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What is Public Finance? Importance

The term public finance is made up of two words. The general meaning of public is a group of people and the word finance connotes the science of managing money and credit. Hence, public finance means the science of managing money and the credit of public authorities for the government. In brief, public finance is a special branch of economics that deals with the principles, problems, policies, and processes of the government.

public finance written on green calculator

Definition of Public finance

Public finance is related to the meaning of the source and the expenditure of such income in carrying out various activities in the country. So, public finance is defined as the science consider with income and expenditure of the government.
Harold Groves: " Public finance is that science which deals with government revenue and expenditure"
Barnstable: "Public finance deals with income and expenditure of public authorities of the state and their mutual relations as also with financial administration and control"
H. Dalton: "Public finance is concerned with income and expenditure of public authorities and with the adjustment of the one to the other"
Findley Shirras: "Public finance is that science, which deals with the method to collect revenue and make expenditure by government authority"

The various definition given by different economists point out the flowing expect of public finance:

a) Public revenue: This includes methods of raising public revenue and the theory of taxation.
b) Public expenditure: This includes the principle and effect of public expenditure.
c) Public debt: This includes methods of rising public debt and the management of public debt.
d) Financial administration: This includes budget formulation, budget approval, and auditing.

Importance of public finance

The importance of public finance in developing countries are as follows:

1. Allocation resources: The government can make efficient allocation of resources by fiscal means. The pattern of production can be changed by the efficient allocation of resources. The government can divert the resources from unproductive to productive sectors with the help of different taxes and appropriate expenditure policies.

2. Macro-economics Stabilization: Public revenue and expenditure are the important tools of stabilization. These help to determine the level of rate and inflation, current account deficit, increase of national debt, and economic activities. Public finance helps to control both inflation and deflation.

3. Provision of social goods and infrastructure: The government makes available the public good directly. The public enterprise is established to supply such public goods as electricity, drinking water, transport. The increase in general economic welfare. The government also involves itself in building social infrastructures like health and education facilities. It also used public expenditure on physical and human capital formation.

4. Democratic planning: Public finance is of special significance in democratic countries. The government directs the economy in a particular direction indirectly through public finance. Democracy can also be strengthened by the effective use of the fiscal policy.

5. Capital formation: Low capital accumulation is the main problem of developing countries. The rate of economic growth can be increased by capital accumulation. For this, the government should increase public savings. An important method to increase public saving is taxation.

6. Redistribution of income and wealth: Public finance helps to redistribute income and wealth. It helps in the alleviation of property. The government takes away the income and wealth concentrated on the rich by imposing progressive taxes. The funds so collected are spent on the welfare of the poor. Hence, public finance helps to reduce inequality of income and wealth.

7. Mobilization of resources: The available resources in the country can be effectively mobilized towards the productive sectors with the help of public finance. Public expenditure and text are the best means of resource mobilization. Tax encourages people to reduce consumption and increase savings. This saving is available from investment. The resources mobilized through taxes are deported to productive sectors by the government.

8. Promotion of economic development: Public finance has the government to promote economic development. The means of public finance like text, public borrowing, public expenditure has to transfer the backward economy into a modern one. It helps the government to make the best use of resources. Likewise, the taxes discouraging productive investment should be removed.

9. Technology, enterprise, and efficiency: One of the important factors of economic development is improved technology. The imposition of taxes on production increases the cost of production. Hence, taxes imposed to encourage the use of improved technology in order to reduce the cost of production. Likewise, private enterprises should be encouraged through tax incentives and subsidies.

10. Correct balance of payment: The development process creates difficulty in the balance of payment. This situation occurs when the economy is unable to on foreign exchange through exports. Hence, taxes should be design so as the increase inflow of foreign capital and influence the level of export and import. Generally, a high tax rate is levied on imports and a low tax rate on exports.

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