Question

Explain the principles of federal finance.

Answer 1

Principles of Federal Finance:
In the case of a federal system of finance, the following main principles must be applied:

1. Principle of Independence.
2. Principle of Equity.
3. Principle of Uniformity.
4. Principle of Adequacy.
5. Principle of Fiscal Access.
6. Principle of Integration and coordination.
7. Principle of Efficiency.
8. Principle of Administrative Economy.
9. Principle of Accountability.

1. Principle of Independence:

•  Under the system of federal finance, a Government should be autonomous and free about the internal financial matters concerned.
• It means each Government should have separate sources of revenue, authority to levy taxes, to borrow money, and to meet the expenditure.
• The Government should normally enjoy autonomy in fiscal matters.

2. Principle of Equity:

• From the point of view of equity, the resources should be distributed among the different states so that each state receives a fair share of the revenue.

3. Principle of Uniformity:

• In a federal system, each state should contribute equal tax payments for federal finance.

4. Principle of Adequacy of Resources:

• The principle of adequacy means that the resources of each Government i.e. Central and State should be adequate to carry out its functions effectively.
• Here adequacy must be decided with reference to both currents as well as future needs.
• Besides, the resources should be elastic in order to meet the growing needs and unforeseen expenditures like war, floods, etc.

5. Principle of Fiscal Access:

• In a federal system, there should be the possibility for the Central and State Governments to develop new sources of revenue within their prescribed fields to meet the growing financial needs.
• In a nutshell, the resources should grow with the increase in the responsibilities of the. Government.

6. Principle of Integration and coordination:

• The financial system as a whole should be well integrated.
• There should be perfect coordination among different layers of the financial system of the country.
• Then only the federal system will survive.
• This should be done in such a way as to promote the overall economic development of the country.

7. Principle of Efficiency:

• The financial system should be well organized and efficiently administered.
• Double taxation should be avoided.

8. Principle of Administrative Economy:

• The economy is an important criterion of any federal financial system.
• That is, the cost of collection should be at the minimum level and the major portion of revenue should be made available for the other expenditure outlays of the Governments.

9. Principle of Accountability:

• Each Government should be accountable to its own legislature for its financial decisions i.e. the Central to the Parliament and the State to the Assembly.