CHAPTER THREE LOCAL GOVERNMENT FINANCING AND
3.3 THE THEORY OF PUBLIC FINANCIAL MANAGEMENT
(Pauw et al 2002:62).
3.3 THE THEORY OF PUBLIC FINANCIAL MANAGEMENT
The study of public financial management forms an integral part of the discipline of public administration. It is an important component of public administration.
Furthermore, public financial management touches vital elements adapted from various disciplines such as accounting, economics and business management.
The discipline of public finance encompasses government economics and, as such, encompasses matters of the state fiscus, fiscal policies of the government, the monetary policies and components of macro-economics of the country. Public finance further incorporates elements of business management such as financial planning, accounting, budgeting, financial control and auditing.
According to Visser and Erasmus (2005:3), public sector finances form an integral part of society, and public finances in the broadest sense impact on the social, economic and political dimensions of the country. The state assumes responsibility for welfare, health, and the prosperity of its citizens. For the state to achieve these objectives, it has to perform certain functions and services through government institutions and departments.
The principles and assumptions are based on the premise that:
a. Government provides services and functions on a collective basis;
b. government is a non-profit organization;
c. government is dependent on its taxing powers and authorities for the generation of income;
d. the market economy cannot make provision for services requiring large capital outlay with limited extended long-term dividends;
e. government and not market systems, assumes final overall responsibility for the country’s economic wellbeing, and therefore fulfils economic regulatory functions; and
f. the country’s resources belong to all inhabitants and not exclusively to the market sector. (Visser and Erasmus, 2005:5)
Public finance is a vital component of public administration. It is within that context that elements of public administration relating to finance should be viewed. Governments provide services on a collective basis. For the government to effectively deliver on such services, resources would have to be organized. To organize resources requires a strong financial muscle and particularly strong revenue base. Government revenues derive in the main from taxes.
Pauw et al (2002:1) make a distinction between the private sector and the public sector and define the two as follows:
(a) The private sector is that “sector in which profit is allowed as a main measure of success”, and
(b) the public sector is that “sector in which service to the populace is the main measure of success”.
Visser and Erasmus (2005:5) state that public finance relates to finances of the state in a multi-dimensional way. The reasons are:
a. public finance is manifest in the budget which is financed mainly though taxation;
b. taxation implies that certain moneys are collected from the total moneys available in the country;
c. the use of tax income by the state results in the government being a role player in the national economy; and
d. government expenditure.
Public finance consists of elements relating to the fiscal policy of the government, monetary policy, budgets and budgetary process, revenue collection, and expenditure management, all of which must be co-ordinated into an effective programme for service delivery and development.
Public finance is the study within the field of economics focusing on the economic behaviour of the government. “Economics of the public sector lies in the study of political economy and Economics of the public sector involves the study of public finance, government’s policies and its role in the industrial sector of the economy”
(Trotman Dickenson 1996:3). Public Finance encompasses financial management for all spheres of government; namely, national, provincial and local sphere of government.
According to Visser and Erasmus (2005:4), “macroeconomics and public finance are theoretical fields within economics. Public finance as discussed by economics is concerned with economic principles as they relate to the public sector impact on the private economy. Macroeconomics deals with the behaviour of national economies and is the basis for fiscal and monetary policy recommendations. Neither of the two approaches focuses on the administrative activities of public organisations”.
Section 195 of the Constitution outlines the basic principles governing public administration across the three spheres of government.
195. Basic values and principles governing public administration
a. Public administration must be governed by the democratic values and principles enshrined in the Constitution...
The principles of public administration set in the Constitution generally apply across all three spheres of government. Public Administration outlined above relates to the administration of the affairs of all three spheres of the public service sector. Local government as a sphere of government in terms of the Constitution is located within that broader public sector definition and environment.
Public Administration consists of various generic areas of practice; namely, finance, organising, staffing, procedure and control. Finance, and in this instance, public finance, is located within the generic processes of public administration as an important player.
Public finance encompasses financial management within national, provincial and local government. It can be concluded, therefore, that Local Government Finance is an area of public finance concerned with financial management at local government level.