Meaning, Nature and Scope of Public Finance | Public Finance Notes

Meaning, Nature and Scope of Public Finance

Public Finance Notes

Meaning and Definition of Public Finance

Public finance is a study of income and expenditure or receipt and payment of government. It deals the income raised through revenue and expenditure spend on the activities of the community and the terms ‘finance’ is money resource i.e. coins. But public is collected name for individual within an administrative territory and finance. On the other hand, it refers to income and expenditure. Thus public finance in this manner can be said the science of the income and expenditure of the government.

Different economists have defined public finance differently. Some of the definitions are given below. 

According to prof. Dalton “public finance is one of those subjects that lie on the border lie between economics and politics. It is concerned with income and expenditure of public authorities and with the mutual adjustment of one another. The principal of public finance are the general principles, which may be laid down with regard to these matters.

According to Adam Smith “public finance is an investigation into the nature and principles of the state revenue and expenditure”

To sum up, public finance is the subject, which studies the income and expenditure of the government. In simpler manner, public finance embodies the study of collection of revenue and expenditure in the public interest for the welfare of the country

Nature of Public Finance

Nature of Public finance implies whether it is a science or art or both.

a)      Public Finance is a science: Science is a systematic study of any subject which studies casual relationship between facts. Public finance is a systematically study relating to revenue and expenditure of the government. It also studies the casual relationship between facts relating to revenue and expenditure of the government. Prot. Plehn has advanced the following arguments in favour of public finance being science.

1)      Public finance is not a complete knowledge about human rather it is concerned with definite and limited field of human knowledge.

2)      Public finance is a systematic study of the facts and principles relating to government revenue and expenditure.

3)      Scientific methods are used to study public finance.

4)      Principles of public finance are empirical.

Science is of two types: (1) Positive science and (2) Normative science. In positive science one knows about factual situation or facts as they are. It describes “what is”. As against it, normative science presents norms or ideals. It describes “what ought to be” or what is right or wrong i.e. value judgement. By the study of public finance one gets factual information about the problems of government’s revenue and expenditure. Public finance is therefore, a positive science. Study of public finance also reveals what should be the quantum of taxes. Which taxes, direct or indirect, should be imposed. On what items more or on what items less of public expenditure is incurred. Public finance is therefore a normative science. Thus, study of public finance offers suggestions regarding revenue and expenditure of the government as also apprises of their factual position.

b)      Public Finance is an art: In the words of J.N. Keynes, ”Art is the application of knowledge for achieving definite objectives.” Fiscal policy which is an important instrument of public finance makes use of the knowledge of the government’s revenue and expenditure to achieve the objectives of full employment, economic equality , economic development and price stability, etc. To achieve the objective of economic equality taxes are levied at progressive rate. Since every tax is likely to be opposed, it becomes essential to plan their timing and volume. The process of levying tax is certainly an art. Budget making is an art in itself. Study of public finance is helpful in solving many practical problems. Public finance is therefore an art also.

In sort, public finance is both science and art. It is a positive science as well as normative science.

Scope of Public Finance (Subject Matter of Public Finance)

The scope of public finance may be summarised as under:

1.       Public Revenue

2.       Public Expenditure

3.       Public Debt

4.       Financial Administration

5.       Economic Stabilisation

1.       Public Revenue: Public revenue concentrates on the methods of raising public revenue, the principles of taxation and its problems. In other words, all kinds of income from taxes and receipts from public deposit are included in public revenue. It also includes the methods of raising funds. It further studies the classification of various resources of public revenue into taxes, fees and assessment etc.

2.       Public Expenditure: In this part of public finance we study the principles and problems relating to the expenditure of public funds. This part studies the fundamental principles that govern the flow of Government funds into various streams.

3.       Public Debt: In this section of public finance, we study the problem of raising loans. Public authority or any Government can raise income through loans to meet the short-fall in its traditional income. The loan raised by the government in a particular year is the part of receipts of the public authority.

4.       Financial Administration: Now comes the problem of organisation and administration of the financial mechanism of the Government. In other words, under financial or fiscal administration, we are concerned with the Government machinery which is responsible for performing various functions of the state.

5.       Economic Stabilization: Now –a-day’s economic stabilization and growth are the two aspects of the Government economic policy which got a significant place in the discussion on public finance theory. This part describes the various economic polices and other measures of the government to bring about economic stability in the country.

From the above discussion, we can say that the subject-matter of public finance is not static, but dynamic which is continuously widening with the change in the concept of state and functions of the state. As the economic and social responsibilities of the state are increasing day by day, the methods and techniques of raising public income, public expenditure and public borrowings are also changing. In view of the changed circumstances, it has given more responsibilities in the social and economic field.