PUBLIC FINANCE
Meaning of Public Finance
Professor Dalton defined public finance as being connected with the income
and expenditure of public authorities, with the adjustment of one to another.
Tax revenue and non-tax revenue are the two sources of income.
Scope of Public Finance
Public finance is concerned with the methods of raising and allocating of
funds between various activities of the government. Important branches of
public finance:
• Public revenue: It refers to the income or earnings of the government of
any country. Public revenue consists of tax and non-tax revenue.
• Public expenditure: It deals with various types of expenditures required for
the proper functioning of the government.
• Public debt: When the planned expenditure of the government of a country
exceeds its total revenue, the government has to borrow money from
various organisations and individuals. This is called public debt.
• Budgetary policy: It deals with the type of financial statement made by the
government with respect to its anticipated revenue and expenditure during
any particular year. If the government expenditure exceeds its revenue,
there arises a deficit in the budget.
• Fiscal policy: The fiscal policy affects revenue and expenditure of the
government. Fiscal policy instruments are government expenditure,
imposition of taxes, subsidy provision and public debt.
Nature of Public Finance
Positive and normative are the two aspects of modern finance. Classical
economists believed the market mechanism and they dealt with the theory
of public finance only with public revenue, public expenditure and public
debt without considering their impact on welfare. This aspect is called the
positive aspect of public finance.
Welfare economists strongly believed in the welfare aspects of public
revenue and public expenditure. No government can afford to tax the people
without ensuring economic welfare. Hence, they try to transfer incomes
from the rich to the poor through fiscal operations. This aspect is called the
normative aspect of public finance.
Comparison between Public and Private Finance
• Differences between public and private finance
PRIVATE FINANCE PUBLIC FINANCE
In private finance, individuals adjust In public finance, the government
their spending patterns according to determines the size of expenditure
their income level. which has to be spent on different
segments and adjusts income to
expenditure.
Private individuals try to maximise Public authorities are motivated by
their profits. the welfare of society.
An individual spends less than his The government prefers to have a
income to maintain surplus budget. deficit budget, especially while
financing economic development.
Private finance transactions are Public finance transactions are open
maintained secretly. to everyone in society.
• Similarities between public finance and private finance
• Public and private finance have almost the same objectives. Private
finance aims to satisfy individual wants, whereas public finance tries to
satisfy the wants of all members of society.
• Limited resources are available to satisfy wants. Both private and public
sectors' primary aim is to maximise the use of limited resources.
• Both private and public finance have to look into the income and
expenditure statements. According to priorities, both public and private
finance have to raise the sources of income and allocate funds among
different heads of expenditure.
• Both public and private finance have to borrow to bridge the gap between
expenditure and income.
Significant Role of Public Finance
Public finance plays a dynamic role in the economy. It is very significant for
the allocation of productive resources to maximise the national output. The
public sector makes certain provisions for social wants such as defense,
railways, park, law and order. Apart from the process of revenue and
expenditure of the government, it is used to allocate the total resources of
the community among private and social goods.
Measures to secure equal distribution of income and wealth
• Progressive taxation of direct taxes ensures equality in the distribution of
income and wealth.
• Government expenditure on welfare projects for the poor.
• Levying high taxes on goods mostly purchased by the rich income groups
and providing subsidies on the goods purchased by the poor income
groups.
Relation of Public Finance with Other Social Sciences
• Public finance is considered a branch of economics. In the economy,
public finance involves raising and spending of funds by government
authorities. The principles of economics are considered in the formulation
of policies for public revenue and public expenditure. Hence, public finance
and economics are interrelated.
• Public finance is the study of finances of the government or public bodies.
It has no existence without political finance.
• Policy of public finance is always formulated by looking into its history.
Statistical data of the past guide the government and helps it to follow the
right track.
• While determining the taxation policy, government ensures that the burden
of tax does not fall on the poor sections of society.
