Sources of public finance

Business studies study module

There are two major sources of public finance i.e.

  1. Public revenue
  2. Public debt (government borrowing)
  3. Public revenue-This is the income that the government gets from its citizens. The main sources of public revenue are:
  4. Tax:This is a compulsory payment levied the government on individuals and firms without any direct benefit to the payer.
  5. Fines and penalties-These are the charges imposed on individuals, firms and corporations who break the laws of the country.(offenders)
  6. Fees; These are the payments charged the government for the direct services it renders to its people e.g. road licence fee, marriage certificate fee and import licence fee.
  7. Rent and rates: Charged on use of government properties e.g. game parks, forests e.t.c
  8. Eschiats: Income obtained from properties of persons who die without legal heirs or proper wills. Such people’s properties are taken over the state.
  9. Dividends and profits: These are the income received from the government direct investments e.g. income/surplus from public corporations.
  10. Interest from loans-This is the interest on loans advanced the government to firms and individuals through its agencies such as ICDc,AFC e.t.c
  11. Proceeds from scale of government property.
  12. Public debt (Government borrowing)-This is the money that the government borrows when public revenue is insufficient to meet all its financial obligations.

Government borrowing is also referred to as national debt. It includes all outstanding borrowing the central government, local authorities and government corporations.

These are two majorly two sources of public debts:

  1. Internal borrowing
  2. External borrowing

Internal borrowing

This refers to borrowing government from firms and individuals within the country. This may be done through:

Open market operation; the government sells its securities such as treasury bonds and treasury bills. This however has a disadvantage of causing ‘crowding out effect’ where the government leaves the private investors with little to borrow from.

External borrowing

This refers to government borrowing from external sources. It may either be on a bilateral or multilateral basis.

Bilateral borrowing is where the government borrows directly from another country.

Multilateral borrowing is where the government borrows from international financial institutions such as international monetary fund (IMF), World Bank, African Development bank e.t.c.such bodies get finances from various sources which they lend to their member countries who are in need of such funds.

Generally, external borrowing has strings attached. The borrowing country is expected to meet some set conditions, sometimes adversely affecting some sectors of the economy.

The total internal borrowing (internal debt) added to the total external borrowing (external debt) constitutes the national debt.

Classes of public (National debt)

These are two classes of national debt:

  1. Reproductive debt
  2. Dead-weight debt.

Reproductive debt

This is borrowed money used to finance project(s) that can generate revenue. Such projects, once started may become self sustaining and may contribute towards servicing/repaying the debt. E.g. money used to finance irrigation schemes, electricity production e.t.c.

Dead-weight debt

This is borrowed money that is used to finance activities that do not generate any revenue. Examples are money used to finance recurrent expenditure e.g. payment of salaries or for famine relief e.t.c

Dead-weight debt is a burden to members of the public since they are the ones who are expected to contribute towards its repayment.

 



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