2. Content
Definitions of
Public finance
Functions of
Public Finance
What is
Public
Finance
Economic
Efficiency
Distribution
of Income
Macroeconomic
Stabilization
Scope of Public
Finance
Nature of
Public
Finance
Conclusion
Importance of
Public finance
4. Definitions of Public Finance
Adam Smith
Public finance is an investigation
into the nature and principles of the
state revenue and expenditure
Hugh Dalton
Public finance is concerned with the
income and expenditure of public
authorities, and with the adjustment
of the one to the other.
5. 1. Public finance can be defined as the study of government activities, which may include spending,
deficits and taxation. The goals of public finance are to recognize when, how and why the
government should intervene in the current economy, and also understand the possible outcomes
of making changes in the market. In addition, public finance can involve issues outside of the
economy, including accounting, law and public finance management.
2. Understanding the role of the government and how changes may affect the economy are a few
important aspects of public finance professionals. When the government intervenes and takes
action within the economy, the outcomes are classified into one of three categories: economic
efficiency, distribution of income or macroeconomic stabilization.
What is public finance?
6. Economic efficiency is the standard that economists use to evaluate a
variety of resources. Typically, efficiency can be determined by a
general formula of ratios and their generated outcomes. The difference
between technical efficiency and economic efficiency is the relationship
of values people place on things. Values in technical efficiency may be
subjective from one person to another. Economic efficiency focuses on
eliminating waste to provide as much value as possible. Technical
efficiency looks to maximize value, while sacrificing as much as is
needed to create the best initiative.
Economic Efficiency
7. Distribution of income
Distribution of income is the calculation of the wealth and
income of a nation once it is divided by its total population.
The overall distribution can be evaluated through a series of
statistical studies. Wealth and income are two separate
entities. Wealth is the overall value of a population’s
physical possessions and financial assets. Income is the
exact monetary value of a population’s net intake over a
selected period of time. The information gathered from a
country’s wealth and income can be a valuable resource to
help answer a variety of political, social and economic
questions.
8. Macroeconomic stabilization is a
process by which the stabilization and
growth of the economy is monitored
through the development of fiscal and
monetary policies, laws and regulations
To achieve a stabilized macroeconomic
environment, a balance is required
between the government budgeting,
domestic commerce, banking
operations, international trade and
governing institutions
Stabilization of the economy acts as
the foundation to economic growth.
Without stabilization, the economy is
doomed to collapse
In order to maintain ongoing
microeconomic stabilization and an
optimal level of economic efficiency, the
market must be managed to ensure
interest rates, business cycles and demand
within the economy remains steady.
Macroeconomic Stabilization
9. Public finance helps us to understand the economic functioning of the government. It
helps us to know the areas where the government is spending money and also the
sources from which such expenditure is to meet.
The role of government has increased in both the developed and developing countries.
The economic development depends largely on the rate of capital formation in the
country. Public finance can help increase the rate of capital formation and it can
effectively accelerate the rate of development in the economy.
The study of public finance helps us in understanding the use and effectiveness of fiscal
policy as an important tool of economic policy. The existence of a large and growing
public sector is another reason to study public finance.
Adam smith in his monumental work, “the wealth of nations”, laid out the basic jobs of
government. The government has to provide for the defence of the nation, the
administration of justice and to provide goods and services which cannot wholly be
provided by private activity.
It therefore affects the overall economic and social system of the country.
Importance of Public Finance
10. Major important functions of Public
Finance
Steady state
economic growth
Economic stability Price stability
Equitable
distribution
1 2 3
4 5
Proper allocation of
resources
6
Balanced
development
13. Public Revenue
Public revenue concentrates on the
methods of raising public revenue, the
principles of taxation and its problems. In
other words, all kinds of income from
taxes and receipts from the public deposit
are included in public revenue. It also
includes the methods of raising funds. It
further studies the classification of
various resources of public revenue into
taxes, fees, and assessment etc.
Public Expenditure
In this part of Government finance,
we study the principles and problems
relating to the expenditure of public
funds. This part studies the
fundamental principles that govern
the flow of Government funds into
various streams.
14. Public Debt
In this section of public-finance, we study
the problem of raising loans. The public
authority or any Government can raise
income through loans to meet the
shortfall in its traditional income. The loan
raised by the government in a particular
year is the part of receipts of the public
authority.
Financial Administration
Now comes the problem of organization
and administration of the financial
mechanism of the Government. In other
words, under financial or fiscal
administration, we are concerned with the
Government machinery which is
responsible for performing various
functions of the state.
