PUBLIC AND PRIVATE FINANCE

this is written by manuj gautam

1. PUBLIC AND PRIVATE FINANCE
By Manuj gautam

INDEX
1. What is Public Finance?
2. The scope of Public Finance
2.1. Public Income
2.2. Public Expenditure
2.3. Public Debt
2.4. Financial Administration
3. Function of Public Finance
3.1. The Allocation Function
3.2. The Distribution Function
3.3. The Stabilization Function
4. What is Private Finance?
5. Difference b/w Public and Private Finance
5.1. Income & Expenditure Adjustment in Public & Private Finance
5.2. Borrowing in Public vs. Private Finance
5.3. Currency Ownership in Public vs. Private Finance
5.4. Present vs. Future Income
5.5. Objective Difference in Public vs. Private Finance
5.6. Coercion to Get Revenue
5.7. Ability to Make Huge and Deliberate Changes
5.8. Surplus Budget Concept
6. Summary: of Public Verses Private Finance
7. Similarities b/w Public and Private Finance
8. Importance of Public Finance in Developing Countries
8.1. Helps in Removing Inequalities in Terms of Wealth and Income
8.2. Helps in Controlling Inflation & Deflation
8.3. Helps in Attaining Economic Stability
8.4. Helps in Developing Well Structure and Infrastructure
8.5. Helps in Increasing Export
8.6. Helps in Allocating Resources Properly & Efficiently
8.7. Helps in Bringing Balanced Development in the Economy

2. WHAT IS PUBLIC FINANCE?
In simple layman terms, public finance is the study of finance related to government entities.
It revolves around the role of government income and expenditure in the economy.
Prof. Dalton in his book Principles of Public Finance states that “Public Finance is concerned
with income and expenditure of public authorities and with the adjustment of one to the
other”
By this definition, we can understand that public finance 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.
Let’s understand the scope of public finance to understand how public finance impacts the
economy.
THE SCOPE OF PUBLIC FINANCE
Prof. Dalton classifies the scope of public finance into four areas as follows –
1. PUBLIC INCOME - As the name suggests, public income refers to the income
of the government. The government earns income in two ways – tax income and non-
tax income. Tax income is easy to recognize, it’s the tax paid by people of the country
in the form of income tax, sales tax, duties, etc. On the other hand non-tax income
includes interest income from lending money to other countries, rent & income from
government properties, donations from world organizations, etc.

2. PUBLIC EXPENDITURE - Public expenditure is the money spent by
government entities. Logically, the government is going to spend money on
infrastructure, defence, education, healthcare, etc. for the growth and welfare of the
country.

3. PUBLIC DEBT - When public expenditure exceeds public income, the gap is
filled by borrowing money from the public, or from other countries or world
organizations such as The World Bank. These borrowed funds are public debt.

4. FINANCIAL ADMINISTRATION - As the name suggests this area of public
finance is all about the administration of all public finance i.e. public income, public

3. expenditure, and public debt. Financial administration includes preparation, passing,
and implementation of government budget and various government policies. It also
studies the policy impact on the social-economic environment, inter-governmental
relationships, foreign relationships, etc.

FUNCTIONS OF PUBLIC FINANCE
There are three main functions of public finance as follows –
1. 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.

2. 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.


3. 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. A policy such as deficit budgeting during
the time of depression and surplus budgeting during the time of boom helps achieve
the required economic stability.

What is Private Finance?
Private Finance can be classified into two categories the personal finance and business
finance. Personal finance deals with the process of optimizing finances by individuals such as
people, families and single consumers. A great example is an individual financing his/her
own car by mortgage. Personal finance involves financial planning at the lowest individual
level. It includes savings accounts, insurance policies, consumer loans, stock market
investments, retirement plans and credit cards.

4. Business Finance involves the process of optimizing finances by business organizations. It
involves asset acquisition and proper allocation of funds to in a way that maximizes the
achievement of set goals. Businesses can require finances on either of the three levels; short,
medium or long term.


