Module 2

Nature and scope of public finance

Chapter:4
Public finance

Meaning
Public finance is a study of income and expenditure or receipt and payment of government.
It deals the income raised through revenue and expenditure spend on the activities of the
community and the terms ‘finance’ is money resource i.e. coins. But public is collected name
for individual within an administrative territory and finance.
On the other hand, it refers to income and expenditure. Thus public finance in this manner
can be said the science of the income and expenditure of the government.

Definition
According to prof. Dalton “public finance is one of those subjects that lie on the border lie
between economics and politics. It is concerned with income and expenditure of public
authorities and with the mutual adjustment of one another. The principal of public finance are
the general principles, which may be laid down with regard to these matters.
According to Adam Smith “public finance is an investigation into the nature and principles of
the state revenue and expenditure”

Nature of public finance

Nature of Public finance implies whether it is a science or art or both.
1.Public Finance is a Science:
Science is a systematic study of any subject which studies casual relationship between facts.
Public finance is a systematically study relating to revenue and expenditure of the
government. It also studies the casual relationship between facts relating to revenue and
expenditure of the government.
Arguments in favor of public finance being science:
• i. Public finance is not a complete knowledge about human rather it is concerned with
definite and limited field of human knowledge.
• ii. Public finance is a systematic study of the facts and principles relating to
government revenue and expenditure.
 • iii. Scientific methods are used to study public finance.
• iv. Principles of public finance are empirical(based on observation and experiment)
the above argument proves that public finance is a science. Now one question arise whether
public finance is a positive science or negative science
Science is of two types:
a) Positive science
In positive science one knows about factual situation or facts as they are. It describes “what
is”. As against it, normative science presents norms or ideals. It describes “what ought to be”
or what is right or wrong i.e. value judgement.

b) Normative science.
By the study of public finance one gets factual information about the problems of
government’s revenue and expenditure. Public finance is therefore, a positive science.
Study of public finance also reveals what should be the quantum of taxes. Which taxes, direct
or indirect, should be imposed. On what items more or on what items less of public
expenditure be incurred. Public finance is therefore a normative science. Thus, study of
public finance offers suggestions regarding revenue and expenditure of the government as
also apprises of their factual position.
2. Public Finance is an Art:
In the words of J.N. Keynes, ”Art is the application of knowledge for achieving definite
objectives.”
Fiscal policy which is an important instrument of public finance makes use of the knowledge
of the government’s revenue and expenditure to achieve the objectives of full employment,
economic equality , economic development and price stability, etc.
To achieve the objective of economic equality taxes are levied at progressive rate. Since
every tax is likely to be opposed, it becomes essential to plan their timing and volume. The
process of levying tax is certainly an art. Budget making is an art in itself. Study of public
finance is helpful in solving many practical problems. Public finance is therefore an art also.
In sort, public finance is both science and art. It is a positive science as well as normative
science.

Scope or subject matter of public finance

The scope of public finance may be summarized as under:
1. Public Revenue
The income of the government through all the sources is called public income or public
revenue.
2. Public Expenditure
 • 3. Public Debt
• 4. Financial Administration
• 5. Economic Stabilization

Public finance v/s private finance

What is Public finance?
Public finance is a study of the income and expenditure activities of the government.

“public finance is the branch of economics that studies the revenue and expenditure of the
government. And the change of one or the other to achieve desirable effects and avoid
undesirable ones.” The goal of public finance is to benefit the public. Government has many
resources to gain income. Public finance has three main functions.

 The effective use of available resources.

 Income distribution among citizens.
 The economy’s stability.
There are five main components of public finance. – tax collection, expenditure, budget, the
national debt. Government has many resources to get revenue. Collecting tax is the main
resource of the government. The government spends that money on projects. Those projects
are beneficial to the general public. Such as building roads, providing electricity, water, etc.

Government usually makes a budget for the expenditures of projects. When expenditure is
more than income then budget is deficit budget. To increase the collection of taxes, the
government borrows money. Which increases the national debt. Governments usually prefer
deficit budgets. Because it helps in economic growth, causes positive inflation. The
development of entire nations depends on the effective management of public finance. Public
finance plays an important role in reducing economic inequalities.

What is private finance?

The study of private finance includes the income and expenditure of a person or company.
The goal of private finance is to make a profit and fulfill private desires. In private finance,
individuals or a company have fewer resources to earn an income. Individuals or companies
prefer surplus budgets to make a profit.

There are two types of private finance –Personal finance and business finance. Personal
finance is only limited to an individual or household level. It includes investment, banking,
saving, loans, tax management, and retirement planning. Individuals make short-term
investments where they can earn quickly. They always consider their income before making
investments. Business finance means the management of the financial activities of a
 company. In this, we study how to get capital and use it for the growth of the company. Well,
management of finance can help increase the capital of a company.

Difference between public finance and private finance

Basis Public finance Private finance

Public Finance is a study of Private finance is the study of the

Definition government revenue and revenue and expenditure of
expenditure activities. individuals and private entities.

The objective of private finance

The objective of public finance
Objective
is to benefit the public. is to make a profit.

The government chose a deficit Private individuals prefer surplus

Budget
budget. budgets…

Government make a transaction private individuals make

for business transactions for
Motive of Expenditure
public benefit. profit.

government make its In private finance, an individual

can keep their transaction
budget proposals and allocation
Financial transaction of resources to the public. secret.

Government has full control over Private individuals have control

Currency ownership
the currency. over the currency.

The government invests in Private investors put their money

Long term consideration projects that are beneficial for where the returns are quick and
the public. immediate.

The government first decides the

amount of A private individual considers
Determination of expenditure. expenditure and then finds income first and then decides
resources of income. how much to spend.

Resources The government have more Individuals have fewer resources

 resources to make money such as
printing
currency, passing laws to
increase its income to make income.

etc.

Private individuals cannot use

Government can use coercive force to get income.
Coercive methods methods to get income such as
taxes.