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Introduction to Public Administration

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Introduction To Public Administration­MGT111
VU
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
Expenditure
Income
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.
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Introduction To Public Administration­MGT111
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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
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Introduction To Public Administration­MGT111
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Types of Taxation
Taxes tend to fall in two categories: direct and indirect taxation. Direct taxation is a tax levied
directly on individual's income. Whereas indirect taxation is levied on consumers' expenditure or outlay.
Following are the types of taxation:
1. Direct Taxes
Income Tax
Wealth Tax
Workers Welfare Tax
Capital tax
2. Indirect Taxes
Custom Duty
Sales tax
Excise Duty
3. Non- tax Revenue
Income from Property and Enterprise
Profit from Railways
Profit from PTCL
Profit from Post office
Miscellaneous: Foreign travel, passport fee, airport tax, sale proceed on oil and tax etc.
The government of Pakistan levies all the above type of taxes.
Advantages of Direct Taxes
Direct taxes tend to be progressive. People in the higher income groups pay greater taxes than poor
people, i.e. income tax is graduated so that high income earner pays a larger tax. Also projected wealth tax
would apply to those owing more than a certain level of wealth
It is cheap and easy to collect. Consider for example PAYE system which is used to collect income
tax from wages and salary earner
Impact of Taxation
Taxes have variety of impact of following:
On income: Higher taxes reduce disposable income (what people have to spend after taxation). Direct
taxes by directly reduce the income.
On savings and investment: Higher direct taxes reduce individuals' and firms' ability to save and invest.
To a certain extent it depends on how much of the increase in taxes is financed from savings and how
much from consumption.
On prices: Higher direct taxes have deflationary effect on prices by reducing demand. However trade
unions may ask for higher wages to compensate for higher taxes and effect of this will be inflationary.
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Introduction To Public Administration­MGT111
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On economy: Higher taxation will, other things being equal, reduce demand in the economy which will
have deflationary effect on the economy.
P
D
S
S
a
a
S
S
a
a
Output
The affect of taxes is shown in figure 1 below. On the vertical axis is shown price and on horizontal
axis is shown output. With price `a' the demand for output is `b'. When demand decreases the output will
also decrease. So the tax increases price and reduce demand which reduces out put and which reduces
investment.
Concepts
Budget:
a document showing income and expenditure in case of
household; and an instrument of financial control and future
plans in case of organization.
Taxes:
levies charged by government as its source of income.
Non tax
Revenue:
fee, penalties, user charge etc., which constitute the income of
government
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Table of Contents:
  1. INTRODUCTION:Institutions of State, Individualism
  2. EVOLUTION OF PUBLIC ADMINISTRATION:Classical School, The Shovelling Experiment
  3. CLASSICAL SCHOOL OF THOUGHTS I:Theory of Bureaucracy, Human Relation Approach
  4. CLASSICAL SCHOOL OF THOUGHTS II:Contributors of This Approach
  5. HUMAN RELATIONS SCHOOLS:Behavioural School, System Schools
  6. POWER AND POLITICS:Conflict- as Positive and Negative, Reactions of Managers, Three Dimensional Typology
  7. HISTORY OF PUBLIC ADMINISTRATION I:Moghul Period, British Period
  8. HISTORY OF PUBLIC ADMINISTRATION II
  9. CIVIL SERVICE:What are the Functions Performed by the Government?
  10. CIVIL SERVICE REFORMS:Implementation of the Reforms, Categories of the Civil Service
  11. 1973 CONSTITUTION OF PAKISTAN:The Republic of Pakistan, Definition of the State
  12. STRUCTURE OF GOVERNMENT:Rules of Business, Conclusion
  13. PUBLIC AND PRIVATE ADMINISTRATION:The Public Interest, Ambiguity, Less Efficient
  14. ORGANIZATION:Formal Organizations, Departmentalization
  15. DEPARTMENTALIZATION:Departmentalization by Enterprise Function, Departments by Product
  16. POWER AND AUTHORITY:Nature of Relationship, Delegation of Functional Authority
  17. DELEGATION OF AUTHORITY:The Art of Delegation, Coordination
  18. PLANNING I:Four Major Aspects of Planning, Types of Plans
  19. PLANNING II:Planning ProcessThree principles of plans
  20. PLANNING COMMISSION AND PLANNING DEVELOPMENT:Functions, Approval Authority
  21. DECISION MAKING:Theories on Decision Making, Steps in Rational Decision Making
  22. HUMAN RESOURCE MANAGEMENT (HRM):Importance of Human Resource, Recruitment
  23. SELECTION PROCESS AND TRAINING:Levels at Which Selection takes Place, Training and Development
  24. PERFORMANCE APPRAISAL:Formal Appraisals, Informal Appraisals
  25. SELECTION AND TRAINING AND PUBLIC ORGANIZATIONS:Performance Evaluation,
  26. PUBLIC FINANCE:Background, Components of Public Finance, Dissimilarities
  27. BUDGET:Components of Public Income, Use of Taxes, Types of Taxation
  28. PUBLIC BUDGET:Incremental Budget, Annual Budget Statement, Budget Preparation
  29. NATIONAL FINANCE COMMISSION:Fiscal Federalism Defined, Multiple Criteria
  30. ADMINISTRATIVE CONTROL:Types of Accountability, Internal Control, External Control
  31. AUDIT:Economy, Effectiveness, Objectives of Performance Audit, Concepts
  32. MOTIVATION:Assumptions about Motivation, Early ViewsThree Needs
  33. MOTIVATION AND LEADERSHIP:Reinforcement Theory, Leadership, The Trait Approach
  34. LEADERSHIP:Contingency Approaches, Personal Characteristics of Employees
  35. TEAM I:Formal & Informal teams, Functions of Informal Groups, Characteristics of Teams
  36. TEAM II:Team Cohesiveness, Four ways to Cohesiveness, Communication
  37. COMMUNICATION I:Types of Communication, How to Improve Communication
  38. COMMUNICATION II:Factors in Organizational Communication, Negotiating To Manage Conflicts
  39. DISTRICT ADMINISTRATION:The British Period, After Independence, The Issues
  40. DEVOLUTION PLAN I:Country Information, Tiers or Level of Government
  41. DEVOLUTION PLAN II:Aim of Devolution Plan, Administrative Reforms, Separation of powers
  42. POLITICAL REFORMS:District, Tehsil, Functions of Union Council, Fiscal Reforms
  43. NEW PUBLIC MANAGEMENT (NPM):Strategy, Beginning of Management Approach
  44. MANAGERIAL PROGRAMME AGENDA I
  45. MANAGERIAL PROGRAMME AGENDA II:Theoretical Bases of Management, Critique on Management