What is Public Finance and its Components & Functions
3 November 2022
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.
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:
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.
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.
During a fiscal year, the budget outlines the activities on what the government intends to spend.
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
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.
Q1. What does public finance include?
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.
Q2. What is the main objective of public finance?
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.
Q3. What are the 4 areas of public finance?
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.
Q4. What are the main features of public finance?
Ans. Public finance is primarily concerned with three aspects – efficiently allocating resources, distributing income among citizens, and maintaining economic stability.
Q5. What is the scope of public finance?
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.
Before you go…
Looking for instant 🚀 personal loans 24*7 anywhere, anytime? Get personal loans up to ₹20 lakh starting at 9.9% p.a. Install the Navi app now!!
Or, maybe you’re looking to buy that house you’ve been eyeing 🏠 and you need a loan of up to ₹5 crore. Install the Navi app now and get instant in-principle approval right away! Interest rates starting at 8.39% p.a.
How about an affordable health insurance policy👨⚕️ starting at a monthly premium of just ₹235? Install the Navi app now and get your policy in under 2 minutes.
Instead, want to put your savings into action and kick-start your investment journey 💸 But don’t have time to do research. Invest now with Navi Nifty 50 Index Fund, sit back, and earn from the top 50 companies.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
7 Vijay Kedia Investment Tips You Cannot Ignore!
Cristiano Ronaldo 7 ‘Dark’ Jokes, Football’s Bad Boy
100K+ Laid Off! 7 Ways to Be Financially Prepared for Layoffs
Looking Through SKY: Suryakumar Yadav’s Success Secrets🤫
10 Best Party Places in Bangalore: Rooftop, Brewery, Poolside
10 Best Christmas Gift Ideas Even Santa Wouldn’t Ignore
7 Tax Planning Tips You Cannot Ignore!
Save More! Check Out 10 Best Fuel Credit Cards in India
Inside Allu Arjun’s 100 Cr ‘Rectangle’ House
How to Earn Money on YouTube – Check 7 Sure Shot Ways!
We are a diverse group of writers, editors and Subject Matter Experts striving to bring the most accurate, authentic and trustworthy finance and finance-related information to our readers. Our mission is to simplify jargon and industry lingo. We believe sharing knowledge through relatable content is a powerful medium to empower, guide and shape the mindset of a billion people of this country.
Professional Tax: 2023 Slab Rates, Exemptions & Applicability In India
Professional tax in India is levied on anyone who is employed. From professionals such as accountan...Read More »
Best Tax Saving SIPs in 2023: 10 ELSS Funds You Can Consider Investing In Through SIPs
SIP or Systematic Investment Plan is one of the most effective tax-saving instruments. You can clai...Read More »
What is Profit After Tax and How is it Calculated? Why is it Important for Companies?
An essential step for all organisations is to ensure that they continuously monitor the amounts of ...Read More »
What is Accounting Equation – Meaning, Formula and Calculation with Example
Regardless of the size of the company, financial statements are created using a basic accounting eq...Read More »
Cost Inflation Index: What is CII and How is it Calculated?
The price of commodities rises over time, reducing the purchasing power of money, which is the numb...Read More »
What is White-Collar Crime and What is the Penalty?
White shirts, black coats and well-ironed ties are typical stereotypes representing the rich and el...Read More »
Form 12B – Its Significance in Income Tax and How to fill it
When you join a new company in the middle of a financial year, you must complete several formalitie...Read More »
What is Cash Memo, Its Benefits and How to Create It?
All transactions in accounting must have accurate documentation as proof of financial trail. Docume...Read More »
What is Condonation of Delay in Law? What are its General Principles?
As per the Indian law, there is a certain time frame to submit all forms and applications to the Re...Read More »
Foreign Exchange Management Act (FEMA): Its Regulations and Penalties
Import and export are essential components of the aggregate trade that occurs in India. Import-expo...Read More »
What is Withholding Tax? What are its Rates? How is it Different from TDS?
The Central government of India levies income tax, a type of direct tax, on the income of individua...Read More »
Section 115BAA: Provisions for New Tax Rate for Domestic Companies
The Government of India brought in multiple amendments to the Income Tax Act of 1961 through the Ta...Read More »
Diwali 2022: Diwali Holidays – The Festival of Lights
The ‘Festival of Lights’ is one of the biggest and most anticipated festivals in India. This is...Read More »
Best Index Funds – Top 20 Index Funds in India
Index funds replicate the performance of a stock market index, such as the Sensex or Nifty 50 to ge...Read More »