Public Sector Finance-Financial Activities in the Public Sector


Broadly, finance can be classified into three fields:-

(1)Public Sector Finance: Financing in the government or public level is known as public sector finance. Government meets its expenditures mainly through taxes. Government budget generally don't balance, hence it has to borrow for these deficits which in turn gives rise to public debt.

(2)Business Finance: It tries to optimize the goals (profit, sales, etc. of a corporation or other business organization by estimating future asset requirements and then allocating funds in accordance to the availability of funds.

(3)Personal Finance: It basically deals with the optimization of finances in the individual (single consumer, family, personal savings, etc.) level subjected to the budget constraint. Eg. A consumer can finance his/her purchase of a car by taking a loan from any bank or financial insti


Public Sector Finance

Government finance (or, Public Sector Finance as it is commonly known, deals with the allocation of resources in accordance with the budget constraint of a public sector organization, especially government. As the objective of the government is not profit maximization but welfare so, it is usually noticed that government expenditure exceeds the revenue. Hence a budget deficit is a common phenomenon in government entities. This leads the concerned entity to borrow which in turn leads to public debt. Public debts are mostly marketable securities which are issued by the government. These securities make specified payments at specified times to the concerned holders of the same. Public sector entities can issue bonds (revenue bonds, increment bonds) which may give tax advantage to its holders. Main source of revenue of the government comes from the different forms of taxes (income tax, sales tax, etc.


Taxes are a financial charges collected by the government and its functional equivalents for meeting certain state expenditures, such as on wars, law and order enforcements, infrastructural projects(roads, irrigation,etc.), education, health, pensions for the elderly, benefits for the unemployed persons, operation of governmental departments, etc.

Government always try to distribute the burden of tax among different classes of individuals in accordance to their income levels by applying differentiated taxes and tax rates.

Tax imposed can be differentiated in accordance to the percentage of the income or consumption:-

(a) Progressive tax: A tax is called progressive when the rate of tax increases with the rate of increase of income or consumption.

(b) Proportional tax: A tax is called proportional when the rate of tax remains fixed with the rate of increase of income or consumption.

(c) Regressive tax: A tax is called regressive when the rate of tax decreases with the rate of increase of income or consumption.

Broadly taxes are of two types:-

(i)Direct tax: These are taxes collected by the government assessor directly from the people or organization on whom it is imposed. eg. Income tax.

(ii)Indirect tax: These are taxes collected from the person other than the one on whom it is imposed. Here the burden of tax gets shifted from the one to another. eg. Sales tax

Income Tax:Income tax are the taxes imposed on the incomes of either persons or organizations. It can be either progressive, proportional or regressive. Income tax are of two types :Personal income tax: These are the taxes on the total income of the salaried persons on a pay as you earn basis (with some deductions permitted)Corporate tax: These are taxes imposed on the on the income of the companies. Corporation tax or Corporate income tax are basically tax net of income where the tax is imposed on the difference between the gross receipts, expenses and additional reductions.

Sales Tax:Sales tax is the excise imposed on the final selling of a commodity. Generally, the lower income people spend a large proportion of their income in food, utilities and other necessities. Hence these products are exempted from the ambit of sales tax.