BAIIIVSemEconomics Prepared ByDr Suneyna Department of Economics Meaning

BAII(IV-Sem)Economics Prepared By-Dr. Suneyna Department of Economics

Meaning In simple layman terms, public finance is the study of finance related to government entities. It deals with income and expenditure of government entity at any level be it central, state or local. However in the modern day context, public finance has a wider scope – it studies the impact of government policies on the economy. Thus public finance is the branch of economics that assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones.

Subject Matter of Public Finance • Public Revenue deals with the method of raising funds and the principles of taxation. • Public Expenditure deals with the principles and problems relating to the allocation of public spending. • Public Debt deals with the study of the causes and methods of public loans as well as public debt management. • Financial Administration, under this the problem of how the financial machinery is organised and administered is dealt with.

Scope of Public Finance According to Musgrave, the scope of public finance embraces the following three functions of the government’s budgetary policy confined to the fiscal department: (i) The Allocation Branch, (ii) The Distribution Branch, and (iii) The Stabilisation Branch.

• Function of the allocation branch of the fiscal department is to determine what adjustments in allocation are needed, who shall bear the cost, what revenue and expenditure policies to be formulated to fulfil the desired objectives. • Function of the distribution branch is to determine what steps are needed to bring about the desired or equitable state of distribution in the economy. • Function of the stabilisation branch shall confine itself to the decisions as to what should be done to secure price stability and to maintain full employment level.

Nature of Public Finance SCIENCE ART

Public Finance is a science because we study in it the various principles, problems and policies underlying the spending and raising of funds by the public authorities. It teaches how to collect taxes in the best way and how to maintain them economically and how to spend them properly. Public Finance is an art, public finance enables the concerned personnel to adopt the principles and policies in solving the financial problems of the Government in the best possible way to the maximum benefit of the society. The way to be adopted should be logical, suitable and proper according to the time. Application of various principles and policies depends much on the ability of the personnel in the Government how best he can extract from it in the public interest. Thus, public finance is a science as well as an art.

PUBLIC AND PRIVATE PUBLIC FINANCE

Importance of Public Finance • Steady state economic growth: Government finance is important to achieve sustainable high economic growth rate. The government uses the fiscal tools in order to bring increase in both aggregate demand aggregate supply. The tools are taxes, public debt, and public expenditure and so on. • Price stability: The government uses the public finance in order to overcome from inflation and deflation. During inflation, it reduces the indirect taxes and general expenditures but increases direct taxes and capital expenditure. It collects internal public debt and mobilizes for investment. In case of deflation, the policy is just reversed.

• Economic stability: The government uses the fiscal tools to stabilize the economy. During prosperity, the government imposes more tax and raises the internal public debt. The amount is used to repay foreign debt and invention. The internal expenditures are reduced. During recession, the case is just reversed. • Equitable distribution: The government uses the revenues and expenditures of itself in order to reduce inequality. If there is high disparity it imposes more taxes on income, profit and properties of rich people and on the goods they consume. The money collected is used for the benefit of poor people through subsidies, allowance, and other types of direct and indirect benefits to them.

• Proper allocation of resources: The government finance is important for proper utilization of natural, man made and human resources. For it, on the production and sales of less desirable goods, the government imposes more taxes and provides subsidies or imposes taxes lightly on more desirable goods. • Balanced development: The government uses the revenues and expenditures in order to erase the gap between urban and rural and agricultural and industrial sectors. For it, the government allocates the budget for infrastructural development in rural areas and direct economic benefits to the rural people.

• Promotion of export The government promotes the export imposing less tax or exempting from the taxes or providing subsidies to the export oriented goods. It may supply the inputs at the subsidized prices. It imposes more taxes on imports and so on. • Infrastructural development The government collects revenues and spends for the construction of infrastructures. It has to keep peace, justice and security too. It has to bring socio-economic reformation too. For all these things it uses the revenues and expenditures as fiscal tools.

THANK YOU