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Public Finance; Meaning and its Importance

Updated on May 16, 2016
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IRSHAD CV has been a student in Economics. Now he is doing Masters in Economics. He completed B.A. Economics from the University of Calicut.

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Introduction

Public finance has become one of the most important branches of economics. In modern economies public finance is essential. In simple words, for economists, public finance refers to the study of the expenditure and income of a public authority or a government. The authority may acquire revenue from the public in the form of taxes, charges, fees etc. Then this revenue will convert and used for public expenditure such as social welfare works, public investment etc. An efficient public finance administration will help the economy to achieve economic growth and development in every field.

Public Finance and Private Finance

Broadly there are two types of finance like public finance and private finance. Public finance refers to the financial matters of an authority or an organization like government. Private finance refers to the financial matters of individuals, firms etc. Both these are based on income and expenditure matching and aiming to the optimum utilization of resources. In the case of private finance, the ultimate aim is to acquire profits while public finance focuses on social welfare and development. The following table provided a comparative analysis and differences between private and public finance.

Public Finance
Private Finance
Adjusts incomes to expenditure
Adjusts expenditure to income
Deficit financing is possible
Limited scope for deficit financing
Aims social welfare
Aims individual benefits like earning profits
Based on long term
Based on short term
No secracy
Secracy in nature
Income and expenditure can easily adjust
income and expenditure can not easily adjust
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Public expenditure on social capital is productive onePublic expenditure will boost employment opportunities
Public expenditure on social capital is productive one
Public expenditure on social capital is productive one | Source
Public expenditure will boost employment opportunities
Public expenditure will boost employment opportunities | Source

Role of Public Finance

When consider a country, public finance playing an important role in its progress. No doubt, development is the ultimate aim of any country. For that each country must utilize its social, economical and natural resources in an optimum manner. In fact, the role of public finance is indefinite. The following are some of the major roles of public finance in a country.

i) Social and economical changes are very necessary one for any country to achieve development. Public finance facilitates a country to adopt necessary changes in its social and economical structures.

ii) Public finance facilitates the government as a role of controller over the economy. Economic supervision is curtailed to stabilize the country.

iii) Public finance ensures the role of governmental authority in several matters like social welfare programs, defense, law etc.

iv) Public finance will give power to the government on the country. So it can be used for establishing social justice. Social justice is the peculiar feature of social development.

v) Public finance will helps to stabilize the economy through fiscal policy. By adjusting taxes and subsidies, the government can ensure social equality along with economic stability.

vi) Public finance speed up the progress of a country from underdeveloped state to a developed one by removing tensions like poverty, inequality, unemployment etc.

vii) Public finance can also control the distribution of national income to various sectors of the society. The income inequality can be reduced by imposing more taxes to richer class and granting benefits to poorer class.

viii) Similarly government can able to control the resource allocation in the hands of private, public or both.

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Views on Public Finance

Finance plays an important role in any society irrespective of its nature. There are different opinions among economists of different times on public finance. Broadly, there are three views on public finance like classicalists' view, Keynesians' view and the modern view. Each of them is briefly explained below.

Classicalists’ View on Public Finance

The classical economists like Adam Smith believed in laissez-faire system, they were supported free competition. They believed that free competition would enlarge the size of market and then specialization, which will automatically results in full employment. For classical economists, the role of government must be lower. They focused on market mechanism. Further, they argued for surplus budget. For that, they were in favor to impose taxes. The main reason behind supporting of surplus budget is that, the deficit budget may lead to inflation. They were also against in the practice of borrowings. A public borrowing is better only in the case of extreme necessity. Further, they argued for repaying the debt quickly as far as possible.

Keynesian View on Public Finance

Keynes becomes a great figure in economics after the great depression of 1930s. He published his great masterpiece, “The Theory of Employment Interest and Money” in 1936. He raised his voice against the beliefs of classical economists and their methodology. The main problem witnessed by J.M Keynes was the instability in economic systems. Therefore, Keynes connected the role of public finance with economic stability. He suggested mainly two types of applications of public finance like public finance during inflation and public finance during deflation.

Public finance during depression: During crisis or economic deflation, Keynes argued for deficit budget. Because during deflation there will be shortage of effective demand, employment and productivity. To solve this problem, government must follow deficit budget, which will help to increase money supply in the economy. This will automatically boost the production, employment and output.

Public finance during inflation: During inflation, people may hold more quantity of money and demand more commodities. At the same time, the value of money will be lower as increase in the price level. The value of currency will fall. To cure inflation, Keynes suggests surplus budget. Surplus budget implies that the higher flow of money from the public to the government treasury. It can be done by imposing more taxes and reducing government assistants. In fact, surplus budget during inflation will reduce the instability in the economy.

Modern view on public finance:

The modern economists support deficit financing. The main argument is that deficit financing will ensure more money in the market by introducing various projects and schemes. It will generate employment opportunities. In the long run it will be beneficial for the country to boost up the progress of development.

Subject Matters of Public Finance

There are five matters dealing with public finance. They are public revenue, public expenditure, public debt, financial administration and economic stabilization.

Public revenue is the most impotent part of public finance. This facilitates the authority to acquire funds for its expenditure. The public revenue may be collected in the form of taxes, fines, charges, fees etc.

Public expenditure is the counterpart of public revenue. Public expenditure plays significant role in the development of underdeveloped economies by ensuing social justice and equality. Public expenditure may be in the forms of social welfare programs for education, poverty eradication schemes, health care etc.

Public debt is playing a curtail role in modern times particularly in under developed economies. Public debt facilitates to bridge the gap in public income and public expenditure. Since the emergence of national level as well as international level financial organizations, public debt becomes a common matter in public finance.

Financial administration refers to the functioning of the authority who dealing with financial matters of the country. The most familiar part of public finance is the budgeting. This provides data regarding the public affairs of a country. Financial administration also includes many functions like tax collection, public payments, public receipts etc.

Conclusion

Public finance is a broad area of economics. It studies about the financial matters and its administration of a country. Today the role of public finance has increased more since each country is focusing on achieving development. Today it works as a key to ensure social justice and equality

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      IRSHAD CV 2 years ago from India, Kerala

      thanks for reading and sharing your views

    • BlossomSB profile image

      Bronwen Scott-Branagan 2 years ago from Victoria, Australia

      Interesting. I guess a lot of this would apply to personal finance, too.