Budget-Introduction to Public Administration-Lecture Handout, Exercises of Introduction to Public Administration

Download Budget-Introduction to Public Administration-Lecture Handout and more Exercises Introduction to Public Administration in PDF only on Docsity! Introduction To Public Administration–MGT111 VU © Copyright Virtual University of Pakistan 97 LESSON 27 BUDGET At the end of the lecture students will: - Understand the concept of budget - Examine the Revenue raising of the government (taxes Vs. Fee) - Examine the purpose, quality of good taxation, types of taxation, impact of taxation and objectives and impact of public spending First of we will see and try to explain the budget as a concept. A budget is a statement of income and expenditure. By normal standards the expenditure should equal expenditure, so that the economic unit (house-hold, government, firm etc.) stays in its mean. We will look at the example below to understand the concepts involved in budget. Example In this example we have taken a household whose income is Rs. 7000 per month and its family members are four. Let us see their budget for one month. This is given below Income Expenditure Salary 5000 Food 3000 Rent on Education 3000 Property 1000 Health 1000 Overtime 1000 Loan Repayment 2000 Installment 2000 Other 2000 Total 7000 Total 13000 What we see here is that the expenditure exceeds income. When expenditures exceed income in a given period of time, the budget is in deficit. What we observe in the example is that household has borrowed money and loan is repaid every month. This loan was taken for creating asset, like a house, or a piece of land, or motorbike etc. Another form of loan for which Rs.2000 installment is paid was also taken to create another asset. Expenditures are usually incurred to create assets or maintain assets like for education, health etc. On the other hand an income is either the wages for labour or rent on property or return on assets. From budget we can analyze where to reduce expenditure or increase income. Why Organizations Need Budget A household is a small economy, which uses inputs and gives output in the form of services that it provides. Likewise organizations use inputs and process inputs to give outputs. Organizations need to control the use of resources to ensure that these are utilized for the purpose of achieving the goals of organization. Budgets also indicate what the organizations plan to do in future. Budget For any organization financial resources are an important input to the running of organization. Organization generates resources to make expenditures to produce goods & services. Private organization price their product or services on the basis of value of the product or service and cost in producing product and in this way generate income. But organizations also create assets to produce output which are source of income. Definition of Budget Budget is an instrument of financial control and management. It is summary of intended expenditures along with proposals for how to meet this expenditure. docsity.com Introduction To Public Administration–MGT111 VU © Copyright Virtual University of Pakistan 97 LESSON 27 BUDGET At the end of the lecture students will: - Understand the concept of budget - Examine the Revenue raising of the government (taxes Vs. Fee) - Examine the purpose, quality of good taxation, types of taxation, impact of taxation and objectives and impact of public spending First of we will see and try to explain the budget as a concept. A budget is a statement of income and expenditure. By normal standards the expenditure should equal expenditure, so that the economic unit (house-hold, government, firm etc.) stays in its mean. We will look at the example below to understand the concepts involved in budget. Example In this example we have taken a household whose income is Rs. 7000 per month and its family members are four. Let us see their budget for one month. This is given below Income Expenditure Salary 5000 Food 3000 Rent on Education 3000 Property 1000 Health 1000 Overtime 1000 Loan Repayment 2000 Installment 2000 Other 2000 Total 7000 Total 13000 What we see here is that the expenditure exceeds income. When expenditures exceed income in a given period of time, the budget is in deficit. What we observe in the example is that household has borrowed money and loan is repaid every month. This loan was taken for creating asset, like a house, or a piece of land, or motorbike etc. Another form of loan for which Rs.2000 installment is paid was also taken to create another asset. Expenditures are usually incurred to create assets or maintain assets like for education, health etc. On the other hand an income is either the wages for labour or rent on property or return on assets. From budget we can analyze where to reduce expenditure or increase income. Why Organizations Need Budget A household is a small economy, which uses inputs and gives output in the form of services that it provides. Likewise organizations use inputs and process inputs to give outputs. Organizations need to control the use of resources to ensure that these are utilized for the purpose of achieving the goals of organization. Budgets also indicate what the organizations plan to do in future. Budget For any organization financial resources are an important input to the running of organization. Organization generates resources to make expenditures to produce goods & services. Private organization price their product or services on the basis of value of the product or service and cost in producing product and in this way generate income. But organizations also create assets to produce output which are source of income. Definition of Budget Budget is an instrument of financial control and management. It is summary of intended expenditures along with proposals for how to meet this expenditure. docsity.com Introduction To Public Administration–MGT111 VU © Copyright Virtual University of Pakistan 98 It is also detailed plan of income and expenses expected over a period of time. It provides guidelines for managing future investment and expenses. Components of Public Income Just as households have income, governments also have source of income. The source of income for the government is taxes. Taxes are of various types. Besides taxes government have non tax receipts. Following are the component of government income: Tax Receipt: can be divided into direct and indirect taxes. Direct tax is levied on income. Indirect tax is not directly on income but is paid through a product or service being consumed by user. You might have purchased a bottle of Coca Cola or some other drink on which the rice is written plus sales tax. The sales tax is indirect tax. Non Tax Receipt: Non tax receipts comprise Income from Property & Investment and Receipt from civil administration. Use of Taxes During the Moghul period and later British period government pursued the policy of laissez-faire (leave alone) which meant that government chooses not to interfere with the economy or society. The taxes that were collected were for the purpose of defence or law and order and the welfare concept was non existent Principle purpose of taxation The governments of today have many sources of income but taxes remain an important source of income. Today government’s expenditures have also increased manifold. The main expenditure purpose is: 1. Redistribution of income (from rich to poor) or help finance welfare activities and 2. To achieve economic objectives such as control of inflation, economic growth, employment and reduction of balance of payment deficit. Principles of good Taxation Since the foundation of modern economy was laid, there has been many changing ideas and philosophy on the role of government. Along side the idea and principle of good taxation has also evolved. Adam Smith the economist who wrote Wealth of Nation in 1776 said that a good tax has following four principles: 1. A good tax should be equal: an individual should be called upon to pay tax according to his/ her ability to pay tax. This is called progressive taxation, where the rich pay the higher percentage of taxation then poor; 2. A good tax should be certain: people are certain about how the tax works and how much has to be paid as well as when to pay; 3. A good tax should be convenient: People should be able to pay without any inconvenience. The Pay as You Earn (PAYE) system of income tax complies with this principles and 4. A good tax should be economical: the cost of collecting and administering should not exceed revenues There are several other principles of modern taxation. These are: a. Tax should be impartial, two citizen who earn equal income and have same size of family should be taxed the same; b. It should not be disincentive to hard work and therefore should not penalize for hard work i.e. that those who work hard and earn income should not be heavily taxed. c. The tax should be consistent with government policy. If for example the government is trying to reduce inflation, it should not pursue the policy of taxation which increases demand too much in the economy docsity.com