Public Finance & Budgeting
Public budgeting is a field in public administration and an academic discipline. Theory of public budgeting is related to the study of society. Studying budgeting helps to learn information about a society by looking at how a government spends public funds, with regard to the priorities expressed and processes used. Budgeting varies across societies, jurisdictions and time.
As fairly mentioned by Golembiewski (1997), “The size of a budget, the scope and variety of functions performed by the public sector, the openness of the budget process, and the distribution of costs and benefits vary from society to society and from community to community” (p. 186). Budget theory until today remains fragmented and somewhat incomplete, what makes it interesting to study it, although a little bit confusing. Three major challenges in the U.S. public finance and budgeting, as defined by Slemrod (1994), are learning as much as possible from significant shifts in the U.S. tax policy starting from year 1980; reconstructing the normative principles of American tax policy in the rapidly integrating global economy; and reconciling “the theories with the realities of the administration and enforcement of tax systems” (p. 189).
What lies behind all these three challenges is the idea of looking beyond the standard model of taxation, which suggests that the taxed goods enter the individuals’ utility or the firms’ production functions directly. And this is wrong, according to Slemrod, because the taxed goods are not about what a taxpayer consumes or what a firm produces or uses, but about what is observed by a taxed agency or what is reported by a taxpayer. Thus, the main challenge is that tax systems must be analyzed with explicit compliance and enforcement elements.It is also important to understand major differences between public and private finance.
The first major difference is that in private finance an individual’s income is determined by his or her expenditure, which he or she personally adjusts to the income; but in public finance a state’s proposed expenditure determines the income, meaning that a government adjusts income to expenditure.
The second difference is that in private finance there is no certain defined period of time over which an individual balances his or her own budget; but in public finance a state, as a rule, balances its budget for a year.
The third major difference is that private finance is usually kept as a secret, while public finance is necessarily exposed to the public and every citizen can scrutinize and comment on it (Seth, 2014). Private and public finance are strongly influenced by economic cycles. When the economy at a state level is negatively influenced by economic cycles, private companies and industries, as well, are very sensitive to these overall changes in the state economy. Manufacturers of durable goods are most affected by economic cycles. Public finance benefit a lot from intergovernmental revenues, as funding obtained from other governments (like shared taxes, grants, contingent loans and advances etc.) flows to state and local …