Differences between Public and Private Finance
1. Income and Expenditure Adjustment in Public and Private Finance - The
government adjusts the income according to the expenditure budget. The private sector
including individuals and private businesses adjust their expenditure according to the income
or future estimates. The government first creates an outline for the expenditure then devices
means of acquiring the monetary budget needed. Private finance involves cutting your coat
according to your cloth.
2. Borrowing in Public vs. Private Finance - The government can borrow from
itself; it can simply go back to the people to ask for loans in whichever financial asset e.g.
bonds, when shortages arise. However, an individual can’t borrow from itself.
3. Currency ownership in Public vs. Private Finance - The government is in
charge of all aspects related to currency. This involves the creation, distribution and
monitoring. No one in the private sector is allowed to create currency, this is illegal and most
countries classify it as a capital offense.
4. Present vs. future Income - The public sector is more involved with future planning
and making long-term decisions. The government makes decisions that will bear fruits in the
long-term even ten years. These investments could include building of schools, hospitals and
infrastructure. The private industry makes financial decisions on projects with a shorter
returns waiting time.
5. Objective Difference in Public and Private Finance - The public sector’s main
objective is to create social benefit in the economy. The private industry seeks to maximize
on personal or profit benefits.
6. Coercion to Get Revenue - The government can use force to get revenue from
individuals. This could involve the use of force to get taxes. The private sector however,
doesn’t have this authority.
7. Ability to Make Huge and Deliberate Changes - The public finance sector has
the ability to make huge decisions on income amount without much consequences. For
example, it can effectively and deliberately increase or decrease the income amount instantly.
Businesses and individuals can’t make these decisions and implement them immediately.

5. 8. Surplus Budget Concept - Excess income or surplus budgets is a great virtue in the
private sector, this is however not the case in public finance. The government is expected to
only rise what is needed for a fiscal year. Of what use would it be to have surplus budgets? It
would be much easier to offer tax reliefs to the tax-payers so as to off-set the surplus.

6. Public vis Private Finance: Comparison Table to show the
difference between Public and Private Finance



Summary: of Public verses Private Finance

7. 1. The public sector comprises of all the government owned agencies, companies and
state offices. The private sector comprises of businesses, companies and the
individuals.
2. The public sector’s main objective is to create social benefits while the private is to
make profits.
3. The overall benefits acquired for the public sector’s strategies is the citizens
themselves, however the beneficiary of the private finance strategies are the owners,
shareholders or the individuals themselves.
4. Despite having all these differences both the public and private finance sectors have
some similarities. Both face the issue of scarcity, need for borrowing and the
importance of precedence of income.
5. Both the public and private finance contribute towards a country’s economy and are
co-dependant neither can exist without the other.

Similarities between Public and Private Finance

1. Both the individuals and & the state have broadly same objectives, viz. the
satisfaction of human wants. Private finance- satisfaction of personal wants & public
finance- satisfaction of collective wants.
2. Both individuals and state have receipts and expenditure and each tries to balance
both to get maximum satisfaction.
3. Both in private and public finance, borrowing becomes essential when expenditure is
more than income.
4. Both face the problem of adjustment of income and expenditure. i.e. problem of
unlimited wants and scarce resources.

8. Importance of Public Finance in Developing
Countries
Public finance has importance for both developing and developed economies. It
has a very important role in achieving objectives like full employment and price
stability. Some of the importance of public finance is as follows-

1. Helps in Removing Inequalities in Terms Of Wealth and Income - In
underdeveloped economies, there is a very serious problem regarding inequalities in
the distribution of income and wealth. The rich are getting more and more while the
poor are not getting enough and are thereby becoming poorer and poorer. So to
promote equal distribution government need to invest in the development activities
for the poor people

2. Helps in Controlling Inflation & Deflation - Public finance is a very
effective tool used by the government to control inflation and deflation like situations.
In order to control inflation, the government increases the tax rate and capital
expenditure. While during deflation government decreases the tax rate bringing down
the prices thereby increasing the demand.

3. Helps in Attaining Economic Stability - Public finance is also used as a tool
to stabilize the economy by the government. When there is more prosperity in
the economy and the people are earning more and more, the government increase the
tax rate and during deflation government reduces the tax rate thereby increasing the
demand.

4. Helps in Developing Well Structure & Infrastructure - Public finance
helps the government in raising efficient funds for promoting the various
infrastructural facilities in the economy like road, railways, medical and educational
facilities, etc.
5. Helps in Increasing Export - It helps in promoting the export from the country
and thereby earning the foreign exchange. Government reduces the tax rate or even
exempt the products from the tax category that are exported. It imposes more and
more tax rate on the import thereby disfavouring it.

6. Helps in Encouraging Savings & Investment - A large category of the
population invests their incomes on consumption due to which saving proportionate is
very low leading to very low or nil investment. The government can use its finance to
promote saving and investment habits in people by reducing the tax rate and
providing some relief on product and services prices.

9. 7. Helps in Allocating Resources Properly & Efficiently - It helps the
government in proper allocation and utilization of man-made and natural resources. In
order to allocate resources properly, the government imposes more and more taxes on
the less demandable goods and imposes a low rate of taxes and even provides
subsidies on more desirable products and services.
8. Helps in Bringing Balanced Development in the Economy - It plays a
very efficient role in helping the government in removing or erasing the gap between
the rural and urban area, agricultural and industrial sector.
The government basically allocates an efficient amount from the fund raised through
different sources for the infrastructural development in rural areas and provides direct
benefits to the rural areas.