Meaning of Public finance

Public Finance can be defined as the collection of taxes from those who benefit from the provision of public goods by the governments and the use of those tax funds towards production and distribution of the public goods.

Public finance is the study of the role of the government in the economy. It is the branch of economics which assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones

Public finance is the aspect of economics which deals with government expenditure and revenue. It is the financial activities that concern borrowing and lending, receiving and spending by the federal, state, local governments and their agencies in order to create an impact on individuals and corporate bodies.

Public finance is simply defined as the aspect of economics which deals with government revenue and expenditure. It involves the financial activities of government as they relate to revenue or income expenditure and debt operation and their overall effect on the economy.

Objectives of public finance

The objectives of public finance are the following are:

  1. Provision of employment: Public finance is used to create employment in the country for those who are unemployed.
  2. Revenue generation: Through the public finance, the government of a country is able to generate revenue for the country and used the generated revenue to meet the needs of the society.
  3. Satisfaction of needs: Through public finance, the government is able to identify the needs of the people thereby creating means of satisfying or meeting the needs of the people to satisfy them.
  4. Price stabilization: through the public finance, the government is able to stabilize the prices of goods and services so as to avoid inflation or deflation of goods and services in the community.
  5. Equitable distribution of income: Public finance ensures that the revenue generated is distributed equally to the different economic sector of the economy and ensures there is no partiality in the distribution of the national resources.

Fiscal Policy

Fiscal policy is the use of government revenue collection (mainly taxes) and expenditure (spending) to influence the economy.

According to Keynesian economics, when the government changes the levels of taxation and government spending, it influences aggregate demand and the level of economic activity. Fiscal policy can be used to stabilize the economy over the course of the business cycle

Objectives of Fiscal policy

  1. Full employment: It is very important objective of fiscal policy. Unemployment reduces the level of production, and hence the level of economic growth. It also creates many problems to the unemployed people in their day-to-day life. So, countries try to remove unemployment and attain full employment. Full employment refers to that situation, where there is no involuntary unemployment in the economy. To attain this objective, government tends to:
    •  Increase its spending
    • Lower the personal income taxes
    •  Lower the business taxes, or
    • Employ a combination of increasing government spending and decreasing taxes

 However, in practice, it is difficult to achieve full employment. As the factor markets are not perfect, factor units may lose their jobs and may not get the new jobs immediately

  1. Economic growth: It is also an important objective of fiscal policy. By means of higher rate of economic growth, the problem of unemployment can also be solved. However, it may create some problems in the maintenance of price stability.
  2. Resource allocation: Resource allocation refers to assigning the available resources of the economy to the specific uses chosen among many possible and competing alternatives. It gives answer to what to produce and how to produce-questions of the economy. Fiscal policy should ensure the optimum allocation of the resources. It should divert the resources from unproductive sectors to the productive sectors of the economy.
  3. Increase in Savings: This policy is also used to increase the rate of savings in the country. In the developing countries rich class spends a lot of money on luxuries. The government can impose taxes on them and can provide the basic necessities of life to the poor class on low rate. In this way by providing incentives, savings can be increased.
  4. Equal Distribution of Wealth: Fiscal policy is very useful for the achievement of equal distribution of wealth. When the wealth is equally distributed among the various classes then their purchasing power increases which ensures the high level of employment and production.
  5. Control Inflation: Fiscal policy is very useful weapon for controlling the rate of inflation. When the expenditure on non productive projects is reduced or the rates of taxes are increased then the purchasing power of the people reduces.
  6. Reduce the Regional Disparity: In the less-developing countries, the regional disparity is found. Some areas are more developed while the others are less developed. Government provides the infrastructure facilities in less developed areas. The tax holiday incentive is also provided in these areas which are very useful in increasing the per capita income.
  7. Check Rapid Increase in Consumption: Fiscal policy is also used to check the rapid increase in the consumption will be high then the rate of saving will be low and consequently rate of investment will be low. So one country cannot improve her economic condition without increasing the investment.

Test and Exercise

  1. The aspect of economics which deals with government revenue and expenditure is (a) fiscal policy (b) public finance (c) public issue (d) fiscal speculations.
  2. The use of income and expenditure instruments or policies to control or regulate the economic activities of the country is (a) public finance (b) fiscal policy (c) public issue (d) fiscal speculations.
  3. All of the following are objectives fiscal policy except (a) full employment (b) adequate distribution of wealth (c) economic development (d) corrupt nation.
  4. To attain full employment, government must do all of the following except (a) lower business taxes (b) increase its spending (c) decrease it’s spending (d) lower the personal income tax.
  5. A situation where there is no involuntary unemployment in an economy can be regarded as (a) unemployment (b) middle unemployment (c) full employment (d) employment.

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