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Learn in detail about the Nature and Scope of Public Finance Notes by reading these well-described Article.
Meaning, Nature and Scope of Public Finance Notes – Government revenue and expenditure is the study of government receipts and payments. The English economist Professor Bastable describes the field of public finance as that which deals with spending and income by the state’s public authorities. These two aspects (income and expenditure) have to do with the state’s financial management and control systems.
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Meaning of Public Finance
Studying public finances entails studying how the government spends its money. The proposal, therefore, addresses the issue of how the government raises funds to meet its constantly increasing expenditures. It has been elaborated by Dalton that, according to him,” public finance is “concerned with the income and expenditure of public authorities and with the adjustment of one to the other.”
Therefore, the effects of taxes, government spending, and public borrowing, and deficit financing, are aspects of public finance. Professor Otto Eckstein explains, “Public Finance is the study of the effects of budgets on the economy, particularly the effect on the achievement of the major economic objects growth, stability, equity, and efficiency”.
In addition, it was thought that the budget of the government must balance. The government recommended borrowing primarily to fund production. It was common for the Government to borrow during war times, but repayment or reduction of the debt should be as soon as possible. An administrative territory is governed by public authorities that provide services to its residents. Financially speaking, incomes and expenditures are referred to as finance.
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What is Public Finance?
Through various government and quasi-government institutions, public finance management involves a country’s revenues, expenditures, and debt load. This guide explains how the public finance system works, what the various components of the public finance system are, and how you can know what all the numbers mean. Financial statements for evaluating the fiscal health of a country are similar to those of business enterprises.
Nature of Public Finance
Public Finance Is an Art
The field of public finance is considered an art since it combines knowledge with knowledge in order to achieve various goals. Fiscal policy, an essential element of it, utilizes knowledge of government expenditures and income in order to promote many objectives including full employment, relative economic equality, and economic development.
Public Finance Is a Science
The study of government finance is called a science because it systematically examines the relationships between different aspects of government finances. The finance of the public sector deals with the relationship between government receipts and expenditures.
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Components of Public Finance
Public finance can be classified into three main categories: collecting revenue, making expenditures on behalf of society, and implementing financing mechanisms (such as government debt). Here are some of the main components:
- Tax collection: Collecting taxes is what government agencies rely on to raise revenue. A government collects a variety of taxes, including sales tax, income tax (a progressive tax), estate tax, and property tax. Tariffs and duties on imports, as well as any type of public service that is not free, are other types of revenues in this category.
- Government budget: The government budget is a list of expenditures it anticipates in a given year. For example, in the U.S. Congress creates bills for specific aspects of the budget based on a budget request from the president, and then the president signs the bills into law. Here is a copy of the 2017 Budget of the United States government, as developed by the Office of Management and Budget in Washington, D.C.
- Expenditures: These are the things an organization spends money on, such as social programs, education, and infrastructure. The government spends a lot of money in the form of income or wealth redistribution, which benefits society at large. There is a possibility that actual expenses will exceed or fall below the budgeted amount.
- Deficit/Surplus: This is the period during which the government spends more than it earns in revenue. Taxes collected by the government must exceed the amount spent on expenditures by the government.
- National Debt: When the government experiences a deficit (spending exceeds revenue), it will borrow money to cover the difference. A money market fund called the U.S. Treasury issues debt, and the Treasury’s Office of Debt Management (ODM) decides whether to sell government securities to investors in the event of a deficit.
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Types of Public Finance
- Public Revenue: Taxes, penalties, fines, fees, and maintenance are ways the government collects revenue from the public.
- Public Expenditure: Public expenditures are a variety of expenditures that are made for the benefit of the people, such as infrastructure, health, and education facilities.
- Public Debt: The government borrows from the private sector to meet the needs of a country and run the economy when expenditures exceed revenue.
- Financial Administration: The Financial Administration deals with managing public finances and with managing government needs, such as paying salaries to public electives, and maintaining the public property.
Functions of Public Finance
- Optimal utilization of the resources is necessary to manage income and expenditures.
