Local Finance encompasses the revenue and expenditure decisions of local governments. Local governments are mainly financed by tax revenues from residents and businesses, but in recent years, local governments have expanded their sources of financing to include borrowing and financial derivatives. In addition, the federal government has begun to give aid to local governments through grants-in-aid as well as direct loans and loan guarantees. With help from the Troubled Asset Relief Program (TARP), many banks have been able to restore public confidence in U.S.
What is importance of local finance?
The Local Finance provides numerous services and amenities such as fire, police, roads and schools. These services are typically paid for out of tax revenue collected by local government. Local Finance refers to these decisions about how much is raised in taxes and how it is spent. However, despite local government’s important role in society, there is a surprising lack of literature on the subject.
For example, most academic research on public finance focuses on national governments. As a result, many answer to common questions such as how do we calculate property taxes? Or why don’t state governments run out of money every year? Are not easy to find or understand. This post will answer each question with an explanation that anyone can follow along with.
What are the sources of local finance?
The main sources of local finance are: council tax, business rates, grants from central government, rents and receipts from sales of goods and services. Decisions on how much is to be collected in council tax are not made by councils themselves but by independent tribunals set up by central government. Grants given out by central government play a major role in funding local services as well as some capital projects. Business rates are another important source of income for many local authorities; these are paid directly to councils based on estimated profits made by businesses within their area.
Because local governments do not receive enough money through taxes to pay for all their expenditure they can borrow money through issuing bonds or debt. There are different types of borrowing: short-term borrowing which includes overdrafts and long-term borrowing which can take various forms such as fixed-rate bonds, variable rate bonds etc. note borrowing is different from raising equity capital.
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How does local government finance work?
The money governments have available to spend is typically obtained from three main sources: raising taxes, selling assets and borrowing. Taxes come in a variety of forms. The most well-known taxes are those that can be seen on pay stubs: payroll tax, income tax and sales tax (or value added tax). Then there are less visible taxes such as property taxes that tend to favor owners of expensive homes and even sin taxes (e.g., tobacco or alcohol) that tend to disproportionately affect low-income groups.
Property, sales and income taxes all make up a government’s primary source of revenue commonly known as its general fund which it uses for everything from building roads to paying for police officers and teachers’ salaries. In addition to these direct payments, governments also obtain funding through transfers from higher levels of government. And sometimes they collect user fees or fines from businesses or individuals who benefit directly from public services like trash collection, water treatment and libraries.
In other words Atlantic Finance has many elements that differ across countries but at its core contains three basic steps: raise funds; allocate resources; and evaluate outcomes all part of an ongoing process meant to meet current needs while planning for future growth. Only sustainable budgets will survive. How do we know if our budget is sustainable?
Sustainability requires that government revenues exceed expenditures over time. How much of a difference should there be between spending and taking in? This depends on economic conditions and how quickly you want your debt to go down.
For example, if your economy was weak one year, so were revenues, maybe next year you could allow debt to go up by $50 million instead of trying to get it down again by $30 million.
This would help build fiscal stability without risking financial hardship later in tough times when your economy might once again slow down especially if the economy recovers right away and you need additional investments now that boost revenues beyond what was projected earlier.