Halah Ka Flashcards by ALLER KAYRE, S

is the management of a country’s revenue, expenditures, and debt load through various government and quasi-government
institutions. This guide provides an overview of how public finances are managed, the various components of public finance, and how to understand what all the numbers mean easily. A country’s financial position can be evaluated much
like a business’ financial statements.

Public finance

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Public finance

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Public finance

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is the main revenue source for governments. Examples of taxes collected by governments include sales tax, income tax (a type of progressive tax), estate tax, and property tax. Other types of revenue in this category include duties and tariffs on imports and revenue
from any type of public services that are not free.

Tax collection

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Tax collection

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budget

is a plan of what the government intends to have as expenditures in a fiscal year.

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are everything that a government actually spends money on, such as social programs, education, and infrastructure. Much of the government’s spending is a form of income or wealth redistribution, which is aimed at benefiting society as a whole. The actual expenditures may be greater than or less than the budget.

Expenditures

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If the government spends more then it collects in revenue there is a deficit in that year. If the
government has less expenditures than it collects in taxes, there is a surplus.

Deficit/Surplus

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If the government has a deficit (spending is greater than revenue), it will fund the difference by
borrowing money and issuing national debt. The U.S. Treasury is responsible for issuing debt, and when there is a deficit, the Office of Debt Management (ODM) will make the decision to sell government
securities to investors.

National Debt

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This is a source of cash for
the government.

Total government revenue or tax collection

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are a use of cash, and to the extent that they are greater than revenue, there is a deficit.
The difference between revenue and expenditures is the deficit (or surplus) funded by the national debt.

Expenditures

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a list of some of the most common revenues and expenditures in the world of public finance.

Revenue / Taxes
Income tax (personal, corporate)
Property tax
Sales tax
Value added tax (VAT)
Import duties
Estate tax

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List of Expenses

Health care
Employment Insurance
Pensions
Education
Defense (military)
Infrastructure

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is a branch of economics that focuses on the role of government in the economy. It deals
with how the government raises revenue (through taxation and other means) and allocates spending to
influence the distribution of resources, address inequalities, and ensure economic stability. is essential for the functioning of modern economies, especially in promoting public goods, managing externalities, and stabilizing the economy through fiscal policy.

Public finance

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Why it Matters: ensures that resources are used efficiently
to meet the needs of the population and support sustainable economic growth.

Effective public finance management

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This includes all sources of income that the government collects,
primarily through taxes (income tax, sales tax, property tax, etc.) and non-tax revenue (fees,fines, and profits from government-owned enterprises).

Government Revenue

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When government spending exceeds revenue, it borrows to cover the deficit, leading to public debt. Managing this debt sustainably is a critical part of public finance.

Public Debt

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The use of government spending and tax policies to influence economic conditions,
including aggregate demand, employment, inflation, and economic growth.

Fiscal Policy:

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The use of government spending and tax policies to influence economic conditions,
including aggregate demand, employment, inflation, and economic growth.

Fiscal Policy

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represents how money, goods, services, and resources move throughan economy. It illustrates the interactions between households and firms, and in more complex models, the government and foreign sector.

The circular flow model

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Basic components of circular flow model

Households: Supply factors of production (labor, capital, land) and receive income.
Firms: Produce goods and services, pay households income for factors of production.
Government: (in expanded models) Collects taxes and provides public goods.
Foreign Sector: (in open models) Includes exports and imports.

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Basic components of circular flow model

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Where goods and services are sold by firms and bought by households.

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Product Market:

Where factors of production (land, labor, capital) are sold by
households and bought by firms.

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Factor Market (Resource Market)

Where factors of production (land, labor, capital) are sold by households and bought by firms.

Factor Market (Resource Market)

Households receive income by selling their labor and resources in the factor market.

Income

Households spend this income in the product market to buy goods and services from firms.

Spending

Firms use the money earned from households to pay for the factors of production.

Firm Revenues

One of the most common roles of the state in the economy is as a regulator. Governments create and enforce laws that govern economic activity, from business practices to labor relations and environmental standards. The goal of regulation is often to correct market failures, promote fair competition, and protect public welfare. For example, anti-monopoly laws prevent the creation of monopolies that can lead to higher prices and stifled innovation. Environmental regulations ensure that companies do not exploit natural resources at the expense of future generations. In addition, states regulate financial markets to ensure stability and to prevent crises like the 2008 global financial meltdown. Through regulatory bodies such as central banks, governments control monetary policy by adjusting interest rates and influencing money supply. By doing so, they attempt to control inflation, reduce unemployment, and maintain overall economic stability.

Regulatory Role

Governments collect taxes and allocate resources through public spending to reduce income inequality and provide basic services such as healthcare, education, and social security. Progressive taxation, where higher earners pay a larger proportion of their income in taxes, is often used to fund welfare programs aimed at reducing poverty and addressing social disparities. is not only an economic function but also a political and social one. It can help maintain social order by ensuring that marginalized or less fortunate populations are supported through unemployment benefits, pensions, or housing programs. This role is most pronounced in welfare states, where the government assumes a significant responsibility in providing for its citizens' well-being.

