Grade 10 Economics||Public Finance||Notes

Unit 1: Meaning of Public Finance

1.1 Definition

Public Finance is the study of government revenue and expenditure. It examines:

• How government collects money (taxes, fees, etc.)
• How government spends money (public services, development)
• How government manages public debt
• How government budget is prepared

According to Adam Smith:
"Public finance is an inquiry into the nature and principles of the state's revenue and expenditure."

Unit 2: Government Expenditure

2.1 Definition

Government Expenditure refers to money spent by government for:

1. Public administration
2. Defense and security
3. Social services (education, health)
4. Economic development
5. Public welfare

2.2 Importance/Objectives of Government Expenditure

Unit 3: Classification of Government Expenditure

3.1 Types of Government Expenditure in Nepal

A. Regular/Recurrent Expenditure:

• Day-to-day government operations
• Examples: Salaries, office expenses, maintenance

B. Capital/Development Expenditure:

• Long-term development projects
• Examples: Road construction, building schools, irrigation projects

C. Financial Management:

• Public debt management
• Examples: Loan repayment, interest payments

3.2 Major Heads of Expenditure in Nepal:

1. Administrative Services → Government offices
2. Economic Services → Agriculture, industry, tourism
3. Social Services → Education, health, water supply
4. Defense → Army, police
5. Public Debt → Loan repayment

Unit 4: Government Revenue

4.1 Definition

Government Revenue is money received by government from various sources.

4.2 Sources of Government Revenue

A. Tax Revenue:

1. Income Tax → Tax on individual/company income
2. Value Added Tax (VAT) → Tax on value addition
3. Custom Duty → Tax on imports/exports
4. Excise Duty → Tax on production of goods
5. Land Revenue → Tax on land/property

B. Non-Tax Revenue:

1. Fees → For specific services (license fees)
2. Fines → Penalties for breaking laws
3. Royalty → From natural resources
4. Dividends → From public enterprises
5. Foreign Grants → Aid from other countries

C. Foreign Loans and Grants:

• Loans from World Bank, ADB, etc.
• Grants from foreign governments

Unit 5: Taxes

5.1 Definition of Tax

Tax is a compulsory payment to government without direct benefit to taxpayer.

Characteristics of Tax:

1. Compulsory payment
2. No direct benefit
3. Used for public welfare
4. Legal payment

5.2 Types of Taxes

A. Direct Taxes:

• Taxpayer cannot shift burden to others
• Examples: Income tax, property tax, wealth tax

B. Indirect Taxes:

• Taxpayer can shift burden to consumers
• Examples: VAT, sales tax, custom duty

Comparison:

5.3 Principles/Canons of Taxation (Adam Smith)

5.4 Tax Systems

1. Progressive Tax:

• Tax rate increases as income increases
• Example: Income tax in Nepal
• Advantages: Reduces inequality, based on ability to pay
• Disadvantages: Discourages saving and investment

2. Proportional Tax:

• Same tax rate for all income levels
• Example: 10% tax for everyone
• Advantages: Simple to calculate
• Disadvantages: Unfair to poor people

3. Regressive Tax:

• Tax rate decreases as income increases
• Example: Sales tax (poor pay higher percentage)
• Disadvantages: Increases inequality
• Examples in Nepal:
• Progressive: Income tax
• Proportional: Some fees
• Regressive: VAT (affects poor more)

Unit 6: Government Budget

6.1 Definition

Government Budget is an annual financial statement showing:

• Estimated revenue (income)
• Proposed expenditure (spending)
• For a financial year (Shrawan-Ashad in Nepal)

6.2 Types of Budget

A. Balanced Budget:

• Revenue = Expenditure
• Advantage: No debt
• Disadvantage: Limited development

B. Surplus Budget:

• Revenue > Expenditure
• Advantage: Savings for future
• Disadvantage: May indicate overtaxation

C. Deficit Budget:

• Expenditure > Revenue
• Advantage: More development spending
• Disadvantage: Increases debt

6.3 Budget Process in Nepal

Nepal's Fiscal Year: Shrawan 1 to Ashad 31 (Mid-July to Mid-July)

6.4 Components of Budget

A. Revenue Budget:

• Tax revenue
• Non-tax revenue

B. Expenditure Budget:

• Regular expenditure
• Capital expenditure
• Financial management

C. Other Components:

• Economic survey
• Policy statements
• Tax proposals

Key Terms & Definitions

1. Public Finance: Study of government revenue and expenditure
2. Tax: Compulsory payment to government
3. Direct Tax: Tax paid directly by taxpayer (income tax)
4. Indirect Tax: Tax collected through goods/services (VAT)
5. Progressive Tax: Tax rate increases with income
6. Budget: Government's annual financial plan
7. Fiscal Year: Government's accounting year (Shrawan-Ashad in Nepal)
8. Deficit Budget: Expenditure exceeds revenue
9. Surplus Budget: Revenue exceeds expenditure
10. Balanced Budget: Revenue equals expenditure

Important Formulas

1. Tax Amount = Income × Tax Rate
2. VAT Amount = Price × VAT Rate
3. Budget Deficit = Total Expenditure - Total Revenue
4. Budget Surplus = Total Revenue - Total Expenditure

Examples from Nepal

Major Taxes in Nepal:

Income Tax → Progressive tax system

Value Added Tax (VAT) → 13% on most goods

Custom Duty → On imports

Excise Duty → On alcohol, tobacco

Land Tax → On property

Major Expenditure Heads in Nepal:

1. Education (largest share)
2. Health
3. Infrastructure
4. Defense
5. Social security

Fiscal Year: Shrawan 1 to Ashad 31