What is Public finance ?

What is finance ?

Before heading to the main topic public finance, we will first of all understand what finance is all about.

Finance is defined as the study of money and how it is used. Especifically, it deals with the questions of how an individual, company or government acquires the money needed called capital in the company context and how they then spend or invest that money. More abstractly, finance is concerned with the investment and deployment of assets and liabilities over “space and time”

Finance is, correspondingly, often split into three areas: personal finance, corporate finance and public finance. In this article we shall focus on public finance especially on it’s scope nature and functions.

Public finance

It is the study of the role of the government in the economy. It is the branch of economics that assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones.

According to Adam Smith “public finance is an investigation into the nature and principles of the state revenue and expenditure.”

According to Hugh Dalton “Public finance is concerned with the income and expenditure of public authorities and the with the adjustment of the one to the other.”

H.L Lutz  defines it as “Public finance deals with the provision custody and disbursements of resources needed for conduct of public or government functions.”

I the next section firstly we shall talk about the scope then nature and finally some functions of public finance. Talking about nature some economist consider it as a science while others consider it as science. We shall have a better understanding as we move on.

Scope of Public Finance

  • Public Revenue: Public revenue concentrates on the methods of raising public revenue, the principles of taxation and its problems. In other words, all kinds of income from taxes and receipts from public deposit are included in public revenue.
  • Public Expenditure: In this part of public finance we study the principles and problems relating to the expenditure of public funds. This part studies the fundamental principles that govern the flow of Government funds into various streams.
  • Public Debt: In this section of public finance, we study the problem of raising loans. Public authority or any Government can raise income through loans to meet the short-fall in its traditional income.
  • Financial Administration: Now comes the problem of organisation and administration of the financial mechanism of the Government. In other words, under financial or fiscal administration, we are concerned with the Government machinery.
  • Economic Stabilization: Nowadays’s economic stabilization and growth are the two aspects of the Government economic policy. It got a significant place in the discussion on public finance theory. This part describes the various economic polices and other measures of the government to bring about economic stability in the country.

Nature of public finance

The nature implies whether it is a science or art or both.

  1. Public Finance is a Science: Science is the study of the nature and behavior of natural things and the knowledge that we obtain about them. Public finance is a systematically study relating to revenue and expenditure of the government. It also studies the casual relationship between facts relating to revenue and expenditure of the government. CARL C. PLEHN, Ph.D. a PROFESSOR according to him consider it as a science. He advances the following arguments.
    •  Public finance is not a complete knowledge about human rather it is concerned with definite and limited field of human knowledge.
    • Public finance is a systematic study of the facts and principles relating to government revenue and expenditure.
    • Scientific methods are used to study public finance.
    • Principles of public finance are empirical.
  2. Public Finance is an Art: A British economist John Neville Keynes said that, ”Art is the application of knowledge for achieving definite objectives.” Fiscal policy which is an important instrument of public finance makes use of the knowledge of the government’s revenue and expenditure. This is to achieve the objectives of full employment, economic equality , economic development and price stability. To achieve the objective of economic equality, taxes are levied at progressive rate. Since every tax is likely to be opposed, it becomes essential to plan their timing and volume. The process of levying tax is certainly an art. Budget making is an art in itself. Study of public finance is helpful in solving many practical problems. Public finance is therefore an art.

As a matter of fact public finance is considered to be a Science (positive and normative) as well as an Art.

Functions

We have 3 main functions.

Allocation.

There are two types of goods in an economy, private goods and public goods. Private goods have a kind of exclusivity to themselves. Only those who pay for these goods can get the benefit of such goods, for example a car. In contrast, public goods are non-exclusive. Everyone, regardless of paying or not, can benefit from public goods, for example a road.

The allocation function deals with the allocation of such public goods. The government has to perform various functions such as maintaining law and order, defense against foreign attacks. He equally has to provide healthcare and education, building infrastructure, etc. The list is endless. The allocation function studies how to allocate public expenditure most efficiently to reap maximum benefits with the available public wealth.

Distribution

There are large disparities of income and wealth in every country in the world. These income inequalities plague society and increase the crime rate of the country. The distribution function of public finance is to lessen these inequalities as much as possible through redistribution of income and wealth.

In public finance, primarily three measures are outlined to achieve this target.

  • A tax-transfer scheme or using progressive taxing, i.e. in simpler words charging higher tax from the rich and giving subsidies to the low-income.
  • Progressive taxes can be used to finance public services such as affordable housing, health care, etc.
  • A higher tax can be applied to luxury goods or goods that are purchased by the high-income group, for example, higher taxes on luxury cars.

Stabilization

Every economy goes through periods of booms and depression. It’s the most normal and common business cycles that lead to this scenario. However, these periods cause instability in the economy. The objective of the stabilization function is to eliminate or at least reduce these business fluctuations and its impact on the economy. Policies such as deficit budgeting during the time of depression and surplus budgeting during the time of boom helps achieve the required economic stability.

As a bonus in this last and final section we will deal with some importance of public finance and Carrier opportunities related to this.

See also Reasons and Principles of Taxation

Importance

  • Steady state economic growth:
    Government finance is important to achieve sustainable high economic growth rate. The government uses the fiscal tools in order to bring increase in both aggregate demand and aggregate supply. The tools are taxes, public debt, and public expenditure and so on.
  • Price stability:
    The government uses the public finance in order to overcome form inflation and deflation. During inflation, it reduces the indirect taxes and genera expenditures but increases direct taxes and capital expenditure. It collects internal public debt and mobilizes for investment. In case of deflation, the policy is just reversed.
  • Economic stability:
    The government uses the fiscal tools to stabilize the economy. The government during prosperity imposes more tax and raises the internal public debt. The amount is used to repay foreign debt and invention. Internal expenditures reduces. during recession, the case is just reversed.
  • Equitable distribution:
    The government uses the revenues and expenditures of itself in order to reduce inequality. If there is high disparity it imposes more taxes on income, profit and properties of rich people and on the goods they consume. The money collected is used for the benefit of poor people through subsidies, allowance, and other types of direct and indirect benefits to them.
  • Proper allocation of resources:
    The government finance is important for proper utilization of natural, man made and human resources. For it, on the production and sales of less desirable goods, the government imposes more taxes and provides subsidies or imposes taxes lightly on more desirable goods.
  • Balanced development:
    The government uses the revenues and expenditures in order to erase the gap between urban and rural and agricultural and industrial sectors. For it, the government allocates the budget for infrastructural development in rural areas and direct economic benefits to the rural people.

Some Carrier Opportunities

  • Investment banking. An investment banking career in public finance domain entails raising funds for the development of public projects.
  • Research. This is a fairly large area of public finance careers, and a lot of public finance professionals eventually become researchers.

See also Roles of Central and Commercial Banks

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