What is Public Finance and its Components & Functions
Public funds play a significant role in the growth and development of a country. Public funds, if managed effectively, can benefit a nation in multiple ways, both domestically and internationally. Thus, public finance is an approach to managing the public funds of a country influencing all stakeholders of the economy.
Public Finance Definition: What Is It?
Public finance refers to managing a country’s revenue, debt, and expenditure via different governments and quasi-government institutions. The country’s revenue comes from the collection of various returns on investments, taxes, among other revenue streams.
The government expenditures include healthcare and medical facilities, salaries for government employees, technological developments, etc. The public plays an important role in contributing to the growth and development of a country; hence the term public finance.
Public finance is the management of revenue and expenditure at all stages where a country’s public is involved. Public finance takes place at the state and central levels. Furthermore, the management of public finances plays a significant role in developing the country’s economy since it depends on the effective utilisation of finances.
Objectives of Public Finance
Listed below are the primary objectives of public finance:
1. Meeting public requirements
The primary objective of public finance is to manage the basic requirements of the public, including food, health, housing, education, infrastructure, etc. When public needs are timely met, it contributes to the economic growth and development of the economy.
2. Economic Growth and Development
Effective public financial management results in economic development, eventually contributing to the nation’s growth.
3. Reduces Inequality
Another important objective of public finance is that it aims to reduce inequality by optimum allocation of resources.
4. Establish Price Stability
Public finance also helps to control inflation and maintain price stability.
Other functions include meeting the primary requirements of the country, generating employment opportunities for its citizens and maintaining the value of the currency in the global market.
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Components of Public Finance
The main components of public finance include activities related to making expenditures on the development of the country, collection of revenue, and the implementation of financial strategy. Here’s a list of public finance components:
1. Revenue
The collection of revenue is the primary component of public finance. Moreover, collecting taxes is the main source of revenue for the government. The main examples of taxes include income tax, sales tax, property tax, etc. The government also collects revenue from tariffs on imports, duties, and other public revenue services.
2. Expenditure
The government spends money on education, healthcare facilities, infrastructure, and more. The expenditures by the government are aimed at benefiting the people of the society.
3. Budget
During a fiscal year, the budget outlines the activities on what the government intends to spend.
4. Deficit/Surplus
There is a deficit in a given year when the government spends more than it collects. Surpluses result from fewer expenditures than taxes collected by the government.
5. National Debt
A deficit is when the spending is more than the collected revenue. Whenever the government has a deficit, it will borrow money and issue national debt to cover the shortfall.
Types of Public Finance
Listed below are the types of public finance:
1. Public Revenue
It includes the revenue collected from the public by the government by way of taxes, imports on duties, tariffs, indirect taxes, penalties, fees, maintenance, etc.
2. Public Expenditure
As the name suggests, public expenditure is an expense made by the government. Public expenditure is done on activities, including infrastructure, medical and healthcare facilities, technology, education, and more.
3. Public Debt
Often, the expenditure made by the government exceeds the amount of funds collected as revenue. In times like these, the government can resort to public debt to meet the basic requirements of the citizens of the country.
4. Financial Administration
Financial administration refers to the management of public finances. Furthermore, it also refers to the needs of the government. These include the expenditure for maintaining cultural heritage, general electives, and more.
Functions of Public Finance
The following points illustrate the most important functions of public finance:
- Managing public revenue and expenditure by proper utilisation of resources.
- Establishing price stability and reduce inflation in the economy
- Providing the public with the necessary infrastructure
- Spending on public development will lead to the overall development of the economy
- Maintaining transparency in public policies and records of public revenue and expenditure
- Comparing the current position with the public budgets, and accordingly, modifying the policies to manage the economy
- Monitoring the effectiveness of different functions of the financial policy
- Preparing the economic policies for the nation’s growth and development
What is Public Financial Management?
Public financial management is a term for managing how different components of public finance work, how they are connected, how the government plans the public budget and more.
In public finance, public money is largely involved; therefore, management and transparency are essential. Governments have a wide range of responsibilities, such as managing and repaying debt on time, managing assets, and making investments so that they can decide the value of the holding assets.
Importance of Public Financial Management
Public financial management is important in the following ways:
- The effective management of public finances results in the overall growth of the country
- Public financial management also encourages investment through various investment policies and avenues
- The preparation, implementation, and evolution with the changes in technology and government policies for the development of the economy in general form a part of the public financial management
- It helps in maintaining price stability and keeping the inflation in check
- It also helps in reducing unemployment
- It is also crucial for allocating human and natural resources
Also Read: Personal Finance: 5 Ways To Protect Your Finances From Phishing Attacks
Final Word
Public finance is the process of managing public funds. Despite this, it is only responsible for administering public funds and other aspects such as price stability, economic growth, unemployment, income inequality, human rights, etc. More importantly, the term ‘management of public finances’ has a broader meaning. A nation’s growth depends on proper planning, allocation of resources, minimising the impact of unfavourable global situations, etc., all of which can be achieved through financial and fiscal policies, budgets, etc.
FAQs
Ans. Public finance includes tax collection, budgeting, spending, and the issuance of debt-related policies. These aspects have an effect on how a government pays for the services it offers to the public. It forms a part of the fiscal policy.
Ans. The main objective of public finance is the management of the basic needs of the public. These include food, education, shelter, health, infrastructure, and more. These are clubbed under the government’s responsibilities towards the citizens of the nation. The fulfilment of these fundamental public requirements contributes to the development of the economy.
Ans. Public finance can be divided into 4 primary areas – public revenue, public expenditure, public debt and financial administration. All the four areas of public finance are aimed at achieving one common goal, i.e., the benefit of society as a whole.
Ans. Public finance is primarily concerned with three aspects – efficiently allocating resources, distributing income among citizens, and maintaining economic stability.
Ans. The study of public finance goes beyond determining the composition of public revenues and expenditures. The study of public finance examines the government’s role in the economy. This branch of economics examines public revenue and expenditure of the government, and determines how to adjust either for desired results or to avoid undesirable ones.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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