Public Finance

What is Public Finance?

Public finance 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, what the various components of public finance are, and how to easily understand what all the numbers mean. A country’s financial position can be evaluated in much the same way as a business’ financial statements.

Components of Public Finance

The main components of public finance include activities related to collecting revenue, making expenditures to support society, and implementing a financing strategy (such as issuing government debt). The main components include:

Tax collection

Tax collection 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.

Budget

The budget is a plan of what the government intends to have as expenditures in a fiscal year. In the U.S., for example, the president submits to Congress a budget request, the House and Senate create bills for specific aspects of the budget, and then the President signs them into law. Read a copy of 2017 Budget of the U.S. government, as published by the Office of Management and Budget.

Expenditures

Expenditures 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.

Deficit/Surplus

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.

National Debt

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.

Managing Public Finance

Let’s take a closer look at how taxes, expenditures, and the deficit work. Below is a diagram of how the three are connected, and how the government determines how much financing it needs in a given fiscal year.

Total government revenue or tax collection is represented by the blue bar. This is a source of cash for the government.

Expenditures 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) that is funded with national debt.

2017 U.S. Figures

Now that the concept has been illustrated, let’s look at a real public finance example with the U.S. government in 2017.

2017 example:

• Revenue was approximately $3.3 trillion
• Spending was $3.97 trillion
• Deficit was $665 billion

Source: https://www.usgovernmentrevenue.com/2017

Revenue and Expenditures

Below is 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

Expenses

• Health care
• Employment insurance
• Pensions
• Education
• Defense (military)
• Infrastructure

Additional Resources

Thank you for reading CFI’s guide to what public finance is and how the numbers all fit together. When you look at it in simple terms, it’s quite easy to understand.

To keep advancing your career, the additional CFI resources below will be useful:

• Accounting for Income Taxes
• Top Accounting Scandals
• Finance Salary Guide
• War Bonds
• See all economics resources