The government has to perform some functions. To carry out these functions, it needs funds. Everyone has to contribute something. So the public finance deals with why the government takes money, how it gets money and where it spends money?
1. An individual’s income determines his expenditure, while a state’s proposed expenditure determines his
income. The state first decides the nature and scale of its expenditure and then proceeds to find funds to meet it. An individual knows his income and he has to plan out his expenditure accordingly. An individual adjusts his expenditure to his income, whereas the state adjusts its income to its expenditure.
2. A public authority can vary the amount of its income and expenditure within limits. An individual cannot easily double his income or halve his expenses even if he would be better off that way. But this is not so difficult in the case of governments.
3. A public authority usually does not discount the future at as high a rate as an individual: the reason is obvious. The life of a man is limited in years and his foresight is limited. A state is supposed to live forever.
4. There is no fixed period of time over where an individual balances his budget: State budgets are generally made for one year. But the income and expenditure of an individual are continuous and cover the whole period of his life.
5. individual finance is kept a secret whereas state finance is made public.
6. A state can raise an internal loan, an individual cannot. Nobody can borrow from himself. But the state can borrow from its own citizen.
7. The state can issue paper currency in order to meet its expenditure. But no such course is open to a private individual.
8. No equi- marginalizing of utilities: An individual tries to maximize satisfaction from his income by distributing his expenditure in such a manner as to have equi –marginal utility in every case but the state expenditure is done by the Finance Department in an objective manner.
9. The private individual lacks the coercive authority which a government has. A govt. has simply to pass a law and compel the citizens to pay a tax or subscribe to compulsory loans i.e. compulsory deposits, but an individual cannot do anything of the kind.
10. An individual after meeting his needs saves something to lay-buy. Not so with a state.
Importance of public finance:
1. It is one of the most effective investments of state control over the economy. It is not merely means of collecting state revenues and making disbursements.
2. The state activities which have to be financed by public revenues are over-expanding. This has added to the importance of the public finance manifold.
3. Growing significance of fiscal policy in tackling economic problems has increased the importance of public finance.
4. The study of public finance is especially important for underdeveloped countries. Only prudent management of state finance is essential to break the vicious circle of poverty in which the underdeveloped
countries are involved. Fiscal policy is a powerful tool for increasing capital formation, accelerating growth, increasing national income, and raising the level of employment.
Role or functions of public finance:
1. Allocative functions: It refers to the process by which total resource use is divided between private and social goods by which the mix of social goods is chosen. This is done by the budgetary policy.
2. Distributive functions: the budgetary policy also affects the distribution of income in the community. The tax and expenditure measures are adopted to modify the existing distribution with a view to reducing economic inequalities. In this way, optimal income distribution is brought about.
3. Stabilization function: The budgeting policy can also be used to maintain a high level of employment, a reasonable degree of price level stability, an appropriate rate of economic growth, and stability in the balance of payments.
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