Traditionally, the term public finance has been used and or applied to packages involving policy problems involving use of tax and expenditure measures. This term emerged with the formation of public social institutions and governments hence; it pertains to the management of financing activities and expenditures of any public authority such as the central governments plus other public governing bodies. The subject of public finance is a study of the public’s economics sector and thus, entails the government revenue, expenditure and debt operations plus the impacts of these measures to the society. Therefore, public finance is all about fiscal institutions that include the tax systems, budget procedures, expenditure programs, debt issues, and stabilization instruments among others. From this, public finance implies that it is the study and management of public treasury or even those funds that re commingled of society as it pertains to addressing social wants. As such, public finance strives to achieve societal benefits such as wealth creation and sharing, higher growth, and property and economy among others (Engel, Fischer & Galetovic, 2013).
In essence, it is through the study of public finance that we are able to see the existing relationship between the state and its citizens. It is from this relationship that we reflect on the dominant political philosophy of public finance whether in Neo-liberal, Libertarian, or Collectivist approaches. Theoretically, public finance does provide criteria for appropriate taxation that include the need for fair taxation; the need to minimize on administrative costs; and the need to minimize disincentive effects. Normally, economists will ignore administrative costs because it is difficult for them to model the relationship existing between tax rates and administrative costs.
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Looking at the West European countries, we are able to see the high scale of public finance that has increased substantially over the past couple of years with regard to the governments’ expenditure. According to the Neo-liberal philosophy of public finance, it is a Modern liberal theory that looks at the state and how it continues to grow out of control and this in turn has stifled work and enterprise through having market economies with excessive regulations. Neo-liberal philosophical principles for public finance have a negative plus limited positive rights that have seen nations have mixed economy, which has resulted in the state being a necessary evil because of the efficiency in taxation, human capital is promoted, equal opportunities are accorded the people, and the property rights reflect in policy aims (Bailey, 2017). By having increased taxes means that work and enterprise become less valuable and thus, welfare payments escalate, meaning work becomes less valuable. The occurrence of such situations will imply that governments will need to reduce their size by introducing interventions in the public interest that would eventually increase the prosperity of its citizens.
Nonetheless, the spending of public finance accumulates to only half and the rest goes to the ways in which the public raises finances, which can be in terms of borrowing, grants and aids, or even dividends from its corporations. In many nations, public finance is normally raised from taxes and revenues and research conducted indicates that many governments have found it easy to increase their people’s tax revenues either from their beneficial social or economic activities.
The Libertarian philosophy of public finance is a Classical liberal theory that has features like negative rights only, capitalism, unregulated markets, autonomy of the individual and a laissez-faire state. The belief in such an approach is one that looks at the state as being corruptible since taxation is confiscated and the people have a dependency culture. As such, there is no evidence of moral case when it comes to equality and the private property rights of individuals are inviolable. As such, this implies that there is no such thing as society, the private enterprise has its rights guaranteed, individuals become consumers and not citizens, and they depend more on charity and those active citizen. The implications of having such an approach is the presence of a minimal state, public spending is replaced by private spending, ‘burden of taxation’ is minimized, and there is limited borrowing and public debt.
As for the Collectivist philosophy of public finance, it is Civic theory that bears features such as mutual dependence, market rejections, is a provider state with full positive rights and socialism is promoted. They believe in imposing taxes for social aims, promoting equality of outcome, having a benevolent state that builds on social capital. It is through their belief that society becomes emphasized, the state confers rights by having its citizens come first and charity is replaced by the state. As such, the state becomes expansive with full positive rights, provision of the public sector with unconditional welfare and public insurance is availed. In this philosophy, there is unrestrained public finance, private spending is replaced by public spending, and taxes are redistributed as a way of promoting equality. Hence, taxes become progressive and the welfare of the country is attained from borrowing or debt (Bailey, 2017). The Neo-liberal, Libertarian, or Collectivist approaches are only used in giving focus to the positive and negative rights and hence, they cannot be used in explaining the rising trend pertaining to public finance giving basis to a country’s GDP.
Governmental accounting with non-governmental accounting
In comparison, both governmental and non-governmental accounting requires their financial books to have greater transparency from its constituents and donors (Guillamón, Bastida & Benito, 2011). They also need to have a reduced need for human error. Moreover, they both follow the GAAP (Generally Accepted Accounting Principles). In contrast, however, both have differences in terms of their mode of reporting, standards and statements. The fact that both accounting standards follow the GAAP, they differ in that, the government accounting adhere to the GASB (Government Accounting Standard Board) while the non-governmental accounting follows the FASB (Financial Accounting Standards Board). In terms of their statement, both report using the statement of activities and statement of cash flows (Andrews, 2010). Nonetheless, there is a third one where governments employ the use of statement of net assets whereas the non-governmental use the statement of financial position.
The reporting aspect looks at the governmental accounting being analyzed by CAFR, which also includes their overall financial data plus information of the allocation of certain funds. Since budgets culminate the political process, they are important because they are a great source of constituent concern and controversy compared to annual reports. In contrast, the non-governmental accounting report puts together financial reports for the Board of Directors and subsequent stakeholders. As such, the report needs to be easy in terms of comprehension and reading.
Relationship between budgeting and financial reporting in the government
Budgeting and financial reporting in the government have a distinct relationship in that, they are both involved in the operation and management aspects of government operations and hence, are needed. Both of these aspects are important for the government because they come in handy when it concerns issues of attaining effective decision making (Lee & Johnson, 2008). There are those accounting practitioners who fail to incorporate and integrate accounting information into their budgetary process. As such, they have ended up depriving decision makers with pertinent information relating to possible alternatives ascribed to the allocation of resources. Hence, both accounting systems are essential for the government since they provide them with the necessary information for compiling their yearly budget.
References
Andrews, M. (2010). Good government means different things in different countries. Governance , 23(1), 7-35.
Bailey, S. J. (2017). Strategic public finance . New York, NY: Macmillan International Higher Education.
Engel, E., Fischer, R., & Galetovic, A. (2013). The basic public finance of public–private partnerships. Journal of the European Economic Association , 11(1), 83-111.
Guillamón, M. D., Bastida, F., & Benito, B. (2011). The determinants of local government's financial transparency. Local Government Studies , 37(4), 391-406.
Lee, R. D. & Johnson, R. W. (2008). Public budgeting systems (8th ed.). Sudbury, MA: Jones and Bartlett.
