Public Finance is combination of two words Public and Finance. Here Public terms is used for Government (because Government represents Public) and Finance (represents the financial condition, that is, Income and Expenditure, that is, Budget of Government).
Thus, In Short, Public Finance deals with the Finance of the Government (A Government can be Central or State or Local).
The Public Finance (Taxation and Revenue collection) is widely described in ancient Indian age Like Mahabharata (Veda Vyasa), Manu Smriti (Manu), ShukraNitisar (Shukra) and Kautilya’s Arthashastra.
They have depicted Kosh (Treasury) as the important part of State Machinery. They describe various modes of taxation for various kinds of citizens.
Types of Public Finance
Public Finance is divided into four parts
- Public Revenue
- Public Expenditure
- Public Debt
- Financial Administration
- Public Revenue: Public Revenue is basically Government (Central, State or Local) Income. Now, Government also requires Sources so that they can raise money to spend for the welfare of people.
So, there are two sources where Government can raise money/revenue.
Tax Revenue: Government generate Tax through two sources a) Direct Tax b) Indirect Tax
o Direct Tax: Direct Tax are those taxes which are imposed directly either to people or organization. It cannot be shifted to anyone. For e.g.: Income Tax, Property tax etc.
o Indirect Tax: Indirect Tax are those tax which can be shifted from one individual to other.
For e.g.: Sales Tax, entertainment tax etc. Suppose you are going for a movie with family. Now your father pays all the bills including yours including Entertainment Tax. So, your Taxes are paid by your father. Thus, you shift your Tax to your father.
- Public Expenditure: Government do expenditure for the welfare of the public. For e.g.: Government issues public Schemes, construction of roads/highway etc. for the welfare of people and society, Government prepares Budget for the people.
During Preparation of Budget,
- IF Income> Expenditure, It is called Surplus Budget
- IF Expenditure>Income, It is called Deficit Budget
- IF Expenditure= Income, It is called Normal Budget (Best condition while Preparing Budget)
There are four types of Public Expenditure
- Productive: Government spend money which yield productive result in short- or long-term duration. For E.g.: Public Schemes
- Unproductive: Sometimes Government spend money which is worthless and Unproductive.
- Planned: Government plan or estimate the expenditure accordingly. For E.g.: Budget (In Budget, Government plan that We will spend 2% on Education, 5% on Defense Etc.)
- Unplanned: There are certain situation where Government has to dilute money due to emergency. For E.g.: Flood
- Public Debt: Debt means to Borrow Money from Somewhere. Here Government borrows money for spending money. Suppose Government prepares Budget and is more than its Income. So, Government has to Borrow money for Channelize things systematically.
There are two types of Public Debt
- Internal Debt: The Loan/Debt taken internally within the country by the Government is called Internal Debt. Eg: Government takes loan from the RBI.
- External Debt: The Loan/Debt taken outside the country by the Government is called External Debt. Eg: Government takes loan from the World Bank
- Public/Financial Administration: Government hires a group of people to manage things like Revenue, Expenditure, Debt etc. comes under Public Administration..
Why Public Finance is Important?
Now a days Maximum Government is a Welfare State. It means that Government not only helps in daily routine life like Education, Health, Jos but also during the emergencies like Pandemic, flood.
- There is an Increase in the activities of Government. Like we want government to provide Education, Health facilities, Employment etc. Thus, The Government expenditure is also increasing.
- It also helps in Economic Stability. Now we also know that Business Cycleis never smooth. Sometimes There is an Inflation or Depression
Due to Corona Pandemic, the expenditure of government has been tremendously increased and the lockdown of consecutive 50+ days had made the Market Depressed
Sometimes, We have seen Inflation in any goods like Gases or Edible Oil etc. So, To Stop the Inflation and make the things balanced is also the job of Government
- Every country wants to Accelerate Economic Developmentthrough making Roadways, Harbour, Highway etc and boost Social Structure like Education and Health care. It requires a lot of money to construct all these things.
- Even distribution of resourcesis required so that equal amount of development should take place in each part of the country. It must not be like that we gave the surplus amount of resources to one state and neglect the other state.
- The Government should take preemptive measures to reduce the Economic Inequalities. It must not be like that the Rich get Richer and the poor gets poorer. It should make policies (Like giving subsidies to poor) to reduce the economic gap between Rich and Poor.
- It brings Balanced Development of every parts of the country through equal distribution of resources. It must not that One state is more developed and the other state is under-developed.
So, Public Finance is Important because it helps in equal distribution of resources so that overall development occurs and also helps keeping funds during sudden crisis moment like Pandemic, Flood, Famine etc.
Difference between Private Finance and Public Finance
Private Finance: Private Finance is basically for Individual Finances (Income, Expenditure, Debt -It means the Scope is Limited).
So, Lets begin
|Private Finance||Public Finance|
|The Scope is Micro Level or an Individual Level||The Scope is Macro Level E.g.: Country, State etc.|
|Here the Sources of Income and Expenditure is Limited
Source of Income: Salary or Side Business
Expenditure: Private or Individual based Expenditure to satisfy their requirements
|Here the Sources and Expenditure of Finance is Vast.
Sources of Income: Tax (Direct and Indirect Tax) within Population
Expenditure: The Government have to spend money to overall population
|The Budget is Limited||The Budget is Huge|
|In Private Finance, Firstly We see the Income and then We move to Expenditure||In Public Finance, Firstly We see the Expenditure and then We move to Income|
|As It is limited to Individual, the Debt is less||As it is Government or Public Based, The Debt is very high|
Public Finance is required for Smooth functioning of the country. It helps in analyzing the government function in Normal and Critical condition. So, that the Overall development of the country is not hampered.
It also helps in allocation of resources under external influence like Crude Oil, Pandemic Like Corona etc. and Internal Influence like Flood, Famine etc.