Public Finance in a Digital Economy

Abstract

This chapter deals with the means by which government raises revenue and expenditure profile. Public finance explains the sources of government revenues and the ways in which revenue is allocated to give maximum benefits on the entire society. It cuts across public treasury operations into economic policies on financial transaction of government bothering on revenue, expenditure and public debts. It also attempts to provide the criteria, with the help of the marginal utility analysis, which determine the revenue and expenditure policies of the government. In response to the advances in technology, the author delves into Public finance in a digital economy to highlight the new trends and emerging issues. Areas covered include: (1) Rationale for government public finance; (2) the functions of theory of public finance (3) sources of government revenue (4) items of government expenditure (4) public debt (5) government budget (6) fiscal federalism and economic growth(7) e-government and e-commerce (8) digital economy (9) emerging trend in digital economy and finance. In response to the advances in technology, the work highlighted the new trends and emerging issues on innovative inclination of sharing advances in the economy using new business models based on big data, cloud computing, virtual reality, artificial intelligence, smart city applications, blockchain technology, online/mobile internet banking and third-party payments. The array of topics covered is recommended for rewarding learning experience.

1. Introduction

Public finance is the aspect of economics that deals with the means by which government raises revenue. This explains the sources of government revenues and the ways in which revenue is allocated to give maximum benefits on the entire society. It cuts across public treasury operations into economic policies on financial transaction of government bothering on revenue, expenditure and public debts. It also attempts to provide the criteria, with the help of the marginal utility analysis, which determine the revenue and expenditure policies of the government.

1.1 Rationale for government public finance

The rationale for government public finance include the following:

• To reduce unearned income

• Promoting a sense of national-cultural cohesion

• Ensuring the integrity of the social organism

• Reduction in class division

• To reduce all forms of unjustifiable inequalities of wealth and of economic opportunities.

Public finance is concerned with the following:

• The theory of public revenue: This has to do with the sources of government revenue and these include tax revenue and other revenues.

• The theory of public expenditure: Often government revenues are expended on general administration, social and economic services (recurrent and capital expenditure).

• Budgetary Management: This entails the management of the finances of government through appropriate budgetary practices. It covers the formulation, legal authorization and appropriation, execution, control and auditing of government budgets.

• Stabilization and Growth: Government in order to steer the economy towards stability and ultimate economic growth, various fiscal policy tools such as import duties, tax holidays and export duties.

• Public or National Debt Management: The government in order to reduce the effect of public debts on the economy adopts different measures. These measures range from debt rescheduling, debt conversion, etc.

1.2 The functions of the theory of public finance

The main functions of the Theory of Public Finance include the following:

• The enhancement of social stability through the maintenance of law and order and up-keep of territorial integrity of the nation.

• The provision of important public services such as education, health, at affordable rates and the management of public utilities such as PHCN, NIPOST, Water Board, are aspects of the economic functions of government.

• Assisting in redistributing income and wealth in the economy through the manipulation of existing tax rates and tax base.

• Through the application of fiscal policy, government ensures that prices, employment and incomes are reasonably stable in the economy.

• Government ensuring that there is adequate boost in investment and appropriate management of some sectors of the economy in addition to the positive contributions highlighted.

• Provision of purely social services which entails goods with indivisible benefits that is no one can be excluded from enjoying them. Such services include the provision of roads, street lights, etc.

1.3 Sources of government revenue

The main sources of government revenue include the following:

1. Taxation: Taxes are compulsory payment to the governments without leaving the government with a liability to the payer. They may be direct as income taxes or indirect as sales taxes or export duties.

2. Grants and Gifts: Grants are voluntary financial assistance given by the government of a country or international institution to a defined country for a defined purpose. Most often, administrative and technical conditions are tied to such grants. Grants and gifts are not important sources of government in Nigeria.

3. Administrative Revenues: Administrative revenues are receipts which accrue to the public purse functionally as bye-products of government administrative control. These are voluntary payments occasioned by the rights of operation or practice conferred on the payer.

4. Commercial Revenues: Commercial revenues are resources from payment made for the direct receipts of a good or service produced by the government through its agencies/departments or parastatals. Such revenues include payment for water, electricity, education, health services, telephone, amongst others.

5. Profit and Income from government corporations and parastatals e.g. Federal Inland Revenue Service, Nigerian National Petroleum Corporation, Board of Internal Revenue.

