Public finance is an area of study of economics that deals with problems that deals with issues related to government and political science. It examines the influence of the financial operations on employment, prices and growth.
In this article, we will explore the domain of Public Finance in detail.
Table of Contents
What is Public Finance?
It is the management of the revenue of a country, debt load and expenditures via several quasi-government and government institutions. This branch assesses the government revenue and expenditure of public authorities. Public finance studies the governmental impacts of economic stability, efficient allocation of resources, and distribution of income among citizens.
It is the management of the revenue as well as expenditure at every stage where the public of the country is involved. To develop the economy of the country, public finances are crucial for the effective utilization of funds. It emphasizes the function and role of the government in an economy.
Public finance has a huge impact on the economy since it can be utilized for implementing economic objectives. This includes ensuring equality in terms of income as well as wealth redistribution for citizens. It also helps in redistributing resources so that certain industries are encouraged while limiting the rest. For this purpose, subsidiaries are offered and investments are brought in.
Through taxes, strategic planning takes place which helps in funding the massive project so that the purchasing power of the economy can improve during periods of crisis. Public finance contributes the holistic development and well-being of the macroeconomics of the society. This results in the sustained growth consistent with the time in full transparency.
Public revenue is composed of the following components:
- Collecting Revenue: One of the important components of public finances is collecting revenue through fines, taxes, charges, import duty for running the economy.
- Preparing budgets: Another important component is setting a budget which includes an annual forecast of revenue and expenditure. This helps in analyzing the requirement of debtor for investing in finances.
- Investment analysis: It is necessary to assess and determine whether the funds are in excess or short. Accordingly, the decision related to the deployment of funds is made.
- Public expenditure: This is important for building infrastructure and fulfilling requirements in order to run the government.
- Tax collection: It is one of the main sources of revenue for governments that help in the development of the country.
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Objectives of Public Finance
The following are the objectives of public finances:
- The aim of public finances is managing and fulfilling the public requirements. This is a basic yet essential objective of public finance that facilitates economic growth and development.
- Public finances help in public financial management, which results in economic development. This helps in the economic growth and development of the country.
- Through the optimum allocation of resources, inequality within the economic and social structures also reduces.
- Through public finance, it is possible to control inflation and thus maintain stability in prices.
- Another objective of public finance is to fulfill the fundamental requirements of a nation. This involves planning, allocation of resources, and regulating the country’s finances by creating fiscal policies while setting a budget to ensure the growth of the nation.
Functions of Public Finances
The following are the functions of public finances:
- Preparing economic policies for the development of the economy and nation.
- Managing income and expenditure through the optimum utilization of resources.
- Maintaining transparency of policies as well as records of income and expenditure.
- Comparing actual position with budgets and modifying policies to better manage the economy.
- Fulfilling the financial and infrastructural requirements of the public.
- Maintaining functionality and effectiveness of financial policies.
Types of Public Finances
1. Public Revenue
The income collected through different sources is known as public revenue or public income. There are several sources of Public finances, including non-tax revenue and tax revenue.
- Non-tax revenue includes administrating revenue, commercial revenue, gifts and grants and irrigation charges.
- Administrating revenue includes such as fee, fines and penalties, special assessments, escheat, and Forfeitures.
- In terms of commercial revenue, toll, postage, borrowed funds, electricity payment, etc. are included.
- The other type of public revenue includes tax revenue which includes progressive taxes, regressive taxes, degressive taxes, direct & indirect taxes and specific & ad valorem tax.
2. Public Debt
It is the total amount of money that government owes to the public as a part of development funds. All prior deficits in addition, are known as public debt. It can be either short-term or long-term. Public debt can be of the following types:
- Internal and external debt: When the borrowing is from within the country, it is known as internal debt. Banks, business firms, and individuals are the sources for lending internal debt. External debt is borrowings from outside the country. World bank and Asian Development Bank are two prominent external lenders.
- Compulsory and voluntary debt: The debts that are mandatory for the public to pay such as taxes, are known as compulsory debt. On the other hand, voluntary debt includes debts such as the ones where commercial banks subscribe to securities issued through government loans.
- Productive and unproductive debt: When the debts owned bring revenue to the government, they act as productive debt and are self-liquidating in nature. When loans are a burden on the community, they are referred to as unproductive debts. For this, government charges additional taxes for repayment and services.
- Redeemable and irredeemable debt: These are the debt that the government repays after a fixed period. For selling securities to the public, the government borrows money from them. When there is no promised date for repayment by the government, then it is known as irredeemable debt and is not reported by the government.
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