Contents
Meaning of Public Finance
Public finance refers to the study of income, expenditure, and debt of the government. It is concerned with the financial activities of government and also its impact on the overall economy.
Public finance studies how the government raises its income through different activities and spends it on various development activities of the community. It shows how the government manages its incomes and expenditures for the attainment of its objectives that is the overall development of the community.
Public finance is mainly classified into 4 parts that are public revenue, public expenditure, public debt, and financial administration. The government generates its incomes through the collection of taxes from the general public for using various public amenities. These collected funds are used in the development and betterment of the economy. Public finance is of great importance for both developing and developed economies. It has a very important role in achieving objectives like full employment and price stability.
Nature of Public Finance
Public Finance is an Art
Public finance is defined as an art as it applies knowledge for obtaining various objectives. Its essential component that is fiscal policy uses knowledge of government income and expenses for achieving numerous goals like full employment, economic equality, and development.
Public Finance is a Science
It is referred to as a science as it systematically studies the relationship between various facts of government finance. Public finance studies the relationship between income and expenditure of the government.
Scope of Public Finance
Stabilization of prices
Public finance avoids fluctuations and maintains stability in the prices of goods and services. The government uses this tool for monitoring inflation and deflation like situations in country. During the time of deflation, government reduces the prices of goods for increasing demand by cutting down their tax rate. Whereas during inflation, the government raises capital expenditure and tax rate.
Equal Distribution of Wealth
It helps in equal distribution of income and wealth among people in an economy. Inequalities in income and wealth distribution is one the serious problem faced by underdeveloped countries. Rich persons receive more and more but poor are not even getting enough to fulfill their basic needs. Therefore for overcome this issue the government is required to spend on development activities for poor peoples.
Economic Stability
Stabilization of country’s economy is another important role played by public finance. The government uses taxation as a tool to control and improve the economic conditions. When an economy faces prosperity and people have more funds in their hands, it increases the tax rate. On the other hand, it reduces the tax rate to bring up the demand during the deflation period.
Proper Allocation of Resources
Efficient allocation of resources is a must for the growth of every economy. Public finance supports the government for optimum utilization of all-natural and man-made resources.The government may impose lower tax rates or even provide subsidies on highly desirables goods. Whereas, on goods which are less demandable government may impose a higher tax rate.
Encourages Savings and Investment
Public finance is a tool that helps the government in motivating its people for saving and investment habits. Peoples are generally not able to save their income due to large spending on consumption activities leading to low or zero investment. Government by decreasing the tax rates and giving some relief on goods prices can encourage people for saving and investment activities.
Promote Exports
Export of goods and services is essential for earning sufficient foreign exchange for every country. Public finance assists the government in promoting exports and disfavoring of imports in an economy. Goods to be exported are imposed to lower tax rate or even exempted from the tax category. Whereas, imports of goods are restricted by charging higher tax rates on them.
Develops Infrastructure Facilities
Infrastructural development in a country requires the huge costs to be incurred by the government. Public fiancé raises sufficient funds for the government for meeting these expenses.It enables in providing better and well maintained public amenities such as hospitals, roads, railways, educational facilities, etc.