15. Economic Stabilization
Now, a day’s economic stabilization and growth
are the two aspects of the Government economic
policy which got a significant place in the
discussion on public finance theory. This part
describes the various economic policies and other
measures of the government to bring about
economic stability in the country.
16. Further According to Musgrave, the scope of public finance embraces the following three functions of the
government’s budgetary policy confined to the fiscal department:
The Allocation Branch.
The Distribution Branch, and.
The Stabilization Branch.
the function of the allocation branch of the finance department is to determine what adjustments in
allocation are needed, who shall bear the cost, what revenue and expenditure policies to be formulated
to fulfill the desired objectives.
The 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 and the stabilization branch shall confine itself
to the decisions as to what should be done to secure price stability and to maintain full employment
level.
18. The Allocation Function
There are two types of goods in an economy – private goods and public goods.
Private goods have a kind of exclusivity to themselves. Only those who pay for
these goods can get the benefit of such goods, for example – a car. In contrast,
public goods are non-exclusive. Everyone, regardless of paying or not, can
benefit from public goods, for example – a road.
The allocation function deals with the allocation of such public goods. The
government has to perform various functions such as maintaining law and order,
defense against foreign attacks, providing healthcare and education, building
infrastructure, etc. The list is endless. The performance of these functions
requires large scale expenditure, and it is important to allocate the expenditure
efficiently. The allocation function studies how to allocate public expenditure
most efficiently to reap maximum benefits with the available public wealth.
19. The Distribution Function
There are large disparities of income and wealth in every country in the world. These
income inequalities plague society and increase the crime rate of the country.
The distribution function of public finance is to lessen these inequalities as much
as possible through redistribution of income and wealth.
In public finance, primarily three measures are outlined to achieve this target –
A tax-transfer scheme or using progressive taxing, i.e. in simpler words charging
higher tax from the rich and giving subsidies to the low-income
Progressive taxes can be used to finance public services such as affordable housing,
health care, etc.
A higher tax can be applied to luxury goods or goods that are purchased by the high-
income group, for example, higher taxes on luxury cars.
20. The Stabilization Function
Every economy goes through periods of booms and depression. It’s the
most normal and common business cycles that lead to this scenario.
However, these periods cause instability in the economy. The objective
of the stabilization function is to eliminate or at least reduce these
business fluctuations and its impact on the economy. Policies such as
deficit budgeting during the time of depression and surplus budgeting
during the time of boom helps achieve the required economic stability.
22. Public finance as
science
Science is the systematic study of any subject which studies relationship between facts.
Public finance has been held as science which deals with the income and expenditure of the
government’s finance.
It studies the relationship between facts relating to revenue and expenditure of the government.
Arguments in support of Public Finance as Science: It is systematic study of the facts and principles
relating to government expenditure and revenue.
Principles of Public finance are empirical. It is studied by the use of scientific methods.
It is concerned with definite and limited eld of human knowledge.
23. Public finance as
art
Art is application of knowledge for achieving definite objectives.
Fiscal Policy which is an important instrument of public finance makes use of the
knowledge of government’s revenue and expenditure to achieve the objectives of full
employment, economic development and equality.
Price stability etc. To achieve the goal of economic equality taxes are levied which are
likely to be opposed.
Therefore it is important to plan their timing and volume. The process of levying tax is
therefore an art. Study of Public finance is helpful in solving many practical problems.
Public finance is therefore an art also.
24. From the above discussion it can be concluded that public finance is both science and art.
In science too it is of two types
It is a positive science as well as normative science.
It is a positive science as by the study of public finance factual information about the
problems of government’s revenue and expenditure can be known. It also offers
suggestions in this respect.
It is also normative science as study of public finance presents norms or standards of the
government’s financial operations . It reveals what should be the quantum of taxes,
kind of taxes and on what items less of public expenditure can be incurred.
26. So, The word public refers to general people and the word finance means resources.
So public finance means resources of the masses, how they are collected and
utilized. Thus, Public Finance is the branch of economics that studies the taxing
and spending activities of government.
The discipline of public-finance describes and analyses government services,
subsidies and welfare payments, and the methods by which the expenditures to
these ends are covered through taxation, borrowing, foreign aid and the
creation of money. From the above discussion, we can say that the subject-
matter of public finance is not static, but dynamic which is continuously
widening with the change in the concept of state and functions of the state.
As the economic and social responsibilities of the state are increasing day by day,
the methods and techniques of raising public income, public expenditure and
public borrowings are also changing. In view of the changed circumstances, it
has given more responsibilities in the social and economic field.
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