Define Public Finance and describe its scope.

Discuss the Nature and Scope of Public Finance.

Public finance is that branch of economics which is concerned with the study of revenue and expenditure of the public authorities. It focuses on how government policies of taxation and public expenditure affect the economy and the welfare of the people living in the country. In other words, public finance studies how public authorities raise revenue and incur expenditure so that the society may get maximum social benefit. Besides, the revenue and expenditure activities of the public authorities, public finance also studies how and when government raises public debt manages financial administration of the government and maintains stability and growth of the economy and manages distribution of resources between different layers of the government.

Meaning and Definition of Public Finance

The word, “Public”, means a group of people, represented by the government, and “Finance” means monetary resources. Thus, public finance means the financial resources or income and expenditure of the government of a country. The word, Public Finance, is related to Fisc. In Italian language, the word, Fisc, means government treasury. So, the word, Public Finance, means the transaction made by government treasury. In other words, the income and expenditure of the government. In the words of Dalton, “It is one of those subjects that lies on the border line, between economics and politics.”

Public Economics instead of Public Finance: In brief, public finance or public economics is that branch of economics in which the economic activities of the government are studied.

According to Buchnan, “Public Finance studies the economic activities of government as a unit. “

In the words of Dalton, “Public Finance deals with the income and expenditure of public authorities and with the manner in which the one is adjusted with the other.”

According to R. A. Musgrave, “A complex of problems that centres around the revenue- expenditure process of government is referred to traditionally as public finance.”

Scope or Subject Matter of Public Finance

Scope or subject matter of public finance refers to those activities of the public authorities which are related to finance, that is, collection of revenue and its allocation among different branches of the economy. Besides the financial activities of the government, the scope and subject matter of public finance in the modern times has expanded greatly because of increasing functions of the government. The economic role of the government is not only confined to allocation and distribution of resources but has also expanded to achieve stability, full employment and higher economic growth. Thus, over the years the subject matter of public finance has expanded greatly. The scope of public finance can be divided into the following parts:

(1) Theory of Public Revenue: Theory of public revenue is the most important branch of public finance study. It is related to the study of all those sources or methods through which a government earns revenue. This branch of public finance also studies the principles of taxation, methods of raising revenue, classification of revenue, deficit financing, etc… Comparative advantages and disadvantages of the various sources of government revenue are also analysed in this part. This branch of public finance is termed as distribution branch by Prof. Musgrave because government taxation policies generally aims at equitable distribution of income and wealth with economic development.

(2) Theory of Public Expenditure : Principles and problems related to government expenditure are studied in this branch of public finance. Whatever resources government raises through various sources, it needs to be distributed. It is possible through public expenditure, for the attainment of the objectives like administration, defence, economic development, full employment, economic welfare, price stability, etc.. This branch of public finance also studies classification, causes of growth public expenditure and the theories associated with it. Since this branch of public finance is concerned with allocation of resources among different branches of the economy, Prof. Musgrave has called this branch as allocation branch.

(3) Theory of Public Debt: At times government expenditure may exceed its revenue. To meet this deficit, government raises loans. This branch of public finance is concerned with how government raises loans through various sources to meet the short fall in the government budget. Besides the sources of public debt, this part of public finance also studies the impact of the burden of public debt, debt management, methods of interest payments, redemption of debt, etc.. Thus, the study of the theory of public debt focuses on the sources and the problems of raising loans and the methods of repayments of loans.

(4) Financial Administration : This branch of public finance studies the income and expenditure or the financial administration of the government. It is related to the problems regarding drafting of the budget, its acceptance and its application, etc…

(5) Stability and Growth: In present times, public finance is mainly concerned with the economic stability and other related problems of a country. For the attainment of these objectives, the government formulates its fiscal policy comprising of various fiscal instruments directed towards the economic stability of the nation, Prof. Musgrave, has named it as stabilisation branch.

(6) Federal Finance: Distribution of the sources of income and expenditure between the central and the state governments in the federal system of government is also studied as the subject matter of public finance. This branch of public finance is popularly known as Federal Finance. In short, it may be said that scope of public finance can be studied from three points of view.

(1) Allocation Branch, (2) Distribution Branch and (3) Stabilisation Branch.

Nature of Public Finance

Nature of public finance implies whether it is a science or an art or both.

(1) Public Finance is a Science: Before we conclude whether public finance is a science or not, it is imperative to know what we mean by science. Science is the systematic study of any subject which studies causal relationship between facts. Public finance is a systematic study relating to revenue and expenditure of the government. It also studies the causal relationship between facts relating to revenue and expenditure of the government. For example, it is known from the study of public finance that if taxes are levied at high rates it will have an adverse affect on production and consumption. Prof. Plehn has advanced the following arguments in favour of public finance being science.

(i) Public finance is not a study of complete knowledge about human being rather, it is concerned with 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. 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 government’s revenue and expenditure to achieve the objectives of full employment, economic equality, economic development, price stability, etc. To achieve the objective of economic equality taxes are levied at progressive rate. Magnitude of development expenditure is enhanced to achieve economic development of the country. Since every tax is likely to be opposed, it becomes essential to plan their timing and volume. The process of levying tax is, therefore, 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. It has been aptly remarked by Mrs. Ursla Hicks, “Public Finance is an art. It is concerned with real problems.

In short, public finance is both science and art. It is a positive science as well as normative science.