Public finance is a vast area dealing as it does with government finances. In this article, the focus is to introduce the simple argument that understanding development through public finance has a great advantage as it helps see many interrelated aspects, but is not a part of Development Studies curriculum. This is an introductory article providing a broad picture of what is involved
It is a plausible argument to make that studying public finance (and all that goes with it) is a better way of understanding any contemporary economics than the traditional macroeconomics, because public finance is more than just finance. In simple terms, public finance is the terrain of government revenues and expenditure and borrowings. Think of the annual budget in India and you will have a fair view of the subject. This annual exercise, together with other policies and measures, determines the allocation of government resources directly affecting development.
There is the looming and large presence of the government in public life (and even private lives) in every country. The size and reach of governments varies based on history and political processes but they play a fundamental role in the process of development (either by doing or not doing something). Incidentally, contrary to popular misconception, the most sprawling government in the world is in the USA, the land that articulates individual liberty the most.
In India, we need to examine the role of the union, state and local governments as they help or impede the process of development. But I will start with a simple piece of writing on the role of public finances in development and will address vital issues as we move along. If development is a (continuous) process, our writing about it too has to be. For the moment, I would like to emphasize one crucial point – the government is not a single entity either at the centre or the states comprising as they do of multiple entities, which don’t (always) articulate the same point of view. If anything, they can be contradictory. Recall, the controversy over the maintenance of flyovers in Mumba between the MSRDC and BMC. In short, it is messy and complicated but we have no choice but to study them as they affect our everyday lives. This inter and intra conflicts are a subject for a later discussion.
Apart from these three units of government, there are many sector-specific semi-government or autonomous corporations which are engaged in development activities. Power, water, railways, roads. We have institutions such as the Rural Electrification Corporation. Just take a look at the National Highway Authority of India and see the size of their borrowings. Or the many other such corporations and entities. These together with the three basic units of governments, will show you the list to gauge the huge breadth of the modern government. It is a gargantuan machinery running which alone will take a significant toll on revenues.
Consider municipal corporations or local bodies. In different countries, they have different roles. And raising monies for them is itself a huge business. One of the principal activities of MCs are providing education and healthcare. Some of you might recall the infamous housing mortgage fiasco in 2008 which began in the US and rapidly adversely affected the global economy. Many local bodies in the US saw their revenues shrink because they were linked to housing prices. As prices crashed, so did property taxes which led to budget cuts immediately affecting education and healthcare. The BMC, for instance, has decided to redevelop octroi nakas (since octroi is abolished) as transport and commercial hubs as a means of raising revenues, given the loss of octroi https://timesofindia.indiatimes.com/city/mumbai/commercial-transport-hubs-planned-on-octroi-naka-land/articleshow/81216546.cms).
The beauty of the subject of public finance is that it brings together economics, finance with politics as domiciled within a parliamentary democratic system, with clear lines of demarcation among the three forms of government. The centre, since it is at the top, has the power to delimit the role of the other two principally by taking away their sources of revenue. Interested readers may like to look up the debates between the States and the Centre on GST as they were losing their principal source of tax revenue – sales tax. Readers of Indian politics will recall the recent acrimonious discussion between the States and the Centre on the sharing of GST revenues. The politics of parliamentary democracy either awards or denies development opportunities depending on which part of the political spectrum is powerful. Or the bitter ongoing controversy over farm laws. Or the supposed boost to infrastructure. This is actually nauseating as every budget speaks of it.
Anyway, the important point to bear in mind is that investment (by governments) in public infrastructure is a recurring phenomenon (it has to be) and not a one-time event. This means that they need to find viable options to fund the investment and ensuring that invested funds are recovered so as to keep the cycle going, which means that you need to understand how to price such goods and services. This can be a daunting task as there will be multiple stakeholders each with adamant stances. Toll roads are quite common in India and most people have accepted the need to price them but when toll roads began sometime in the 1990s in Latin America, people protested on the streets. Unfortunately, this critical area isn’t taught to students of development but to students of public policy or public administration. If development has to be looked at holistically students must be equipped to do so.
The challenge now is more than ever before to find creative solutions to funding investment in public infrastructure as expenditure growth outpaces revenue growth. It certainly can’t be printing of money as did the governments of the US and EU in the aftermath of the 2008 crisis in financial markets. We will examine later the adverse consequences of such a step but leave you with this thought that just printing money is no solution. Nor is it just a matter of issuing bonds. We will come back to these themes as they directly affect the process of development.
Let me end this with a caution and warning. It is not going to be possible to think of reforms in the plural and in a big way within a short period time; it is just not sustainable. Given, however, the way elections are fought, we are probably doomed to visit the adverse consequences of someone’s aspirations for political career camouflaged as concern for development.
Takeaways
Not studying public finance is a serious omission
Public finance is more than just finance
Investment in public infrastructure is (has to be) a recurring phenomenon
We need to find creative funding solutions