Redistribution of Wealth

In some economies, the state goes beyond regulation and redistribution to actively participate in production and ownership of key industries. This is particularly true in socialist or command economies, where the government owns and controls large portions of the economy, such as energy, transportation, and healthcare sectors. In these models, the state is seen as a means of organizing economic activity in a way that prioritizes social welfare over private profit.

Direct Involvement in Production

is the process through which government-owned businesses, assets, or services are transferred to private ownership and control. This can include the sale of public enterprises, contracting out government services to private companies, or deregulating industries to encourage private sector participation. is often to improve efficiency, reduce government expenditure, and increase competitiveness in the economy.

Privatization

Methods of Privatization

Public Offering or Stock Market Sale. Private sale or Auction Public-Private Partnerships (PPP) Management or Employee buyouts

This method involves selling shares of a state-owned company to private investors via a stock market. This approach is often used for large, profitable enterprises like utilities or telecommunications companies. The government may sell a portion of the company while retaining some ownership, or it may fully divest its stake. Example: The privatization of British Telecom (BT) in the 1980s under Prime Minister Margaret Thatcher is a famous case where the government sold shares of the state-owned telecom company to the public through the stock market.

Public Offering or Stock Market Sale

In a private sale, the government sells a state-owned enterprise directly to one or more private investors, often through an auction process. This method is typically used for smaller or less profitable enterprises where a public offering might not generate enough interest. Example: The sale of state-owned steel companies or airlines to private investors is a common form of this method, often negotiated with specific corporations or private equity groups.

Private Sale or Auction

In a PPP, the government retains ownership of the asset but allows private firms to manage and operate it under a long-term contract. This is common in infrastructure projects, such as highways, airports, or hospitals, where the government lacks the capital or expertise to manage the project alone. Example: In many countries, toll roads are often built and operated by private companies under a PPP model, while ownership remains with the state.

Public-Private Partnerships (PPP)

In this method, the management team or employees of a state-owned enterprise purchase the company. This is often facilitated by government loans or subsidies to allow the employees to take control of the enterprise. Example: In some Eastern European countries during the 1990s, employees of previously state-owned firms were given the opportunity to buy shares in the company during the transition from a centrally planned to a market economy.

Management or Employee Buyouts

While not strictly selling state assets, privatization can also involve deregulating industries that were previously state-controlled, allowing private companies to enter and compete. This form of privatization is common in sectors like telecommunications, energy, and air transport, where the government reduces its monopoly power and encourages private participation. Example: The deregulation of the airline industry in the United States in the late 1970s allowed private companies to compete more freely, leading to lower prices and more choices for consumers.

Liberalization and Deregulation

Rationale for Privatization Governments choose to privatize for several reasons, including:

Efficiency Reducing Government Debt and Expenditure Attracting Investment and Innovation Fostering Competition

Private companies are generally perceived to be more efficient than government entities due to market competition and profit incentives. By privatizing, governments hope to reduce inefficiencies, increase productivity, and offer better services to the public.

Efficiency

Privatization can provide governments with immediate revenue through the sale of state-owned assets, which can help reduce budget deficits or fund other public services. It can also reduce the financial burden on the government, as private companies take over the costs of maintaining and operating these businesses.

Reducing Government Debt and Expenditure

Privatized companies often have better access to capital markets and are more incentivized to innovate and improve their services. This can lead to more investment in industries such as telecommunications, energy, and transportation, which are critical to national economic growth. d. Fostering Competition

Attracting Investment and Innovation

By privatizing sectors that were previously dominated by government monopolies, privatization encourages competition. This competition can lead to lower prices, improved services, and more consumer choice.

Fostering Competition

Positive Impacts

Improved Efficiency Increased Investment: Reduced Fiscal Burden Market Competition:

Negative Impacts

Job Losses Inequality Loss of Public Control Monopolies Impact on Quality of Services

this is a positive impact where Private companies are typically more profit-driven and efficient, leading to better resource allocation and improved service quality.

Improved Efficiency

Privatization can attract private capital and expertise, particularly in sectors that require significant infrastructure development.

Increased Investment

Governments can reduce their debt and budget deficits by selling state- owned assets and by eliminating the need to subsidize unprofitable state enterprises.

Reduced Fiscal Burden:

In sectors where privatization fosters competition, consumers benefit from lower prices, better service, and more options.

Market Competition

Privatization can lead to layoffs as private firms often streamline operations to increase efficiency. This can result in significant social and political backlash, particularly in industries that employ large numbers of people.

Job Losses

If privatization is not properly managed, it can exacerbate inequality by benefitting wealthy investors or corporations at the expense of the general public. For example, basic services like water, electricity, or healthcare might become more expensive or less accessible to low-income households.

Inequality

Some argue that certain sectors-such as healthcare, education, or essential utilities-are too important to be left to the private sector, as private companies may prioritize profit over public interest. This can lead to reduced service quality or higher costs for essential services.

Loss of Public Control

If privatization is not accompanied by adequate regulation, it can create private monopolies, where a single company dominates the market. This can lead to higher prices and reduced service quality, essentially replicating the problems of state-owned monopolies under private ownership.

Monopolies

In sectors like healthcare, education, and utilities, there is concern that privatization may lead to a decline in the quality of services if private companies prioritize cost-cutting and profit maximization. In these cases, governments often need to regulate or contractually oblige private companies to maintain certain standards.

Impact on Quality of Services

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