Basics of Public Finance and Its Bearing on Business

Public finance is the branch of economics that studies the income (revenue) and expenditure of the government and the management of the two. Because government is by far the largest single economic actor, its finances shape the environment in which every business operates.

Public revenue is the income of the government. Its two broad sources are:

• Tax revenue — compulsory payments with no direct quid pro quo. Taxes are of two kinds:
  • Direct taxes, whose burden cannot be shifted to another person — the person who pays also bears it (e.g. income tax, corporate tax).
  • Indirect taxes, whose burden can be shifted to the final consumer through higher prices (e.g. the Goods and Services Tax, customs duty).
• Non-tax revenue — receipts such as fees, fines, interest on loans given by the government, dividends from public-sector undertakings, and profits of public enterprises.

Public expenditure is government spending. It is broadly classified as:

• Revenue expenditure — recurring spending that neither creates an asset nor reduces a liability (salaries, pensions, subsidies, interest payments).
• Capital expenditure — spending that creates assets or reduces liabilities (roads, ports, schools, hospitals, repayment of loans).

The government budget is the annual statement of estimated receipts and expenditure. When expenditure exceeds receipts, the government runs a deficit. The most watched measure is the fiscal deficit — the excess of total expenditure over total receipts other than borrowings, i.e. the amount the government must borrow in a year:

$\text{Fiscal Deficit} = \text{Total Expenditure} - \text{(Revenue Receipts} + \text{Non-debt Capital Receipts)}$ …