Public Finance: Public Finance and Private Finance

What is Public Finance? Discuss its scope and fiscal operations.

  • Classical and neoclassical economists discussed public finance is money raising and money spending activities of the government.
  • Public finance includes public revenue, public expenditure, public debt, and financial administration Thus, Public Finance is the branch of economics that studies the taxing and spending activities of the government.
  • Public finance is the study of the role of the government in the economy. It is a field of economics concerned with how a government raises money, how that money is spent, and the effects of these activities on the economy and society.
  • According to Hugh Dalton “Public finance is concerned with the income and expenditure of public authorities, and with the adjustment of the one to the other.

Public Finance

Fiscal Policy:

  • Fiscal policy is the part of government policy that deals with raising revenue through taxation and deciding the level and pattern of public expenditure. Fiscal policy is composed of tax policy, expenditure policy, investment or disinvestment strategies, and public debt management.
  • Budgetary policy refers to government strategies to implement and manage a budget.

Monetary Policy:

Monetary policy is concerned with the changes in the money supply of money, credit, lending rates, and interest rates. It is administered by the central bank. Monetary policy is the process by which the monetary authority of a country controls the supply of money, and targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.

Scope of Public Finance

The study of public finance relates to the financial activities of the government including the financial activities of central govt., state govt. and local govt.

  1. Public Revenue: Public revenue deals with the methods of raising income from tax and non-tax sources. So it deals with sources or methods (taxation & Fees) through which a government earns revenue.
  2. Public Expenditure: Public expenditure refers to the expenses of public authorities – central, state, and local government. Public expenditure is a major tool for implementing various policies of the government with respect to welfare, growth, stabilization, and so on.
  3. Public debt: With the increase in the economic activity of the state, the shortfalls in public revenue of the state is frequently made up through loan. It deals with borrowing by the government from internal and external sources. To meet the deficit, the government raises loans.
  4. Financial administration: The scope and subject matter of public finance is not only to the study of public expenditure, public revenue, and public debt but also to examine the mechanism by which this process carried out. It covers all the financial functions of the government. The relating to the preparation of the budget, presentation of the budget, passing budget, execution of the budget, and evaluation of the budget is the subject matter of public finance.
  5. Economic activities of the State: Till around the mid-1940s, the scope of public finance was restricted to the traditional functions of the State, i.e. Provision of defence, law and order, justice, and civil amenities. But with the emergence of welfare states, the scope of public finance was broadened that include the socio-economic effects of all fiscal operations. Public finance now includes the use of the budget to mobilize resources, to maintain price stability, create employment, and maximize social welfare.

Fiscal Operation: The scope of public finance includes fiscal operations and its objectives. Fiscal operation means raising public revenue, spending to achieve certain goals, and financial administration. For such operations, the government uses fiscal tools like taxation, public expenditure, and public debt. The following are the objective of Fiscal operation

  1. Allocation of resources: The most important objective of the fiscal operation is to determine how the country’s resources will be allocated to different sectors (defence, law and order, justices, education, health, etc.) of the economy in order to achieve predetermined goals.  Allocation of resources depends upon the collection of taxes and size of and composition of government expenditure.
  2. Distribution: Fiscal operations can be effectively used to affect the distribution of national income and resources. Taxation and public expenditure are used by the government to reduce inequalities. Progressive direct taxes impose a heavier burden on the rich than the poor. Public expenditure on social infrastructure and subsidies on food, housing, health, and education help reduce income inequality.
  3. Stabilization: It is another important function of fiscal policy in that the purpose of budgeting is to provide stable economic growth. Stabilization of the economy (e.g., full employment, control of inflation, and an equitable balance of payments) is one of the goals that governments attempt to achieve through manipulation of fiscal and monetary policies. Fiscal policy relates to taxes and expenditures, monetary policy to financial markets, and the supply of credit, money, and other financial assets.
  4. Economic growth: The basic focus of fiscal operations is to use budgetary operations to achieve growth and Development. The use of Public revenue and Public expenditure to secure stability in levels of prices by controlling inflationary as well as deflationary pressures. Similarly, the income and expenditure policies adopted by the government so as to attain full employment, optimum use of resources, equitable distribution of income, etc.

The distinction between Public Finance and Private Finance

Points of difference Public finance Private finance
Meaning Public finance is a branch of economics that deals with the expenses and revenues from the government to the government in the economy. It basically deals with the optimization of finances at the individual (single consumer, family, personal savings, etc.) level subjected to the budget constraint.
Objectives/ Motive To offer a maximum social advantage to society To fulfill private interests
Source of revenue In the case of governments, the sources of income are taxes and non-tax revenues. In the case of taxes, fees, fines, fines there is an element of compulsion Private economic units earn their income by using assets owned by them. Their sources of income are salaries, wages, interest, rent, and profits which arise out of transactions
Sources of borrowing: Public bodies can borrow almost on a continuous basis from internal and external sources. They can borrow from the people, the central bank, Commercial banks, and other financial institutions as well from external sources Private economic units may borrow from informal sources like friends, relatives, moneylenders as well as from formal sources like banks and financial institutions.
Determination of expenditure The government first determines the volume and different ways of its expenditure An individual considers his income and then determines the volume of expenditure
Credit status The high degree of credibility in the market The credit of a private individual is limited
Right to print currency The Government can print notes through the Reserve Bank of India The private individual does not enjoy such right
Assessment of outcomes In the case of public finance, the outcome has to measure and evaluated in terms of multiple parameters. These are social welfare, economic growth, security, productivity, and efficiency. It is much easier to measure and evaluate the outcome of private financial activities than the outcome of public financial activities.
Effect on the economy Tremendous impact on the economy of the country Marginal effect on the national economy

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Reference: ML Jhingan, Manan Prakashan


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