The Utilisation of Public Funds

The public fund is the public’s financial resource that the state manages as a custodian. The impact of how governments manage public funds on economic growth and citizen well-being is referred to as public fund management. Managing public resources entails determining how the government makes money (revenue) and how it spends money (expenditure).

Sources of Public Funds

Taxes, money earned by state enterprises (PSUs), foreign aid, and other sources of revenue are all considered as revenue of the government.

Expenditures of Public Funds

Expenditures include government salaries, purchases of goods and services, infrastructure and public service spending and grants etc.

Principles of Public Fund Utilisation

Public resources should be used to the greatest extent possible for the benefit of the general public. As a result, when managing public resources, public entities (Government) should follow certain principles. The following principles should be demonstrated by public entities when using public funds:

Legality– Government bodies must follow the law and fulfil their legal obligations. After receiving approval from a competent authority, the public fund must be used. Unauthorized spending will inevitably lead to excess and overspending. Furthermore, funds must be used only for the purpose for which they were approved.

Accountability– Government bodies should be held accountable for the use of public funds and should be able to provide complete and accurate accounts of their activities, as well as have appropriate governance and management arrangements in place to address any issues.

Institutions and instruments to ensure accountability

LegislativeFinancial bill, Budget
ExecutiveCAG, Parliamentary committees, Lokpal, Lokayukta, CBI, CVC  
JudiciaryJudicial review  
Civil Society-Questioning through Media, Citizen charter, Social audit, Protests etc

Transparency and openness are dependent on high reporting and disclosure standards. This has two advantages:

  1. It demonstrates that a public resource is being used appropriately, fairly, and effectively for the greatest public good.
  2. It boosts public confidence in the government.
  • Transparency ensures that authorities acted legally and in accordance with the law. Transparency also ensures that the authority followed the overall principles of equity and fairness and provided the best value for money to the end user.
  • Some government agencies operate in less-than-ideal circumstances, such as when there is no market for providers or when those that are available lack the necessary capability or capacity.
  • These conditions give government entities disproportionate discretion and power. In such situations, transparency is required to ensure that actions are taken in good faith.

Value for money:

  • Public funds must be used effectively and efficiently, with no waste, and in a way that maximises public benefit. All public expenditure must pass one fundamental test, namely, Maximum Social Advantage.
  • That is, by balancing social benefits and social costs, the government should discover and maintain an optimal level of public expenditure. Every dollar spent by a government must have the goal of maximising the welfare of society as a whole.
  • It is essential to ensure that public funds are not used to benefit a specific group or segment of society. The goal is for everyone to be happy.

The value-for-money principle involves several aspects, such as:

  1. Striking a balance between effectiveness and efficiency
  2. Keeping the funding arrangement in place (where this is desirable)
  3. Demonstrating the public entity’s competence.
  4. Sustainability of the funding relationship– When using public funds, a public entity should consider the long-term effects of its funding decisions as well as future funding needs.
  5. Government bodies should ensure a fair and reasonable flow of funds for a cause while not jeopardising long-term service delivery expectations. Consider the case of India’s fertiliser subsidy. A subsidy is given to each fertiliser manufacturer in order to ensure their financial viability. This means that the most inefficient get rewarded for it. Such funding arrangements are not long-term sustainable, but they are strategic for the country. This creates a quandary in terms of public spending.
  6. Fairness– Because of the public’s trust in government, it has a fundamental obligation to always act fairly and reasonably when using public funds. The actions of a public entity should be transparent and unbiased. To be fair and reasonable, it is also necessary to respect the nation’s diversity while avoiding discrimination on the basis of caste, community, religion, gender, or class, and to adequately protect the interests of the poor, underprivileged, and weaker sections.
  7. Integrity– Anyone in charge of public resources should do so with the highest level of honesty. A government should have policies and procedures in place to support the highest levels of integrity, such as a code of conduct, an ethics code, and a public service code. Public servants should declare any personal interests that may affect, or appear to affect, their impartiality in any aspect of their work when using public funds ethically.

