Public finance is
related to income and expenditure of the government. Public finance deals with
the expenditure and income of public authorities of the state and their mutual
relation as also with financial administration and control. In narrow sense,
public finance deals with any public expenditure and public revenue but in
broad sence public finance also includes, besides public revenue and public
expenditure, public debt, financial administration and fiscal policy.
DEFINITION OF PUBLIC FINANCE
"Public finance is the study of
principles underlying the spending and raising of funds by public authorities.
“
Prof. Findlay Shirras,
"Public finance is concerned with income and expenditure of public
authorities and with the adjustment of one of other.”
Dalton,
"The investigation into the nature and principle of state expenditure and
state revenues called Public Finance."
Adam Smith,
"Public finance has a
field of enquiry treats on income and out modern times go of governments
(federal, state and local). In this includes four major divisions, public
revenue, publicexpenditure, public debt and certain problems of fiscal system
as a whole such as fiscal administration and fiscal policy.”
Harold Groves,
SCOPE OF PUBLIC FINANCE
The scope of public finance is ‘Income and Expenditure ‘ of
the government and their adjustment. In other words, ‘How government manage
their finance is studied in public finance.
The subject matter of public finance can be divided into
following branches:
1. Public Revenue: In this branch of Public
Finance, various sources of public revenue, tax structure and tax system etc.
are studied. It is public revenue through which the government performs its
various activities.
2. Public Expenditure: The government has to
incur various types of expenditure in present welfare society. Various
principles of public expenditure, economy, various policies including budget
efc. are its effects on studied in this branch of public finance.Public
expenditure obtains that very similar place in public finance which consumption
has in economics,
3. Public Debts: In present days,
government is performing various welfare oriented development policies and as a
result public expenditure exceeds public revenue in most of the cases. Under
these circumstances, the government secures public debis--both internal as well
as externalDebt policies, theirmethods of obtaining, their effects, ways of
redemption ere, are studied in this branch of public finance. Financial
4. FinancialAdministration:
The
management of all is studied in this branch of public finance.Budget making,
activities publication, auditing etc. are also included in financial
administration.
5. EconomicStabilisation: The various policies
related to economic in this branch of public finance. Various fiscal and tariff
stability are studied policies are included under this section. With this
section of public finance, policies art regulates and controls complete
economic system. This branchof public
finance helps in obtaining the objective of maximum social advantage.
IMPORTANCE OF PUBLIC
FINANCE:
Public
finance had little importance in the 19th century. The reason was that the
government did not intervene in those days in economic affairs. But, during the
20th century, public finance has come into the forefront on account of the new
concept of ‘welfare state' Modern governments do not confine themselves to law
and order only. On the contrary, they actively intervene in economic matters.
Hence, the importance of public finance has vastly increased in recent years.
The importance of public finance is evident from the following:
(1) Helpful in
Government's Increasing Activities. Today, the government does not
confine itself only with the three functions of defending the country from
foreign aggression, maintaining law and order in the country and giving justice
to the public but also has become concerned with the management of transport,
electricity, social security, insurance and banking. It requires finance for
all these activities the management of which can be done only with the help of
the principles of public finance.
(2) Importance in Economic Planning: Today,
every country is launching its policy of planning to have rapid, balanced and
more and more economic development and no doubt, public finance plays
significant role to meet this end. The success of financial planning depends on
the fiscal policy of the government.
(3) Helpful in Reducing Economic
Inequalities: Public finance also plays a vital role in reducing economic
inequalities in capitalist countries. For example- the government can levy heavy taxes on the richer sections and spend
the income on providing cheap food, cheap housing, free medical aid etc., for
the poorer sections of the community.
(4) Improvement in Employment: Public
finance occupies special place in the modern theory of a employment. For
example- the government obtains long-term
loan and invests it in trade and industriesof short-gestation period which give
employment to many persons in the country.
(5) Helpful Raising National Income: The
income of the people and their standard of living is low in economically
backward countries. Public finance serves as a tool of economic upliftment of
such countries by raising the level of national income.
(6) Helpful in Running Public
Enterprises: Huge amount of capital is required for running. public
enterprises and maintaining essential services, like--water, electricity,
health and education etc.Public finance plays a vital role in arranging this
huge amount of capital.The sources available can be channelfrom the developed
regions to the under-developed regions through a suitable fiscal policy.
(7) Management of Social Activities:
Public Finance policy plays an important role in managing activities of social
welfare, in developing the under-developed areas and controlling the harmful
and luxurious consumption. Thus public finance aims at providing maximum social
advantage.
(8) Achievements of
Political Objectives: Political objectives, too, can be obtained only when the
government has sufficient financial resources. Finance is needed to protect the
country from external aggression, to maintain law and order in the country and
to express our political views strongly before the International Political
Institutions. " Dalton clearly
writes, "Public finance is one of those subjects which lie on the border
line between Economics and politics.”
