Price Stability: Public finance regulate the stability of prices in an economy by controlling fluctuations. It monitors the phases of inflation and deflation which destabilize the economy and brings fluctuations in prices of goods or services. Government raises the tax rates and capital expenditure during the inflation phase. Whereas at deflation times, government bring down the taxation rates for enhancing the purchasing power of the public thereby resulting in rise of demand.
Allocation of Resources: Public finance is an effective tool available with government for efficient allocation of both natural and man-made resources. It performs the role of proper resource allocation among public and private sectors. For this, more and more taxes are imposed on less desirable or demandable products by government. Whereas for more desirable goods, taxes are imposed at lower rate and even subsidies are provided.
Infrastructural Development: Public finance facilitate government in financing its large infrastructural development projects across the country. It enables in raising large funds for construction for infrastructure needed for maintaining peace, justice and security. Government uses as a fiscal tool all of revenues and expenditures associated with building of facilities like road, railways, educational, health and sanitation.
High Economic Growth Rate: Government finance plays an efficient role in promoting higher economic growth rate in an economy. Government using the taxation tools are able to transfer resources from consumption to investment for productive means. Fiscal tools enable in enhancing the aggregate demand and aggregate supply that accelerates the overall economic growth. Taxes, public debt and public expenditure are various tools deployed by government for this purpose.
Equitable Distribution: It enables government in removing disparities in distribution of income and wealth among public. The presence of inequalities in wealth distribution is a serious issue in underdeveloped countries where rich gets more and more whereas poor get poorer and poorer. Government in case of large disparities impose higher rate of taxes on profit, income and properties of rich peoples. This money is utilized by government for providing different types of allowance, subsidies and various other direct or indirect benefits to poor people.
Promotion of Export: Public finance assist government in promoting exports and disfavoring imports in a country. Exports serve as a major source for earning foreign exchange by every nation. Government for favoring export provide subsidies or even exempt the export oriented products from taxation. Inputs are also supplied for manufacturing of such products at subsidized rates. Whereas, it imposes more taxes on importing of goods by citizens in order to disfavor it as it reduces the foreign exchange reserve.
Attaining Favorable balance of payments: Government uses tariffs and distinct fiscal policies in order to maintain a favorable balance of payments within a country. Public finance enables in raising needed funds by government thereby avoiding any deficits. Every expenditure is made after due consideration leading to growth and development.
Balanced development: Balanced development of nation is another important role played by government finance. In order to overcome gap in between the urban and rural areas as well as agricultural and industrial sector, government uses revenue and expenditure. Government allocates budget for development of infrastructural facilities in rural areas and providing several economic benefits to rural population.
Provision of full employment: Public finance aims at providing better employment opportunities to every citizen of country. It via facilitating the overall development of economy assist businesses in expanding their activities and attaining growth. With the increase in size there is a requirement of additional manpower by business organizations thereby creating more employment opportunities.
Functions of Public finance
The Allocation Function- The allocation function of public finance deals with efficient allocation of government expenditure. Funds should be utilized properly by government for those activities that generate maximum benefits for general public. Every economy comprises of two type of goods: private goods and public goods. Private goods are exclusive and available for use to only those people who pay for them. Whereas, public goods are non-exclusive and available to every citizen regardless of paying or not such as roads. These goods yield benefits for whole population and government should allocate in a right way for public goods. There variety of functions that need to be performed by government like providing education and healthcare, maintaining law and order, building infrastructure, defense against foreign attacks etc. All these require a large amount of expenditure which makes an effective allocation must for generating proper results.
The Distribution Function- Every country faces the problem of large disparities of income and wealth. Inequalities in income leads to increase the crime rate and plague society. Distribution function deals with overcoming these inequalities via redistribution of income and wealth. There are three measures which enables in achieving the target of equal distribution of wealth in public finance: –
Implying progressive taxing under higher rate of taxes are imposed on rich peoples and provide subsidies to low-income earners.
Progressive taxes can be utilized for financing public services like health care, affordable housing facilities etc.
A higher rate of taxes is imposed on luxury goods as these are purchased by group of high-income earners. For example, taxing luxury cars and watches with higher tax rate.
The Stabilization Function- Every economy goes through the phases of booms and depression which are the normal business cycles. These phase need to control timely as they lead to economic instability. Stabilization function of public finance aims at eliminating such business fluctuations that have adverse effects on economy. Methods like surplus budgeting at time of boom and deficit budgeting during depression phase enables in attaining the required economic stability.
All of the three primary functions played by public finance plays an effective role in normal functioning of every economy. It enables government in proper adjustment of all its revenues and expenditures for reaping maximum possible benefits.