Differentiate between Public finance and Private Finance.

What are the similarities and dissimilarities between Public and Private Finance?

Public Finance and Private Finance:

A Comparison In order to comprehend the principles of public finance properly, it is essential to explain the differences between public finance and private finance. Public Finance is concerned with the income and expenditure of the government. As against it, the problems related to finance of an individual or any private institution are called private finance. Some notable similarities and dissimilarities between public finance and private finance are discussed as under:

Similarities

Following are the similarities between public and private finance –

(1) Balance between Income and Expenditure: The first similarity is that the state or an individual both want to strike a balance between income and expenditure. Their budget may be imbalanced temporarily, but a balance between income and expenditure has to be established sooner or later.

(2) Maximum Satisfaction: Both the state and an individual spend their income with a view to maximise welfare. However, for an individual, it is the maximisation of personal welfare while for the state it is the maximisation of social welfare or collective welfare. Nevertheless, in both the cases, welfare is maximised in accordance with the law of equimarginal utility.

(3) Impact of Economic Changes : Financial management of both an individual and the state are similarly impacted by the economic changes. For example, during inflation, expenditure of an individual as well as of a state tends to rise to achieve a given level of welfare, owing to the rise in prices.

(4) Capacity to Borrow : Both the government and individual have the capacity to borrow money from one or the other source. This enhances their capacity to spend beyond the level of their income.

(5) Possibility of Misuse: While public money can be misused on non-development programmes or on programmes to get political mileage; private money can be misused on drugs and narcotics that lowers real welfare of the individual and of the society as a whole.

Dissimilarities

The following are the main dissimilarities between public and private finance-

(1) Difference in the Nature of Income: The rights of the government to obtain income are determined by law. So, the nature of government income is compulsory. Government can compel people to pay taxes and to give loans, but no individual has such rights. The scope of state income is very wide. Government can get loans from the foreign countries, or it can expand money supply, while these facilities are not available to private finance.

(2) Difference Regarding Income and Expenditure : Government makes an estimate of its expenditure first and then, tries to make income for it, while an individual makes an estimate, first, of his income, and then, determines his expenditure in accordance with his income. According to Dr. Dalton, “While an individual’s income determines his expenditure, a public authority’s expenditure determines its income”. The proverb, “Cut your coat according to your cloth,.” applies to the individual. Contrary to it, the government, first of all, determines the dimensions of the coat, and then, makes arrangement of the required length of cloth.

(3) Difference in Income Elasticity: The income of a person is inelastic. In other words, he cannot increase or decrease his income as required. Very few changes can be made in it. Contrary to it, government can increase its income easily and rapidly. As such the income of the government is relatively more elastic.

(4) Difference in the Nature of Expenditure: An individual wants to get the maximum benefit or utility out of his expenditure, but several expenses have to be made in the public sector which are not directly beneficial to the government, or which do not yield any income to the government for a long time. Habits and customs affect the personal expenditure greatly, but public expenditure is motivated by such government policies as removal of unemployment, economic development, etc.

(5) Secrecy: Every person tries not to let anyone know his real income and expenditure. In other words, he wants to maintain a secrecy in this regard. But government publicises extensively the details of its income and expenditure. That is why the saying goes, “There is no secrecy in public finances; private finances are secret.”

(6) Difference in the Nature of Budget: A person prepares a budget for a short period, say, a month. Mostly, he wants to have a surplus budget. Public budgets, on the other hand, are always prepared for a year. For a government, it is not essential to have surplus budget. Government budget may also be a deficit budget.

(7) Difference in Future Programme : An individual generally attaches more importance to his existing needs than his future needs. Short term has been given greater importance than long term in private finance. But state is a permanent organisation. Future is also important to it. Government spends a major portion of its revenue on long-term projects, such as, multipurpose projects, establishment of heavy industries and construction of dams, etc…

(8) Difference in Objectives: Private finance always aims at getting maximum profit, but public finance aims at increasing social welfare, defending the country, etc., along with economic profit.

(9) Difference in Organisation : Financial setup of a state is much more extensive than that of an individual. Therefore, a special type of organisation is needed for its management. The state has to set up such departments as can manage the public finance properly.

(10) Resource Allocation : According to Prof. H. B. Newman, the allocation of resources in private finance is made on the basis of the prices prevailing in the market, but resource allocation in public finance is effected by the budgetary decisions of the government. These decisions depend upon other objectives besides price and market mechanism.

(11) Deficit Financing: When the government does not get the requisite revenue from all sources, it can get money as a loan from the Central Bank of the country. The Central Bank can give loan to the government by printing new currency notes. This arrangement is called deficit financing. But an individual cannot meet his expenses by deficit financing.

(12) Bankruptcy: A person can go bankrupt. His liabilities may be more than his assets. But a state ran never go bankrupt. There is no limit to the liabilities of a state.

In a nutshell, despite some similarities between private finance and public finance, certain dissimilarities or differences are also found between them. Owing to these differences, several theories regarding private finance are not applicable to public finance. Several major differences between public and private finances, such as, different objectives of their expenditure, various sources of income, like, the power of the government regarding imposition of taxation and raising loans, etc., cannot be ignored. But it should be kept in mind that public sector is also a part and parcel of the whole economy. The activities of both public and private sectors are mutually related. They are interdependent. Mutual transfer of resources takes place to a great extent through them. So, public sector should be considered as the co-operating factor to the private sector. It is only through the mutual co-operation of both these sectors that the mixed economies of the world are striving to attain the objectives of economic development and economic welfare.