The Importance of Public Finance has acquired a very wide and deep dimension discuss fully.
The Importance of Public Finance has acquired a very wide and deep dimension discuss fully.
Or
“The study of Public Finance has assumed increasing significance in the field of economic analysis in recent years.” Explain this statement.
Importance of Public Finance
Importance of public finance depends upon the nature of economic system. Classical Economists favoured the Laissez Faire or Free Market Economy. In such an economic system, public finance or the government does not have any importance in the economic activities. Main functions of the government were to maintain law and order in the country and defending it against any external aggression. So, the government were to impose only those taxes which were sufficient to meet its administrative expenses. Government budget must be balanced. Deficit budget or surplus budget was not justified from the economic point of view. So, there was not much place for the fiscal policy in the free market economies or laissez faire.
The Great Depression of 1929-30 has changed the thinking of economists regarding public finance. Famous economist, Lord Keynes had said that the government should interfere in the economic activities in order to save the economy from trade cycles or the ill effects of the boom or depression and to attain full employment. Therefore, in these days, the countries of the world have either mixed economies or socialist economies instead of free market economies. Both these economies attach importance to public finance. Modern economists do not give importance to the problem of balanced or unbalanced budget. They think that a budget should be evaluated on the basis of the objectives to be attained by it. Budget may have several objectives, such as, removing unemployment, accelerating the pace of economic development and bringing equality in the distribution of wealth, etc. In order to attain these objectives, deficit budget is also formulated. Prof. A, P. Learner has propounded the doctrine of Functional Finance for the mixed economies. According to this concept, the objective of public finance is to increase or decrease the effective demand so as to attain the economic objectives. If a deficit budget has to be adopted for increasing the effective demand, it will not be improper. In economic planning of the underdeveloped economies, the importance of public finance is increasing day by day. There are two significant reasons behind the increasing importance of public finance –
(1) Increase in the activities of the Government: There has been a great increase in the activities of the government of every country. Government’s responsibility today is not merely to maintain peace and order, rather, the modern welfare governments also work for the economic development, full employment, price stability, eradication of poverty, equitable distribution of income and wealth, etc. According to Musgrave, there are two kinds of goods in a country: (i) private goods, (ii) public goods. Public goods are those goods which can be used by people with or without payment. These public goods include parks, bridges, roads, etc. It is government’s responsibility to make public goods available. Similarly, some goods and services are required for the satisfaction of our qualitative wants. For instance, free education, free medical care, food subsidies are our qualitative wants. Supply of these goods and services is also made by the government. So owing to an increase in economic development and social welfare activities. there has also been an increase in the importance of public finance.
(2) Increase in the effect on Economic Life: The activities of public finance like public expenditure, taxation system, public debt, deficit financing, etc., have a great effect on economic life. As a result of the government policy regarding taxation or expenditure; production can be increased; savings and investment can also be increased; consumption of harmful goods can be reduced; equality in the distribution of national income can be brought about; the pace of economic development can be accelerated; unemployment and poverty can be reduced; employment opportunities can be increased and economic planning can be implemented successfully. So, public finance has a great significance for the economic development and economic welfare of the country. In the socialist economies like Cuba, China, etc., all economic activities are totally under government control. Therefore, the economic activities in these economies are performed only through public finance or the fiscal policy of the government. In countries like Russia, Poland, Romania, etc. mixed economy has taken the place of socialist economy. Under mixed economy also public finance occupies an important place.
Significance of public finance to modern economy is evident from the following facts
(1) To Achieve Adjustment in Allocation of Resources: According to Musgrave, study of public finance tells how co-ordination among the allocation of resources should be effected. Public finance is associated with the study of public sector. The reason why public sector is so important is that all the needs of the people cannot be satisfied by the private sector. Collective or Social Wants of the people, like, defence, justice, social welfare, railways, roads, parks, etc. can be met by public sector alone. Income and expenditure process the government serves to allocate the resources of the country between private goods and social goods. It also determines the quantum of production of different social goods. In other words, what amount of resources be utilized for their production. Study of public finance is, therefore, important for the proper allocation of resources for the production of private and social goods.
(2) To Achieve Adjustment in the Distribution of Income and Wealth : Study of public finance gives us the knowledge of those methods which help us to remove the inequalities of wealth and income. For example, (i) imposing taxes on the rich at progressive rate and providing subsidies to the poor, (ii) Using the proceeds of progressive taxation to provide for such public utility services as are likely to promote welfare of the poor sections, (iii) Levying high rate of indirect taxes on luxury goods and exempting necessities from the burden of taxation.
(3) To Achieve Economic Stability: (i) In order to remove involuntary unemployment, effective demand be stimulated by reducing the taxes, (ii) To check inflation, public expenditure be curtailed and the level of taxation nhanced, (iii) If there is full employment and price stability in the economy, en the existing level of taxes and public expenditure be maintained to avoid economic fluctuations. (4) To Accelerate Economic Development: Main cause of low rate of economic growth of underdeveloped countries is lack of capital formation. To increase the rate of economic growth, it is essential to accelerate the rate Icapital formation. Hence, fiscal policy should be so framed as to increase the rate of saving and investment and reduce consumption. It is the objective of Active Finance.
It is clear from the above account that study of public finance is of utmost importance in the modern times.