- Maintaining price stability and growing the economy.
- Assuring that the public has access to necessary infrastructure and needs.
- The public can be developed through initiatives that can positively influence the future of the nation.
- Keeping the records of income and expenditures and policies transparent.
- Assess the actual situation in relation to the budget, alter the policies accordingly, and manage the economy appropriately.
- Keep an eye on the financial policy to make sure it is operating properly and effectively.
- The preparation of financial policies to promote the development of the national economy across the board.
Objectives of Public Finance
- Managing Public Needs: One of the primary objectives is to provide basic needs such as food, shelter, health, infrastructure, and education for the public. Government is responsible for ensuring that basic public needs are met as well as contributing to the economy’s development.
- Economic Development: Proper management facilitates economic development, which is eventually responsible for economic growth.
- Removes Inequality: Not only does this aim to eradicate inequality by distributing resources more equally, but it also aims to provide relief to the poor by collecting taxes from the rich class.
- Maintaining Price Stability: By implementing various reform packages and ensuring the development of the nation at large through control of inflation.
- Other objectives
- To ensure the country’s basic needs are met
- Employment generation
- The international currency market is kept at its value.
SCOPE OF PUBLIC FINANCE
Managing the public finances is just one aspect of public finance, The program also focuses on maintaining the proper infrastructure, contributing to the national economy, reducing unemployment, managing the financial pillars of the economy, keeping the nation clean, monitoring and enforcing the implementation of financial and fiscal policy, keeping the general public’s confidence, etc.
In public finance, it is possible to divide the subject into a number of different branches:
- Public Revenue: This branch of Public Finance analyzes the sources of tax revenue, taxation, and taxation systems, among other matters. Revenue derived from public sources is used to fund the various activities of the government.
- Public Expenditure: In the current welfare state, it is necessary for the government to incur many types of expenditures. Public expenditure principles and the principles of economy, including budget efficiency and various policies. The effects of public finance on this branch of the economy are studied. A very similar place to that occupied by consumption in economics is held by public expenditure in public finance.
- Public Debts: Governments today are performing various welfare programs, resulting in a surplus of public expenditures exceeding public revenue in many cases. This branch of public finance deals with how the government secures public debts-both internal and external-including the ways of obtaining public debt, its effects, ways of redemption, etc. Financial
- Financial Administration: This branch of finance studies how all aspects of public finances are managed. Among other activities, financial administration includes budget preparation, activity publication, auditing, etc.
- Economic Stabilization: This branch of public finance pertains to various policies related to the economy. The section, under which the stability of the fiscal and tariff policies are studied, contains various fiscal and tariff policies. The public finance section of the budget regulates and controls the entire economy. Obtaining maximum social advantage is the objective of this branch of public finance.
IMPORTANCE OF PUBLIC FINANCE
It was of relatively little importance in the 19th century to deal with public finances. As a consequence, there was no intervention by the government in economic matters. A new welfare state concept has pushed public finance to the forefront during the 20th century, as modern governments are not restricted to law and order.
Contrary to popular belief, they are active participants in economic affairs. Therefore, the importance of public finance has risen dramatically over the last decade. Following are some of the reasons why public finances are important.
Contributes to the increased activities of the government. Its role today goes beyond maintaining law and order in the country, defending the country from foreign aggression, and delivering justice to the public, and has diversified into transportation, electricity, social security, insurance, and banking.
These activities require financial resources for the management of which can be achieved only in accordance with the public policy principles.
- Importance in Economic Planning: Today, every country has launched its own economic planning to achieve rapid, balanced, and greater economic growth, and the role of public finance in achieving this is undeniable. It is critical that the government should implement a fiscal policy that encourages financial planning.
- Helpful in Reducing Economic Inequalities: The public sector can also help reduce economic inequality in capitalist nations. Governments could, for instance, levy heavy taxes on the rich and use the income generated to provide cheap food and housing to those in need, as well as provide free medical care.
- Improvement in Employment: Public finance plays an important role in the contemporary theory of employment. A short-gestation period loan is obtained by the government which is then invested in trade and industry. Many of the persons employed in the country are able to receive jobs from this loan.
