Understanding Public Finance
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Understanding Public Finance

Public finance is a major player in a government's economy. As a matter of fact, a nation's overall interest depends on it. Private sectors alone won't be able support an entire economy; it will tumbledown the moment it is deprived of an effective public finance system.

In economics, public finance is the aspect that decides how a government collects money, and how and where to spend it. It funds services that benefits the public, and ensures security on all financial resources.

To better understand how public finance functions, we have to cover the very basics of revenue, taxation, spending, and overall economic activity.

Revenue:

Governments need resources to compensate for their actions, whether it is for public services, or for internal functions. Most of the government's revenue are hailed from taxes, however, it is not the only way that a government can monetize itself.

There are service fees, entrance fees to national parks, highway toll fees, and fees for basically everything. As for taxes, it's a wholly different subject to breach. There are all kinds of taxes:

  • Individual income taxes
  • Corporate income taxes
  • Payroll taxes
  • Consumption taxes (general sales, excise sales, value-added, tariffs)
  • Property taxes
  • Estate, inheritance, and gift taxes
  • Lump-sum taxes

This might be overwhelming for some, considering how much the government makes. But it's just the way it is. Without these taxes, the government cannot function properly.

And if the government goes down, so will the economy.

Budget:

Governments at all level—local, state, national—organizes a budget each year, in order to predict the economic flow in the next year. Will the road projects need this much money? Will the fire department have enough funds?

The public budget also clarifies: Which goods should be produced? Which services are needed the most? Which sector of the economy should be given most attention by the government?

Formulating a budget varies depending on the trends, the economic status, past budgets, and even trial and error. But it all boils down to the needs of the people.

Spending:

This is classified into two: exhaustive spending and transfer spending.

To complete operations, and to produce goods and services, the government spends "exhaustively" on raw materials and labor. This money goes back to the economy (traders or workers) so the financial flow could continue.

On the other hand, transfer spending occurs when the government (directly or indirectly) transfers income to people so they could support themselves. The transfer is made either cash or in-kind.

Public Finance and the Economy:

Public finance is a major player in a government's economy. As a matter of fact, a nation's overall interest depends on it. Private sectors alone won't be able support an entire economy; it will tumbledown the moment it is deprived of an effective public finance system. 

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