6. Borrowing: Loans from both internal and external sources, that is, government and private individual loans.

7. Custom duties, tariffs, and excise duties.

1.4 Items of government expenditure

These include the following:

1. Construction of road and provision of infrastructural facilities.

2. Provision of both internal and external defense e.g. Ministry of Defense.

3. Provision of healthcare services.

4. Provision of social amenities.

5. Provision of education.

6. Provision of courts and judicial justice.

1.5 Public debt

The government borrowing should be used for the purpose for which it is borrowed. It should be so managed in such a way that the incident of debt should not weigh the government down and the focus of paying back the debt should be maintained [1]. The increasing portfolio of public debts, debt service burden and debt overhang create worry and concern in many African economies including Nigeria. The government can borrow for profitable investment purposes but the situation where governments borrow for consumption in many developing countries should be discouraged as this will not improve the economy. Rather this scenario poses prodigious challenge to economic growth and development in spite of mindful effort to resuscitate nation’s economy. Conscious efforts should be made to entrench fiscal discipline in governance and public debt management.

1.6 Government budget

Budget can be defined as a financial statement which spells out estimated government revenue and the proposed expenditure for a particular period usually one year. A budget comprises of a package of proposal regarding intended revenue to be generated from different sources and expected expenditure to be incurred on various items.

Balanced Budget: When the expected revenue equals the proposed expenditure.

Budget Deficit: There is budget deficit if the estimated government revenue is less than its proposed expenditure for a given financial year. This implies that the government plans to spend more money than it is likely to generate through taxation and other sources. In this situation, the government has to use part of its former reserves. If there are no reserves, the government may borrow money to finance the deficit.

1.6.1 Importance of a budget deficit

A budget deficit is useful in the following ways:

1. Increase aggregate expenditure (or demand) and thereby reducing unemployment.

2. It is used to finance a national emergency such as war and other natural disasters like flood, earthquake, and coronavirus pandemic.

3. It is also used to finance huge capital projects.

4. It is used to remedy a deflationary trend (or recession) by increasing aggregate demands.

Budget deficit has the effect of enabling the government to increase expenditure on different projects, thereby helping to increase the level of employment. A budget deficit could result in inflation. This is because it may lead to excess money being in circulation, if the level of productivity does not increase in the same magnitude.

1.6.2 Budget surplus

There is budget surplus if estimated government revenue is greater than the proposed expenditure during a fiscal year. The government plans to spend less money than it is likely to get through taxation and other sources [2].

1.6.3 Importance of budget surplus

1. A surplus budget is used to reduce aggregate demand thereby reducing inflationary pressure in the economy.

2. It is sometimes used to meet one of the conditionalities of world financial institutions, like international Monetary Fund for lending money to enable borrowing country to revitalize its economy.

A budget surplus would lead to an increase in government financial reserves but there may be increase in unemployment because of decreased total investment.

1.6.4 Importance of budget in modern economy

1. The budget is a means of raising revenue. This was the original role of the budget. Through it, the government plan to raise adequate or enough money to finance its activities. In the budget, the government sets out how it plans to generate its revenue and how expenditure is to be carried out.

2. It is used to correct depression or a deflationary situation in an economy. This is true of the deficit budget which can be used to stimulate recovery from a trade depression. During this period, the government will spend more money than its revenues and this has the effect of increasing the level of economic activities, thereby increasing aggregate demand and the level of employment.

3. It is also used to control inflation. This is true of surplus budget. The government plans to spend less money than it generates by way of tax and other sources. This reduces the level of aggregate demand in the economy thereby helping to curb inflation.

4. The budget is also a means of protecting the economy and rectifying a balance of payment deficit. In the budget, the government outlines the various forms of import control. It enumerates the measures by which exports can be encouraged.

5. It is a means of enhancing public welfare and reducing income inequality in the country through the budget, the government could plan to increase taxes on the rich and reduce taxes on those with relatively low income. When free social facilities are provided, the welfare of the citizens is further enhanced.

6. The budget is used as a tool for economic planning. Through this medium, areas or sectors that require attention are identified and ways of improving such sectors are enumerated [3].

1.6.5 Qualities of a good budget

1. A good budget gathers all available economic data with a realistic approach to future issues and can be anticipated to affect everybody.

2. A good budget is one that can be changed and which can be foreseen in advance.

3. A good budget must strive to fulfill the desires of a large group of people.

1.6.6 Principles of revenue allocation in Nigeria

Revenue allocation is the redistribution of fiscal capacity between the various levels of.

government, or the nature of fiscal responsibilities between the various tiers of government using guided allocation principles [4].

The major principles of revenue allocation in Nigeria include: Derivation principle (Table 1).

S/No	Beneficiary	Percentage of revenue allocated
1	National Government	48.5
2	36 States	26.72
3	774 Indigenous governments	20.60
4	Centrally controlled Special Fund	4.18
	Total	100

Table 1.

Analysis of revenue allocation formula in Nigeria.

Source. Authors’ tabulation.

Principle of need, Principle of national interest and Principle of independent revenues.

Components of Revenue Allocation Formula in Nigeria.

