Definition: Public Finance implies a branch of economics, which is concerned with government activities and the various sources of financing expenditure. Basically, it deals with government revenue, expenses, and debt, as well as its impact on the entire economy.
As its name suggests, public finance is all about the management of finances of the public authorities or public bodies, such as Central Government, State Government and Local Self Government, for carrying out their operations, which results in incurring money for providing subsidies, public utility services, and welfare payments to the residents.
Public utility services include education, health, sanitation, transportation, infrastructure, electricity, communication, food, etc. The basic source of revenue to provide the services are taxes, duties, fees, foreign aid, sale of goods and services, borrowing, creation of new money, etc.
Elements of Public Finance
- Public Revenue: Otherwise called as Government revenue, it covers revenue generated or received by the government from various sources – Tax Revenue and Non-Tax Revenue.
Tax Revenue covers income from income tax, corporate tax, taxes levied on imports and exports, excise duty, goods and services tax, etc. On the other hand non-tax revenue includes income from fees, surplus of Public Sector Undertakings, capital receipts, fines and penalties, grants and gifts, central bank revenue, etc.
- Public Expenditure: As the name itself signifies, public expenditure refers to the expenses incurred by the public bodies in order to fulfil the overall needs of the general public. The expenses are made in connection to the investment in defence activities, healthcare and medical research, economic development, infrastructure development, provision of social security, and maintenance of the government.
- Public Debt: Also referred to as Government Debt, it indicates the total outstanding liabilities, i.e. amount which a country owes to creditors, which can be individuals, undertakings, and other governments. The creditors can be internal (debt borrowed from domestic lenders such as banks or financial institutions) and external (debt borrowed from international financial institutions, and governments).
- Financial Administration: Financial Administration is that portion of public finance which focuses on the administrative control techniques and issues concerning the preparation of the budget. It is a tool through which financial operations of the countries are performed.
The subject matter of financial administration is: How the budget is prepared, passed and implemented? What matters are considered while preparing the budget? How taxes are collected by various authorities? Which departments are responsible for auditing and reporting of public accounts?
- Economic Stabilization: The basic objective of the economic system is the stability of the economy. It refers to the state, wherein the fluctuations in the economy due to political, legal or monetary policies of the government, is very less and so the inflation rate is quite low.
The fiscal policy of the country plays an important role here, in maintaining a fair distribution of national income in the country, which leads to economic stability.
- Economic Growth: Economic growth is when there is a rise in the production of goods and supply of services, in comparison to the previous years. Many experts are of the view that the problem of economic growth lies in developing countries only. Therefore, Public Finance is considered as one of the main tools with the help of which the country can cope with the problem of economic growth.
Public Finance studies How the government raises funds? Where it spends the funds raised? How the government operating at various levels, provides necessary services and facilities to the public? And how the government arranges funds to provide these services.
In finer terms, public finance looks after the facts, principles, policies, theories, techniques, rules and problems which determine, direct, influence and regulate the use of financial resources to alternative projects initiated by the government.