Intro of public finance

1. Chapter I
Public Finance
DEFINITION AND CONCEPT OF
PUBLIC FINANCE

2. Definition
• Public Finance is related to the financing of State
activities. It is a field of economics that is
concerned with how to pay for government
activities and how to plan out and administer
those activities.
• Dalton states that “Public Finance is one of those
subjects which lie on the border line between
economics and politics. It is concerned with the
income and Expenditure of public authorities,
and with the manner in which one is adjusted
with the other. ”

3. Subject matter of Public Finance
 The theory of Public revenue: It includes the study of different
sources of government’s income, with major emphasis on
taxation. The kinds of taxes, incidence and effects of taxation are
analysed in detail.
 The theory of Public expenditure: It includes the classification of
public expenditure, the causes for its increase and the effects of
public expenditures on the economy.
 The theory of Public debt: It includes the classification of public
debt, the burden and the effects of public debt on the economy.
 Financial administration: It refers to how public money is
managed. Public money has to be managed well. This includes
the study of budgets. It deals with the problem of organisation
and administration of the financial machinery. There must be an
efficient way of auditing and scrutinising the funds used by the
various agencies of the government so that there is no misuse of
funds.

4. OBJECTIVES OF PUBLIC FINANCE
 To maintain law and order and secure internal peace and
justice
 To safeguard democracy
 To protect the country from external violence and
invasion
 To promote social and economic justice and upliftment of
the masses
 To promote economic planning
 To provide health and education facilities
 To fulfil social wants provide public goods
 To promote welfare schemes
 To promote economic development and growth

5. Functions of Public finance
1. Allocation function
2. Distribution functions
3. Stabilisation function
4. Growth function

6. Allocation Function
A major function of public finance is allocation of the nation’s
resources for economic and social development. The allocation
depends upon the collection of revenue and composition and size of
government expenditure. The public budget determines the
allocation of funds to various activities under different heads of
expenditures. Through budgetary operations, the government
ensures provision of public goods, such as maintenance of law and
order, defence, roads, transport and so on. In a mixed economy like
India the government tries to correct the mal-allocation of market
mechanism through appropriate fiscal policy.

7. Distribution Function
The function of the distribution branch is to transfer the income
in the economy from one individual to another. Here the
objective is to reduce the inequalities in the distribution of
income and wealth in the country. This is achieved through the
programme of compulsory taxation and public expenditures.
The taxes are imposed on people with high level of income in
the form of progressive income tax and taxes on luxury
consumption. This makes the rich less rich. The money collected
is then spent for the benefit of the poor and thereby make the
poor less poor. In this way the distribution branch can reduce
the gap in the standard of living between rich and poor.

8. Stabilisation Function
Stabilisation function is the newest function of fiscal policy
and has become important in the 1930s. Stabilisation
function, also known as compensatory finance, attempts at
maintaining a high level of employment and a reasonable
degree of price stability. Full employment and a stable value
of money do not happen automatically in a market economy.
Depression and booms are the characteristic features of
capitalist developed economies. J.M Keynes advocated the
use of budgetary policies in controlling business depression
and booms.

9. Growth Function
This refers to the use of budget and fiscal instruments for
promoting economic growth. Public expenditure should be
development oriented. The basic objective of fiscal
operations in emerging and developing economies is to
achieve economic growth and development. Infrastructure
development expenditure facilitates increase in production
of goods and services, which in turn leads to higher
economic growth.