG) . This functional classification allows policy makers to analyze expenditures on categories such as health, education, social protection, and environmental protection. The financial statements can provide investors with the necessary information to assess the capacity of a government to service and repay its debt, a key element determining sovereign risk, and risk premia. Like the risk of default of a private corporation, sovereign risk is a function of the level of debt, its ratio to liquid assets, revenues and expenditures, the expected growth and volatility of these revenues and expenditures, and the cost of servicing the debt. The government's financial statements contain the relevant information for this analysis. The government's balance sheet presents the level of the debt; that is the government's liabilities. The memorandum items of the balance sheet provide additional information on the debt including its maturity and whether it is owed to domestic or external residents. The balance sheet also presents a disaggregated classification of financial and non-financial assets. These data help estimate the resources a government can potentially access to repay its debt. The statement of operations (“income statement”) contains the revenue and expense accounts of the government. The revenue accounts are divided into subaccounts, including the different types of taxes, social contributions, dividends from the public sector, and royalties from natural resources. Finally, the interest expense account is one of the necessary inputs to estimate the cost of servicing the debt.


Fiscal data using the ''GFSM 2001'' methodology

GFS can be accessible through several sources. The International Monetary Fund publishes GFS in two publications: ''International Financial Statistics'' and the ''Government Finance Statistics Yearbook''. The World Bank gathers information on external debt. On a regional level, the Organization for Economic Co-operation and Development (Dibidami ) compiles general government account data for its members, and Eurostat, following a methodology compatible with the GFSM 2001, compiles GFS for the members of the European Union.


See also

*
Constitutional economics A constitution is an aggregate of fundamental principles A principle is a proposition or value that is a guide for behavior or evaluation. In law, it is a rule Rule or ruling may refer to: Human activity * The exercise of political ...
* Efficiency dividend *
Fiscal incidenceIn public finance, a sub-discipline of economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption ...
*
Government budget A government budget is a document prepared by the government and/or other political entity presenting its anticipated government revenues, tax revenues (Inheritance tax, income tax, corporation tax, import taxes) and proposed government expenditu ...
* Henry George Theorem * Personal finance * Public economics * Public choice


Notes


References

* Anthony B. Atkinson and Joseph E. Stiglitz (1980). ''Lectures in Public Economics'', McGraw-Hill Economics Handbook Series * Alan S. Blinder, Robert M. Solow, ''et al.'' (1974). ''The Economics of Public Finance'', Brookings Institution
Table of Contents.
* James M. Buchanan, ([1967] 1987). ''Public Finance in Democratic Process: Fiscal Institutions and Individual Choice'', UNC Press. * _____ and Richard A. Musgrave (1999). ''Public Finance and Public Choice: Two Contrasting Visions of the State'', MIT Press
Description
and scrollable previe
links.
* Ferguson, E. James. ''The power of the purse: A history of American public finance, 1776-1790'' (UNC Press Books, 1961). * Richard A. Musgrave, 1959. ''The Theory of Public Finance: A Study in Public Economy'', McGraw-Hill. 1st-page reviews of J.M. Buchana

& Carl Shoup, C.S. Shoup]

* _____ (2008). "public finance," ''The New Palgrave Dictionary of Economics'', 2nd Edition
Abstract.
* _____ and Peggy B. Musgrave (1973). ''Public Finance in Theory and Practice'', McGraw-Hill. * Richard A. Musgrave and Alan T. Peacock, ed. ([1958] 1994). ''Classics in the Theory of Public Finance'', Palgrave Macmillan
Description
an
contents.
* Edwin J. Perkins, ''American public finance and financial services, 1700-1815'' (1994) pp 324–48
Complete text line free
* Joseph E. Stiglitz (2000). ''Economics of the Public Sector'', 3rd ed. Norton
Description.
*


External links



* [http://dsbb.imf.org/Applications/web/sddsnsdppage/ IMF – Dissemination Standards Bulletin Board – Subscribing ...] (see "fiscal sector") * {{DEFAULTSORT:Public Finance Public finance,