Public Finance | Economics Optional Notes for UPSC PDF Download

Introduction

The word public refers to general people and the word finance means resources.So public finance means resources of the masses,how they are collected and utilized.Thus, Public Finance is the branch of economics that studies the taxing and spending activities of government.The discipline of public finance describes and analyses government services,subsidies and welfare payments,and the methods by which the expenditures to these ends are covered through taxation,borrowing,foreign aid and the creation of money.

Definition

• According to  Findlay Shirras: “Public finance is the study of principles underlying the spending and raising of funds by public authorities”.
• According to H.L Lutz: “Public finance deals with the provision,custody and discursement of resources needed for conduct of public or government function.”
• According to  Hugh Dalton: “Public finance is concerned with the income and expenditure of public authorities,and with the adjustment of the one to the other.

Nature of Public Finance

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

1. Public Finance as Science
Science is the systematic study of any subject which studies relationship between facts. Public finance has been held as science which deals with the income and expenditure of the government’s finance.It studies the relationship between facts relating to revenue and expenditure of the government.

Arguments in support of Public Finance as Science:

• Public finance is systematic study of the facts and principles relating to government expenditure and revenue.
• Principles of Public finance are empirical.
• Public finance is studied by the use of scientific methods.
• Public finance is concerned with definite and limited field of human knowledge.

2. Public Finance as Art
Art is 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 development and equality. Price stability etc. To achieve  the goal of economic equality taxes are levied which are likely to be opposed.  Therefore it is important to plan their timing and volume. The process of levying tax is therefore an art. Study of Public finance is helpful in solving many practical problems. Public finance is therefore an art also. From the above discussion it can be concluded that public finance is both science and art. It is positive science as well as normative science.

• It is  a positive  science as by the study of public finance factual information about the problems of government’s revenue and expenditure can be known. It also offers suggestions in this respect.
• It is also normative science as study of public finance presents norms or standards of the government’s financial operations . It reveals what should be the quantum of taxes,kind of taxes and on what items less of public expenditure can be incurred.

Scope of Public Finance

Public finance not only includes the income and expenditure of the government but also the sources of income and the way of expenditure of various government corporations, public companies and quasi government ventures. Thus the scope of public finance extends to the study of independent bodies acting under the government’s direct and indirect control. The Scope of public finance includes:

• Public Revenue: Public finance deals with all those sources or methods through which a government earns revenue. It studies the principles of taxation, methods of raising revenue, classification of revenue, deficit financing etc
• Public Expenditure: Public expenditure studies how the government distributes the resources for the fulfillment of various expenses. It also studies principles that the government should keep in view while allocating resources to various sectors and effects of such expenditure.
• Public debt: It deals with borrowing by the government from internal and external sources. AT any time government may exceed its revenue. To meet the deficit, government raises loans. The study of public fiancé focuses on the problems of raising loans and the methods of repayment of loans.
• Financial/Fiscal administration: The scope of financial administration is wider. It covers all the financial functions of the government. It includes drafting and sanctioning of the budget, auditing of the budget, etc. Financial administration is concerned with the organization and functioning of the government machinery responsible for performing the various financial functions of the state. The budget is the master financial plan of the government.
• Economic Stabilization and Growth: In the 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.
• 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 the public finance. This branch of public finance is popularly known as Federal Finance.
  • It is  a positive  science as by the study of public finance factual information about the problems of government’s revenue and expenditure can be known. It also offers suggestions in this respect.
  • It is also normative science as study of public finance presents norms or standards of the government’s financial operations . It reveals what should be the quantum of taxes,kind of taxes and on what items less of public expenditure can be incurred.