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Public Finance, Public Revenue and Public Expenditure

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Public Finance

Each and every year, a democratic government presents its budget to the parliament. The budget contains all the economic and social commitments of the government with detailed plans of revenue and expenditure. The branch of economics that deals with income and expenditure of the government and it effects in various socio-economic aspects is known as public finance. Therefore, public finance is often called government finance as well.

Importance of Public Finance

Some major roles that public finance plays in an economy are discussed below:

  1. To increase agriculture and Industrial Production: Increase in production of agricultural and industrial goods and services dependon the fiscal policy followed by the government. If a public authority implements subsidized tax policy, stable fiscal policy and business-friendly policies in the field of agriculture, trade, commerce and industry.

  2. To reduce Income Inequality: One of the major objectives of government is to reduce inequality in the distribution of income and wealth. In order to achieve this objective, the government imposes a progressive tax to reduce disparity in income and wealth between the rich and the poor people.

  3. To maintain Economic Stability: Economic stability refers to stable price structure, the desired amount of savings and investment, absence of stock and shortage of goods etc. These are necessary conditions for rapid and sustainable economic development of a nation.

  4. To accelerate the course of Economic Development: Development of social and economic infrastructure is the most important responsibility of a government. Therefore, it needs large funds to spend in the construction of social infrastructure such as schools, colleges, universities, drinking water projects etc.

  5. To increase Employment: Government can stimulate employment opportunity for the labour force by its own action of opening public institutions and carrying public infrastructure activities.

Public Revenue


Public revenue refers to the income of a government from various sources. In the early days of human civilization, the role of government was limited. There was limited population and they had limited needs and demand to be fulfilled. As time passed, the population increased sustainably. In order to carry out different activities, the government has to collect revenue from different sources. Some major sources of public revenue are discussed below:

Source of Public Revenue

Public revenue can be broadly classified into three heads. The three sources of public revenue are tax revenue, non-tax revenue and foreign grants.

Tax Revenue

Tax is the major source of public revenue of a government. The government collects revenue from both direct and indirect taxes. The major forms of tax are as follows:

  1. Customs : It is collected at customs points located at the border of a nation. It includes income obtained from import and export duties imposed by the government on goods and services. The amount of income from customs depends upon the volume of exports and imports.

  2. Tax on consumption and production of goods and services: The government imposes various types of direct and indirect taxes on goods and services consumption. It includes income through exercise duties, sales tax, VAT, contract tax etc.

  3. Land Revenue and Registration Tax : Land revenue and house registration are a direct tax because it cannot be shifted to others. It is a major and regular source of income of a government.

  4. Tax on the property, profit and income : These type of taxes are also direct. They are obtained from income tax, urban house tax, land tax and tax on bank interest.
Non-Tax revenue

Mainly the non-tax revenue constitutes the following:

  1. Fee, License and Permits: Fee means the amount raised by the government for services rendered in the field of education, training, registration, etc. Likewise, the government collects some amount of revenue from the distribution of license for gun, pistol and vehicle.

  2. Fines and Penalties: A fine is a monetary punishment imposed by the government for the violation of low and order by its citizens. The additional amount charged on the delay of paying telephone bills, water fees, license renewable fees within the fixed time are examples of such fines.

  3. Income from public properties and public enterprises: The amount of income that government collects from the sale of its own goods and services. Income from public corporations falls under this kinds.

  4. Grants and Gifts: The fund provided by an individual and institutions of a country to the government voluntarily welfare of common people is known as grants and gifts.

  5. Other services : It includes betterment levy, escheats, etc.
Foreign Grants

A government may receive grants from foreign government and institutions for development programs, security expenses and to meet even regular expenses. It occupies a large percentage of shares in the regular budget of developing nations.

Public Expenditure


Public revenue collected from various sources is allocated for different purposes. Generally, it is classified into development expenditure and administrative expenditure. The central government allocates resources through its ministries, departments and local authorities.

Importance of Public Expenditure

The role of public expenditure is steadily increasing due to growing responsibilities of public authorities. Its role is greater in developing countries than in developed countries. Some important role of public expenditure are discussed below:

  1. To maintain Law and Order : The primary function of a government is to maintain law and order in the state. In order to carry out the task, the government allocates a large amount of budget every year in police and various courts.

  2. To maintain National Security: The next important function of any government is to maintain national security. The government has to allocate a substantial portion of the budget every year for national security for Nepal Army.

  3. To provide Administrative Service: Government has to provide various types of administrative services to the people. It should allocate some portion of its budget to carry out administrative functions of different ministries, departments and concerned functions.

  4. To invest in social overheads : Capital investment in transportation, communication, irrigation, energy is also known as an investment in economic overheads. Similarly, capital investment in education, health, social security, law and justice is known as an investment in social overhead capitals.

  5. To Ensure Economic Equity in society: Unequal distribution of income and wealth in the society is regarded as an economic weakness and social injustice. Therefore, government expenditure should be directed to reduce such inequality through countervailing measures.

Classification of Public Expenditure

Public expenditure of a country is classified under various heads. The public expenditure is classified below as:

i. Regular or Administrative Expenditure

It is incurred to run the administrative functions of the government for a fiscal year. It constitutes the expenditure made on various government organizations to run daily administrative works and to provide salary for civil service holders.

  1. Constitutional Organs: It includes the expenditure made by the government to run daily administrative works on various constitutional organs like Auditor's general office, Election Commission, etc.

  2. General Administration: It includes the expenditure on a council of ministers, various ministries, police force and expenses on jails.

  3. Revenue Administration: It constitutes the expenditure made by National Planning Commission, Central Bureau of Statistics and Development of Metric Measurement to perform their activities.

  4. Economic Administration and Planning: It compresses the expenditure made by National Planning Commission, CBS and Development of Metric Measurement to perform their activities.

  5. Judicial Administration : It includes the expenses required to courts and judicial commissions like district courts, special courts, appellate courts, etc.

  6. Miscellaneous : It includes services, loans, investments, loan repayments, etc.
ii. Capital Development Expenditure
  1. Constitutional organ: It includes expenditure made by the government in infrastructure development of various constitutional organs.

  2. General Administration: It includes expenditure made on administration reform of government organizations like a various ministries, departments, local offices, etc.

  3. Economic Administration: It includes the expenditures made on health, education, drinking water and local development.

  4. Social Services: It includes the expenditures made on health, education, drinking water and local development.


Adhikari, Ramesh Prasad, Economics-XI, Asmita Pustak Prakashan, Kathmandu

Kanel, Navaraj, Principles of Economics-XI, Buddha Prakashan, Kathmandu

Kharel, Khom Raj, Economics In English Medium-XI, Sukunda Pustak Bhawan, Kathmandu

Importance of Public Finance

  1. To increase agriculture and Industrial Production
  2. To reduce Income Inequality
  3. To maintain Economic stability
  4. To accelerate the course of Economic Development
  5. To increase Employment 

Sources of Public revenue

  1. Tax Revenue
  2. Non-Tax revenue
  3. Foreign Grants

Public expenditure is broadly classified under two heads

  1. Regular or Administrative Expenditure
  2. Capital Development Expenditure




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habimana samuel

explain how public revenue being a source of public expenditure on social overhead

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