- Helpful Raising National Income: Individuals and their families in economically backward countries have low incomes and living standards. In such countries, public finance is used to raise the level of national income in order to improve the economic situation.
- Helpful in Running Public Enterprises: Large amounts of capital are needed in running. The focus should be on maintaining public warehousing and essential services like water, electricity, health, and education. The public sector plays a crucial role in arranging this considerable amount of capital. Through an appropriate fiscal policy, it is possible to incorporate sources from the developed regions into the underdeveloped regions.
- Management of Social Activities: Financial policies play an important role in the consideration of social activities, in the development of underdeveloped areas, and in the control of luxurious consumption. So, public finance aims to benefit society to the maximum extent possible.
- Achievements of Political Objectives: Achieving political objectives is also contingent on enough financial resources on the part of the government. A country needs finance to protect itself against external invasion, to maintain law and order within the country, and to be able to express its political opinions clearly before international political institutions. The writing of Dalton clearly states that public finance falls somewhere between the analysis of economics and the analysis of politics.”
WHAT ARE SOME DIFFERENCES IN PUBLIC VS PRIVATE FINANCE
As a general rule, both public and private finance are included in the phrase ‘finance’. Specifically, private finance refers to the study of income, debt, and expenditures of an individual, business, or organization. As opposed to private finance, public finance deals with the revenue, expenditures, and borrowing of governments. Comparing governmental financial operations to those of a private businessman, there are both similarities and differences.
In a free society, everyone is interested in satisfying social needs by means of labor and capital resources. In summary, both the public and private sectors have a common objective of satisfying human needs. A further difference between private and public finance is that the former focuses on individual gains whereas the latter does its best to promote community welfare. These two viewpoints are correct to a greater extent only because of their similarities as well as dissimilarities between both.
Similarities between Public and Private Finance
- Individuals, as well as the government, employ their financial resources to satisfy human desires. The state spends its income on communal or social wants, whereas individuals spend theirs on personal wants.
- At times, both the State and an individual must borrow money to finance their expenditures when their incomes exceed their expenditures.
- There are incomes and expenditures in both public and private finance. In both cases, achieving a balance between income and expenditure is their ultimate goal.
- Both kinds of finances must adhere to the guiding principle of rationality. A rational approach involves the maximization of personal and social benefits through corresponding expenditures.
- In both cases, a choice is sought, which implies that limited resources can be put to multiple uses in order to satisfy unlimited ends.
Dissimilarities between Public and Private Finance
- Private individuals have to adjust their expenses in accordance with their incomes. He accounts for expenditures in terms of his income. However, the government’s expenditures are determined first, followed by the means by which the necessary revenue can be raised.
- Private individuals do not have as many sources of revenue as governments do. In financial hardship, a state can borrow internal funds from its citizens, in addition to borrowing external funds from foreign nations. All borrowings are external in the case of a private individual.
- The government, when financially strained, can print currency as a means of generating additional revenue. For example, it can print new currency during times of crisis such as war to meet its increased obligations. It is impossible for an individual to generate income by creating money.
- State officials prepare a budget each year along with estimates of their revenues and expenditures. Individuals are exempt from the same limitation. There are various schedule options available, such as weekly, monthly, or yearly.
- The best financial position is always held by individuals who have surpluses. Governments don’t always end up doing well if their budgets are surpluses. In that sense, there are two things implied. Taxation and spending are inadequate in the government, since a) taxes are too high and b) the government does not spend as much on the welfare of the people as it should.
- Also, the motives behind the government’s expenditure differ from that of the individual. Individuals are hankering after profit. They operate their businesses based on private profit interests. Government spending, however, is governed by welfare motives.
- The way of spending that an individual follows does not have much impact on society. The government, however, can modify an economy’s structure through its fiscal policies.
- When it comes to private finance, customs, habits, and social status affect the pattern of expenditure. Governing bodies follow a specific economic policy when making expenditures.