Two main components of the revenue allocation formula commonly used Nigeria are: Vertical Allocation Formula (VAF) and Horizontal Allocation Formula (HAF).

1.7 E-governance and E-commerce

E-government refers to how governments at every level and in every department use the internet and associated technologies to conduct functions, both internally and with external groups including businesses and citizens. For instance, when you file your taxes online instead of sending them through the mail, you are using e-government. When the government sends your tax refund directly to your bank via direct deposit, that is also e-government.

1.7.1 E-commerce

E-commerce (Electronic Commerce) is the buying and selling of goods and services, or the transmitting of funds or data, over the internet to reduce cost and improve the quality of goods and services while increasing the speed of delivery. There are four main types of ecommerce models that can describe almost every transaction that takes place between consumers and businesses. These include the following:

• Business-to-Consumer (B2C): The B2C model involves transaction between business organization and customer. The business organization sells its products directly to a consumer. Customer can view the products shown on the website. The customer can choose a product and order the same.

• Business-to-Business (B2B): The B2B model involves the transaction between companies/businesses, such as between a manufacturer and a wholesaler or between wholesaler and a retailer. The business/company sells its products to an intermediate buyer who then sells the product to the final customer.

• Consumer-to-Business (C2B): The C2B model involves a transaction between a consumer and business organization.

• Consumer-to-Consumer (C2C): The C2C model involves transaction between consumers. Here, a consumer sells directly to another consumer. A well-known example is eBay.

1.8 Digital economy

Digital economy uses digital technologies to cover all businesses, economic, social, cultural etc. activities that are supported by the web and other digital communication technologies such as e-business, e-business infrastructure and e-commerce. Recently, there has been tremendous growth of digital platforms and their influence on our lives and the economy.

1.8.1 Merits of digital economy

Digital economy has given rise to many new trends and start-up ideas. Almost all of the biggest companies in the world (Google, Apple, Microsoft, Amazon) are from the digital world. Some important merits of the digital economy include the following:

• Promotes Use of the Internet

• Rise in E-Commerce.

• Digital Goods and Services

• Transparency: The digital economy helps reduce the black money and corruption in the market and make the economy more transparent.

1.8.2 Demerits of digital economy

• Loss in Employment: Advancement of the digital economy could a threat that may lead to the loss of countless jobs.

• Lack of Experts.

• Heavy Investment are required

2. Emerging technological trends in digital economy and finance

The digital economy is undergoing rapid advancements and transformative changes, especially in emerging markets. The digital economy is accelerated by technological innovation such as artificial intelligence (AI) and technology-driven economic innovation Atiquzzaman et al. [5]. Prominent amongst the new emerging trends include the following:

• Online Banking: The world of finance is rapidly evolving, driven by advancements in technology and changing consumer behaviors on apps like Apple Pay, Google Pay Samsung Pay, Digital wallets and contactless payments, embedded finance which is the integration of financial services into software and systems, Robo-advisers and AI-powered financial services.

• New Development Trend of Blockchain: In the era of digital economy, the development trends of blockchain are applied to the real sector to promote the efficiency of the real economy, accelerate the integration with new digital technologies such as big data, the Internet of things, and artificial intelligence [6].

• New Development Trend of Virtual Reality: The development of virtual reality technology has brought new industrial changes and business opportunities like virtual shopping, psychological therapy and rehabilitation, military simulation, industrial designs and other fields in this era of digital economy.

• Innovative Inclination of sharing advances in the economy using new business model based on big data, cloud computing, mobile internet and third-party payment.

• Digital technology has improved transaction process in the form of point-to-point connection, reduce transaction costs, and enable consumers to enjoy the characteristics of productive services. New Advancement and development of the Internet of things has led to a variety of sensors and terminals that can quickly access the network and gather together.

• New Patterns in AI Advancement has improved Digital Economy leading to emerging economic activities and its core elements in data mining cloud computing, network, artificial intelligence, and blockchain technologies leading to the digital transformation of the economy which is a driving force for innovative economic development Li et al. [7].

• Digital Technology in Operation Optimization and Achieves Lean Management, Production has led to intelligent production, supply chain distribution networks, field environmental management, etc.

• New Trend of Smart City Application has improved urban informatization infrastructure construction, Spatial Structure, Social Structure, urban social order, ecological environment, and infrastructure, urban traffic, logistics, energy, environment, and other information in real time [8, 9].

• New Trends in Mobile Medical Applications aids Chronic Disease Prevention and Health Management Based through the electronic medical record database multi-source, fragmented, and unstructured medical data, clinical data comparison, clinical decision support, and remote patient data analysis.

• New Trend of Personalized Education Application promotes the innovation and development of education in digital economy using Educational Artificial Intelligence (EAI).