Some ethical issues related to the utilization of public funds

  1. The use of public funds for business bailouts.
  2. The amount of direct and indirect taxes levied.
  3. The use of public funds to promote the government.
  4. Public money is being used to run a loss-making PSU.
  5. Resource distribution across industries such as health, defence, and research.
  6. International aid when millions of Indians lack access to basic services such as education, healthcare, safe drinking water, and electricity.
  7. Corruption in the use of government funds. Example- Using public funds for a corporate bailout

Is it ethical to use public funds to bail out large corporations that continue to pay ‘vulgar’ salaries to their top executives?

  • Some businesses are simply “too big to fail.” If they fail, the repercussions will be felt not just in one sector but throughout the economy. In some cases, the company may be providing a service that no other company can provide, resulting in a monopoly (in the Indian context, we can see cases like DISCOMs, which are loss-making but cannot fail).
  • Furthermore, because large corporations employ a large number of people, the government is under pressure from the public to bail them out. The global economic slowdown, for example, can put private corporations in jeopardy without any fault of their own.
  • Bailouts, on the other hand, promote an inefficient culture and a distorted reward-punishment incentive. The money used for bailouts could be put to better use, such as in education or healthcare.
  • Anticipated bailouts encourage moral hazard by allowing managers to take risks in financial transactions that are higher than recommended. Companies also argue that they pay high salaries to retain talent and that if they are not paid, any future prospects of revival will be lost. It raises the issue of morality vs. economics.
  • There are no simple answers to such questions. When using public funds for bailouts, the government must follow the principles of public fund usage to ensure “maximum benefit for the maximum number.

Reasons for inefficient use of public funds

The inefficient use of public funds can be attributed to a variety of socio-political and administrative factors.

Political reasons

  • Political rivalry: Political rivalry can sometimes devolve into vendettas, undermining the cooperation and collective efforts required for development.
  • Irrational freebie distribution: Irrational freebie distribution and loan signing off for electoral popularity puts a strain on the budgetary balance.
  • Politicized protests: Repeated ill-intentioned protests and bandhs by any political faction raise the costs incurred as a result of delays in public works projects.

Administrative reasons

  • Policy paralysis: One of the main causes of inefficiency in the use of public funds is the government’s or its various departments’ and agencies’ delays, inaction, and inability to make policy decisions.
  • Bureaucratic attitude: Officials’ despotic and obstructionist attitudes, particularly in higher echelons of the bureaucracy, can obstruct the implementation of developmental activities.
  • Inadequate political will: The Members of Parliament Local Area Development Scheme (MPLADS) was recently suspended for two financial years due to inefficiency and underutilization of funds.
  • Red tape: Excessive regulation and the practice of requiring excessive paperwork and time-consuming procedures prior to official action obstructs the implementation of schemes and projects, thereby obstructing the effective use of public funds.
  • Lack of public participation: Due to a high level of illiteracy and ignorance about government policies and schemes, many citizens (particularly the poor) were unable to demand payment from the government for their legitimate financial obligations.
  • Public watchdogs lack autonomy: For example, the Central Vigilance Commission lacks the authority to make decisions because it is merely an advisory body with no authority to file criminal charges against government officials. Similarly, the CAG’s limited jurisdiction and CIC’s lack of autonomy harmed the ability to report and check accountability for public finance irregularities.
  • Citizen charter non-implementation: Many public institutions have yet to adopt a city charter, a tool of good governance that enables citizens to receive public services as rights in a timely manner. Failure to adopt a city charter is a barrier to the effective use of public funds.

Social reasons

Corruption-related social apathy: In India, many people accept corruption as the norm, so even those with ill-gotten wealth have the same status as the honest wealthy. This is in contrast to some societies, such as Japan, where social boycotts of corrupted people have been observed.

Ineffective educational system: The educational system has failed to instil the moral values of honesty and integrity in its citizens.

Inequality: In Indian society, social and economic equality encourages people to amass as much wealth as possible when given the chance. Corruption can be seen in the use of public funds at the community level, such as in Panchayats.

Lack of institutionalised social accounting: In the MNREGA scheme, the process of communicating the social and environmental effects of government actions and inactions to specific interest groups within society is not institutionalised.

Decentralization of power, closing legislative loopholes, strengthening public institutions such as the CVC and RTI, increasing administrative accountability, and making society more democratic are all necessary for the efficient use of public funds. In the long run, these reforms may make society more sustainable.

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