Public finance nature and Scope

Presentation on public finance and
Scope .

1. Public Finance Nature and Scope Rajbardhan singh B.A.LL.B. (H) [email protected]

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

3. What is Public Finance 1

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. 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. 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

11. Scope of Public Finance 2

12. Revenue Expenditure Debt Financial Administration Economic Stabilisation The main scope of Public Finance can be summarized as:

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.

17. Functions of Public Finance 3

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.

21. Nature of Public Finance 4

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.

25. Conclusion 5

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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