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Public Finance Impacts the Economy

Posted on Thursday, 1st October, 2009 by admin

spending1Each component of public finance – government expenditure, taxation and the whole government revenue generation process of a country – has direct impacts to the performance of the same country’s economy.  In turn, different economic factors contribute to influencing the government on decisions about where public funds must be spent or the manner and timing of increasing revenues.  Here is a brief example on how government spending affects the economy.  Suppose a government decides to finance the building infrastructure.  The construction will result to job creation – workers will build.  Jobs generate income for these workers.  Income gives people more purchasing power – the ability to spend.  As people spend for their daily needs and wants, the economy tends to move.

Government earning revenue through taxation always yields the inverse effect to the economy.  Taxation is a basic tool for limiting activities of people in order for more people to be able to enjoy doing some other activities.  Taxes are also considered the lifeblood of a government – without tax the government will not run.  But tax impositions make people decide to spend less for the purpose of saving for what is prioritized.  When people spend less, the economy tends to halt – no movement, no activity.

Expenditure and revenue generation of the government, in turn, will be impacted by the economy – in terms of how the said processes are implemented, received and viewed by the economic players and speculators.  And when a country’s government takes into consideration internationally agreed policies, the cycle of impacting and being impacted upon now operates on a wider ground with more factors to consider and a lot more needs to meet.

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