THREE IMPORTANT CONCEPTS OF
PUBLIC FINANCE
(1) Role and Scope of
Public Finance in Classical Theory of Economics: The classical economic theory
assumed that supply creates its own demand and, therefore, there can never be
unemployment and over production in the long-run. In other words, it assumes
full employment, i.e., full utilisation of public resources. Since one man's
expenditure was another man's income, there was no lack of effective demand in
the economy. They, in fact, favoured small balanced budget, imposition of
indirect taxes, least intervention of the state in economic activity and
borrowing debt only for productive investment.
(2) Keynes' Theory of Public Finance:
Keynesian Theory is also based on the simple proposition that one man's
expenditure is another man's income. A reduction in the expenditure of one will
lead to a fall in the income of others. This will lead to unemployment and a
fall in natural income. He believed that fiscal methods can remove such
fluctuations in the economy. He advocated that budget is powerful instrument for
achieving certain objectives:
i.
Full employment,
ii.
A high level of investment,
iii.
Avoidance of both inflation and deflation.
iv.
A better distribution of income and wealth.
(3) Musgrave Theory of Public Finance: According to
Prof.Musgrave, PublicFinance deals with the economics public sector. In
includes not only its mode of financing but also its effect on the level and
allocation of resources, as well as on the distribution of income and wealth.
Since market mechanism cannot perform all economic functions,
public policy is needed to guide, correct and supplement it. Therefore, Prof.
Musgrave assigned three important responsibilities on the public policy-
i.
To secure adjustments in the distribution of income and
wealth,
ii.
To secure economic stability,
iii.
To secure growth with economic stability.
Thus the scope of public finance has been extended to achieve
the proper state of distribution, economic stability and growth.
DISSIMILARITIES OR DIFFERENCE BETWEEN PUBLIC FINANCE AND PRIVATE FINANCE:
1. Motive: The motive of private
finance is personal interest or benefit, whereas the motive of public finance
is social benefit or public welfare.
2. Adjustment Approach of Income and Expenditure: Every individual tries as far as
possible to adjust his expenditure as to his income because his expenditure is
governed by his income. He follows the principle of cut your coat according to
cloth'. On the contrary, the Government first determines its expenditure and
then devises ways and means to raise the necessary revenue (income) to meet the
expenditure. The government follows the principle ‘cut your cloth according to
coat’.
3. Nature of Borrowing: The government has larger sources of revenue than a private
individual. A government at the time of financial crisis can raise internal
loans from its citizens. It can approach external sources for help such as
foreign governments or markets. But an individual cannot borrow funds from
himself internally. He can borrow funds only externally.
4. Difference in Credit Status: The credit power of a privateindividual is limited. He
can borrow a limited sum of money for a limited period. As against this, the
government can borrow large amounts not only from its own citizens, but also
from the foreigners.
5. Right to Print Currency: The Government has a right to print currency which is legal
tender within the country, whereas private individual does not enjoy such a
right.
6. Law of Equi-Marginal Utility: The private individual spends his income on various
items in such manner as to secure equal marginal utilities from them. It is
only by equalising the various marginal utilities that he can secure maximum
utility out of his expenditure. The government, on the contrary, does not give
as much importance to this law as a private individual does. Modern governments
sometimes incur certain types of expenditure from which they do not derive any
advantage. But they do incur this expenditure to satisfy certain sections of
the community.
7. Secrecy of Budget: Secrecy of budget prevails in private finance whereas public
finance is open to all. An individual already tries to keep his accounts secret
as he never wants that his competitors should know his real financial position.
On the contrary, government gives utmost publicity to its budget by publishing
it in newspapers etc.
8. Elasticity of Finance: Public finance is more elastic than private finance. An
individual cannot make drastic changes in his income but it is not so with the
public finance. The government can make adjustment or changes in its income by
imposing more taxes.
9. Difference of Objectives: The existence of the State is for the welfare and security of
the society as a whole and not for the good of any individual. On the contrary,
the individuals or corporations think of earning profits for themselves.
10. Deliberation in Expenditure: The pattern of expenditure of an individual is
governed by habits, customs, status, personal needs etc. On the contrary, the
pattern of public expenditure is governed and controlled bydeliberate economic
policy of the government.
11. Present and Future Income: For an individual present is valuable than future
whereas for the more government, future is equally important because it lasts
for ever. The state is the trustee for the future. Very often, the state spends
more for future than for the present.
For example- investments
in education, health services, long run projects, etc. are all for future
generation's benefit but its burden is imposed on the present generation.
12. Coercive Methods generation. coercive methods: An individual (private finance)
cannot use finance) can use to raise his income, whereas the Government
coercive methods to collect
(public collected revenue, e.g., tax cannot be without using coercive
methods by the authority.
13. Solvency: A state is a long term institution and cannot be declared insolvent. In
solvency of a state means insolvency of all citizens and that is not possible.
Whereas the individual can be declared insolvent if his liabilities exceed his
assets. Moreover, the assets and liabilities of a state cannot be determined.
14. Audit: Government
expenditure and income are subject to audit by constitutional authorities but
private finance is not subject to audit.Individuals themselves audit their own
accounts without performing any formalities. There is no procedural necessity
as it is in the case of public finance.
