Explain the difference between private and public financial management.

Advanced Financial Management Block Revision Mock Exams

(a) Private Versus Public Financial Management

Financial management in government departments is different from financial management in an industrial or commercial company for some fairly obvious reasons.

(i) Government departments do not operate to make a profit and the objectives of a department or of a programme of spending cannot be expressed in terms of maximizing the return n capital employed.

Government services are provided without the commercial pressure of competition. There are no competitive reasons for controlling costs, being efficient or, when services are charged for (such as medical prescriptions), keeping prices down.
Government departments have full-time professional civil servants and their managers, but decisions are also taken politicians.

(iv) The government gets its money for spending from taxes, other sources of income and borrowing (such as issuing gilts) and the nature of its fund-raising differs substantially from fund-raising companies.

The financial markets regard the government as a totally secure borrower, and so the government can usually borrow whatever it likes, provided it is prepared to pay a suitable rate of interest.

Central government borrowing is co-ordinated centrally the Treasury and the Central Bank. Individual departments of government do not have to borrow funds themselves.

Local governments raise some taxes locally and can do some borrowing in the financial markets, but they also rely for some of their funds on central government.

Companies rely heavily on retained profits as a source of funds. Government departments cannot rely on any such source, because they do not make profits. Some government services must be paid for customers, for example health and educational services, although the price that is charged might not cover the costs in full.

Since managing government is different from managing a company, a different framework is needed for planning and control. This is achieved by:

setting objectives for each department;
careful planning of public expenditure proposals; emphasis on getting value for money.

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