Public Finance

Updated on January 31, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Public Finance Definition

Public finance is the approach to managing the public funds in the country’s economy that plays the most important role in the development and growth of the nation, both domestically and internationally. It also affects every stakeholder of the country, whether a citizen or not. The public finance economics accounts for the government revenue and expenditure and the assessment of desired outcomes is calculated accordingly.

Public Finance

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The management of this aspect of finance is to fulfill the fundamental responsibilities of the government towards their citizens such as food, education, shelter, health, and infrastructure. However, it is vital to understand that according to principle, these expenditures are supposed to be managed from the government’s income through taxation.

Key Takeaways

  • Public finance is the method to manage the public funds in the nation’s economy. It plays a vital role in the nation’s growth and development, domestically and internationally. It influences the nation’s citizen and non-citizen stakeholders.
  • The objectives of public finance are managing public funds, economic development, eliminating inequality, retaining price stability, satisfying the nation’s fundamental needs, and managing the currency value in the international market.
  • The components of public finance are revenue collection, budget preparation, public expenditure, and assessing the debt or investment need.
  • Public finance management is a broader concept. It requires appropriate planning, resource allocation, and regulating adverse situations through creating fiscal and financial policies and budgets to ensure the nation’s growth. 

Public Finance Explained

Public finance is the way of managing public funds. However, it is limited to administering public funds and other things like price stability, economic growth, income inequality Inequality Of IncomeIncome inequality refers to the crucial imbalance of income dispersal across the population.read more, unemployment, human rights, etc. Management of public finance is the wider term. It requires proper planning, allocation of resources, and controlling the unfavorable situations, etc., by making the financial and fiscal policies Fiscal PoliciesFiscal policy refers to government measures utilizing tax revenue and expenditure as a tool to attain economic objectives. read more, budgets, etc., to ensure the nation’s growth.

Every country needs money to run. The country’s revenue is the collection of various taxes and returns on the investment, and the government expended from the collection of the revenue. Some expenditures are healthcare, medical facilities, salaries to the staff, members, etc. All the revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more and expenditure are collected by or for the public. Hence, finance is called public finance, where the role of the people is large in terms of contribution. It deals with the revenue and expenditure at every stage the public is involved, whether at the state or central levels. Public finance theory plays an important role in developing the economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more as its growth largely depends on its proper utilization.

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Objectives

Let us understand the objectives of the public finance economics which is highly regarded and one of the highest forms of assessing the performance of a government or its tenure within an economy. Understanding the basis for such a theory to govern the funds collected from the citizens of the country would help us put things relating to the government and its management into perspective.

#1 – Managing Public Needs

The main objective is managing the basic needs of the public like food, shelter, health, infrastructure, and education. All these are the government’s responsibilities so that the fundamental public needs are fulfilled and contribute to the development of the economy.

#2 – Economic Development

Proper management leads to economic development that leads to the nation’s growth.

#3 – Removes Inequality

It also aims at removing the inequality by proper allocation of resources, i.e., providing relief to the poor by collecting taxes from the rich class people.

#4 – Maintaining Price Stability

It helps control inflation by various packages and means for its development.

Some objective other than the ones mentioned above could be:

  1. Fulfilling the basic needs of the nation.
  2. Generating employment.
  3. Maintaining the currency value in the international market.

Types

The public finance theory comprises of a series of inflows and outflows that comprise to become the body of work it turns out to be for the government and its citizens. Let us understand its types through the explanation below.

Types of Public Finance

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#1 – Public Revenue

Public revenue collects money from the public through direct and indirect taxesIndirect TaxesIndirect tax, also known as consumption tax, is the type of tax the person does not directly bear. In contrast, the incidence of such taxes is passed on to the end consumer of goods or services by adding such taxes to the value of those goods or services, like Excise duty, Service tax, VAT, etc.read more, penalties, fines, fees, maintenance, etc.

#2 – Public Expenditure

Public expenditure is the expenditure for the public like infrastructural facilities, basic health facilities, medical and educational facilities, etc.

#3 – Public Debt

When the expenditure exceeds the revenue, the government can take the help of debtDebtDebt is the practice of borrowing a tangible item, primarily money by an individual, business, or government, from another person, financial institution, or state.read more to fulfill the country’s needs and run the economy.

