Public Finance - Meaning and Importance of Public Finance.

 Meaning and Nature of Public Finance:

          Public Finance according to the traditional definition of the subject is a branch of economics that deals with the income and expenditure of the government. In the words of Adam Smith, the investigation into the nature and principle of state expenditure and revenue is called Public finance.

          The main division in Public Finance is between public income and public expenditure which form two symmetrical branches of the subject. In other words, Public Finance deals with the finances of the public as an organized group under the institution of government. It thus deals only with the finances of government-include the raising and disbursement of government funds.

          Public Finances are concerned with the operation of “fisc” (public treasury). Hence to the degree that it is a science, it is the fiscal science, its policies are fiscal policies, and its problems are fiscal. Public Finance is not concerned with the direct regulatory function of government over the economy, it is not concerned with such matters as public institutes, banks, etc.

Importance of Public Finance:

          Everybody realizes the importance of money in the real life. If the importance of money is great to an individual, it is greater still to govt. The importance of public finance thus arises from the increasing function of the state for which money is needed. The strength of a nation is reflected in its budget. The importance of public finance is revealed from the following facts,

1.                 Public Finance can be used as a powerful instrument to bring about desired social and economic changes in all sectors of the economy such changes have far-reaching effects on the smooth working of the institutions engaged in economic activities such as production, exchange, and distribution.

2.                 Public finance provides guiding principles for tackling the problem related to rising and spending of revenues by the govt. Through this principle, the allocation of the burden of revenue is equitably made. Thus it is regarded as a powerful instrument of social justice. It is used by the government to bridge the gap between the rich and poor. An equitable system of public finance would tax the rich and spends the revenue so collected for the welfare of the whole society.

3.                 It provides techniques for adjustment between the income and expenditure of the government. This sort of adjustment is necessary because of reason that rising and spending of revenue by government shift purchasing power from one section to another section of the economy, which if not rationally adjusted kills the incentive to work and save and discourage production and investment.

4.                 It provides tools for controlling the economic fluctuation and eradicating the evils (inflation, unemployment) created by them. Economic fluctuations bring prosperity (boom) and depression in the country and thus refers to the changes in income, consumption, and employment levels such changes may lead to concentration of wealth in few hands. As a result economic harmony is disturbed. Such fluctuation can be averted through tools of public finance.

5.                 It can be usefully used in the correction of the balance of payment situations where the tools of public finance are very helpful. The imports are discouraged by imposing heavy duties of taxation and exports are increased through relaxation in duties.

6.                 Public finance introduce various devices for accelerating production, stimulating consumption, and raising the level of income and employment.

7.                 It facilitates monetary policy in the regulation of credit and controlling the general price level (inflation).

8.                 It is one of the most effective instruments of state control over the economy. It is not merely a means of controlling state revenues and making disbursements.

9.                 Growing significance of fiscal policy in tackling economic problems has also increased the importance of public finance.

10.            The study of public finance is especially important for L.D.C. Only prudent management of state finances is essential to break the vicious circle of poverty in which the L.D.C are involved. Fiscal policy is a powerful tool for increasing capital formation, accelerating economic growth, increases national income, and raising the level of employment.