- Secrets are always part of private finance. Individuals don’t have to disclose their financial information other than for income tax purposes. The public finance system is, however, open to the public. There is extensive discussion about the government budget in the parliament as well as outside of it. Public finance places a high degree of accountability on public officials.
- It is possible for individuals to defer their private expenditures. It is impossible for the state to delay vital and necessary expenditures like famine relief and defense.
Public Finance Vs Private Finance
DIFFERENCE BETWEEN PUBLIC FINANCE AND PRIVATE FINANCE
- Motivation: Private finance seeks the benefit of the individual, whereas public finance seeks the benefit of the whole community.
- Adjustment Approach of Income and Expenditure: Everyone tries to adjust their expenditures to their incomes as much as possible because their spending is determined by their income. According to the principle of cutting a coat according to its cloth, he does so. Contrary to popular belief, Governments determine their expenditures first and then devise ways to increase revenue (income) to conform with those expenditures. Governments follow the principle that cloth should be cut according to coats.
- Nature of Borrowing: The government has a greater revenue stream than an average individual. Governments are able to obtain internal loans from their citizens during financial crises. In the case of foreign governments or markets, it can seek help from external sources. It is not possible for an individual to borrow funds from himself. He can borrow money only from outside sources.
- The difference in Credit Status: Privatians do not have a lot of credit power. It’ll only be possible for him to borrow a certain amount of money during the loan period. The government, however, can borrow large amounts from a variety of sources, not just from its citizens.
- Right to Print Currency: The government may print currency within its borders which becomes legally tender, whereas an individual does not have this right.
- Law of Equi-Marginal Utility: A person spending his income on a variety of goods achieves the least marginal utility from each of them. The max utility that he will receive from his expenditure will come from balancing the various marginal utilities. Governments, on the other hand, do not view this law with the same degree of importance as individual citizens do. Some government expenditures today are not rewarded by any benefit for the taxpayer. However, certain sections of the community do persuade them to incur these costs.
- Secrecy of Budget: Private finance is characterized by secrecy, while public finance is more transparent. Individuals already hide their accounts due to the fact that they do not want competitors to know how they are doing financially. Publications of the government’s budget in newspapers, etc., are the government’s most public means of publicizing the budget.
- The elasticity of Finance: Public finance has a higher elasticity than private finance. In the private sector, it is hard to make drastic changes in income, but public finance is different. By taxing more, the government can make adjustments or changes to its revenue.
- Difference of Objectives: The purpose of the State is to provide welfare and security for society at large and not merely to promote individual interests. Individuals and corporations, instead of thinking about how to make money, are concerned about how to earn profits.
- Deliberation in Expenditure: An individual’s pattern of spending is determined by his habits, his customs, his station, and his needs. A deliberate economic policy of the government is more likely to dictate and control how public expenditures are arranged.
- Present and Future Income: Present income is much more important than future income for an individual. However, for the government, the future is equally important as it will last forever. As a trustee for the future, the state plays an important role. State expenditures are often more focused on the future than on the present.
- Coercive Methods generation: An individual (private finance) cannot use finance) can use to raise his income, whereas the Government’s coercive methods to collect.
- Solvency: States are long-term institutions and therefore cannot declare insolvency. When a state goes bankrupt, all of its citizens go bankrupt, and that’s impossible. Individuals can be charged with insolvency if they have more liabilities than assets. In addition, it cannot be determined what a state’s assets and liabilities are.
- Audit: Financial matters relating to the government are subject to audit by constitutional authorities, but private finances are not. Without following any formal procedures, individuals conduct their own audits. As in the public finance sector, there is no specific procedure for it.
Traditionally, public finance is viewed as the management of public funds, but it can be seen as more than just managing public funds, since it manages other concerns, such as price stability, economic growth, or issues regarding illiteracy, unemployment, and the rights of human beings. The term public finance management refers to the management of public finances as a whole. To ensure the growth of the nation, proper planning is necessary, the allocation of resources must be appropriate, the unfavorable situations must be addressed, and the budgets must be balanced so as to ensure effective fiscal management.
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