#4 – Financial Administration

Financial administration is managing the public financeFinanceFinance is a broad term that essentially refers to money management or channeling money for various purposes.read more and addressing the needs of the government like salaries to the general electives, expenditure on maintenance of communal heritage, etc.

Components

Let us understand the components of the public finance economics through the discussion below.

#1 – Collection of Revenue

The primary and utmost important component is the collection of the revenue by taxes, fines, charges, import duty, fees, etc., to run the economy.

#2 – Public Expenditure

Expenditure involves public expenditure and government expenditure. Public expenditure includes the infrastructureInfrastructureInfrastructure refers to fundamental physical and technological frameworks that a region or industry establishes for its economy to function properly.read more and other expenses necessary to run the government, like salaries.

#3 – Preparation of Budgets

The budget is the annual forecast of the revenue and expenditures to analyze the need for the debtor to invest in the finance.

#4 – Analyzing the need for Debt or Investment

The important component of public finance is to analyze whether there will be a shortage of funds or availability of excess funds and accordingly deploy the funds.

Functions

Through the collection and payments of funds collected from the public, the public finance theory has a series of responsibilities and functions that must be fulfilled, both in the fundamental sense and for a larger purpose.

  • Management of income and expenditure by optimum utilization of the resources.
  • Managing the growth and price stability in the economy.
  • Providing the necessary needs and infrastructure to the public.
  • Take initiatives for the development of the people, which can contribute to the nation’s development.
  • Maintaining the transparency of the policies and the records of income and expenditures.
  • Compare the actual position with the budgets and accordingly alter the policies and manage the economy.
  • Monitor the functioning and effectiveness of the financial policy.
  • Preparing the economic policies for the nation’s development and the economy.

Scope

The scope of public finance economics is not limited to managing the finance. It also focuses on maintaining the proper infrastructure, contributing to the national economy, reducing unemployment, managing the financial pillars of the economy, operating the hygiene and cleanness in the nation, analyses tax collection, ensuring the burden of tax is not very high, monitoring and enforcing the implementation of the financial and fiscal policy, maintaining the confidence of the public at large, etc.

Management

Managing public finance economics is a specialized job of a team of experts and professionals who not only concentrate on spending the amount collected towards public welfare but also concentrate on the collection of funds from every individual and organization under different tax slabs. Let us understand the management of this pivotal function of a government through the explanation below.

Managing Public Finance

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#1 – Management of Income and Expenditure

Public finance largely involves public money; hence management and transparency in the records play the most important role.

#2 – Managing Debt and Investments

The role of government is wide as it manages various aspects like managing and repayment of the timely debt, managing the assets, and the investment by the government to decide the value of holding and benefit from it.

Importance

Let us understand the importance of implementing the public finance theory to an extend where the economy and its citizens thrive simultaneously. This will help us understand the intricate details of the concept.

  • The proper management of public finance ensures the growth of the nation.
  • It encourages investment through various policies and packages.
  • Preparation, implementation, evolving with the change in technology and the policies framed by the government for the development of the economy at large.
  • It helps to maintain price stability and reduce inflation and unemployment.
  • It is also important in terms of allocating natural and human resources.

Frequently Asked Questions (FAQs)

What is the role of public finance?

The role of public finance is that it verifies the government revenue and expenditure of the public authorities and makes the arrangement of one or the other to obtain stunning results and avert undesirable outcomes.

What are the branches of the public finance sector?

The public finance sector has four branches: public expenditure, public revenue, public debt, and financial administration. Under public expenditure, one may know the many principles, effects, and expenditure complexities created by the public authorities.

What are the externalities in public finance?

The externalities in public finance possess fundamental economic policy problems if households, firms, and individuals do not incorporate the costs or the advantages received from the financial trade.

What is the budget in public finance?

Budgeting in public finance refers to allotting measurable resources to the organization’s classified needs. In the case of government bodies, the budget shows the statutory control to spend the funds.

Recommended Articles

This article is a guide to what is Public Finance. We explain its scope, management, objectives, types, functions, and importance in detail. Also, you may learn more about financing from the following articles: –