Meaning of Public Finance – Its Components, Objectives and Functions
What is Public Finance?
AUTHOR : Riya Kashyap
Public Finance is the management of a country’s revenue, expenditures and debt loads through various government and quasi government institutions. Public finance is the study of government activities, which may include spending, deficits and taxation. The goal of public finance is 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. Also, public finance can involve issues outside of the economy, including accounting, law and public finance management.
Understanding the role of the government and how these changes may impact the economy are a few important aspects of public finance. 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.
Components Of Public Finance
The main components of public finance include activities related to collecting revenue, making expenditures to support society, and implementing a financing strategy (such as issuing government debt). The main components include:
Tax Collection
Tax collection is the major revenue source for governments. Examples of taxes collected by governments include GST, income tax (a type of progressive tax), estate tax, and property tax. Other types of revenue in this category include duties and tariffs on imports and revenue from any type of public services that are not free.
Budget
The budget is a plan of what the government intends to have as expenditures in a fiscal year. It is the estimation of revenue and expenses over a specified period of time, generally future. It is re-evaluated on a periodic basis.
Expenditure
It refers to the estimated spends of the government during a given fiscal year, arising out of certain government schemes or public policies. It has broadly two classifications- Revenue & Capital Expenditure. For e.g.- Construction of Highways, hospitals etc. are part of Government Expenditures.
Deficit/ Surplus
If the government spends more than it collects in revenue there is a deficit in that year. If the government has less expenditures than it collects in taxes, there is a surplus.
National Debt
It is the accumulation of the government’s annual budget deficits. It is also known as government debt. It is caused due to deficit spending by the government.
Objectives of Public Finance
- Equitable Distribution of Wealth
- Allocation of Resources
- Aids in Provision of Employment Opportunities
Economists have classified the government expenditures into three main types- Government purchases of goods and services for current use are classed as government consumption. Government purchases of goods and services intended to create future benefits such as infrastructure investment or research spending is government investment. Government expenditures that are not purchases of goods and services, and instead just represent transfers of money such as social security payments are known as transfer payments.
Working of Public Finance
There are three main functions of public finance as follows –
1. Allocation Function
There are mainly two types of goods in an economy, private goods and public goods. Private goods associate exclusivity to themselves. Only those who pay for these goods can get the benefit of such goods, for example, a car. On the other hand, public goods are non-exclusive. Everyone regardless of paying or not, can enjoy benefits from public goods, for example, a road. This 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 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 within the available public wealth.
2. 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.
3. Stabilization Function
Every economy faces periods of booms and depression. It is the most normal and common business cycles that would lead to this scenario. These periods create instability in the economy. Stabilization eliminates or reduces the business fluctuations and its impact on the economy. Policies like deficit/ surplus budgeting during the time of boom and depression respectively helps in achieving the required economic stability.
FOR MORE INFORMATION VISIT OUR SITE
