Public finance deals with study of income, expenditure, borrowing and financial administration of the government. Private finance is the study of income, expenditure, borrowing and financial administration of individual or private companies. Both public and private finance are fundamentally similar in nature but different from each other on various operational aspects .The similarities and differences between public and private finance have been explained below. SIMILARITIES:
1. Objective Satisfaction of human wants is the main objective of both public and private finance. The main aim of public finance is to satisfy social wants and that of private finance to satisfy individual wants
2. Principles The principle of maximum social benefits is the guiding principle followed by the government while spending its income. Individuals also follow the principle of maximum satisfaction when spending out his given income .
3. Income, Expenditure and borrowing The resources or the income for both government and the individuals are limited .In case of shortage, borrowing can be done for both and both are under obligation to repay the borrowed money.
4. Policies Both the private and public finances adopt policies for maximizing welfare. In Private finances as well as in public finance only sound policies will enable maximization of welfare and benefits.
5. Administration The effectiveness and success of measures adopted by private and public sector depends on the administrative machinery. If the administrative machinery is inefficient and corrupt it will lead to losses and wastages.
1. Magnitude : The most significant difference between the two types of finances is in terms of size and magnitude. Households and businesses have relatively smaller amount of resources available to them and hence their budgets are smaller in size as compared to those of governments.
2. Public Scrutiny: Personal budgets of households are a private affair and not made public. In case of business finance, the budget is made known to the stakeholders and General public for information and scrutiny. In case of public finance, every budgetary decision has to be made known to the people of the nation.
3. Source of revenue: Private economic units earn their income by using assets owned by them. Their sources of income are salaries, wages, interest, rent and profits which arise out of transactions. In case of governments, the sources of income are taxes and non tax revenues. In case of taxes, fees, fines, fines there in an element of compulsion
4Sources of borrowing: Private economic units may borrow from informal sources like friends, relatives ,moneylenders as well as from formal sources like banks and financial institution. Public bodies can borrow almost on a continuous basis from internal and external sources. They can borrow from the people, the central bank, Commercial banks and other financial institutions as well from external sources.
5. Motive: Incase of public finance, the decisions are reached through political and administrative procedure and based on common social objectives. A private finance is governed by profit motive for businesses or satisfaction of wants of individuals and households.
6. Time dimension: Both private and public financial activities try to balance between the immediate objectives and future goals. But private economic units, especially households, are primarily focused on fulfillment of present and immediate wants. In case of public authorities, the focus is on both present and future
7. Income Expenditure adjustment: Generally, while a private economic unit adjusts its expenditure to income, public bodies adjust income to expenditure. Private finance will try and adjust expenditure according to income and in order to do so may even forego fulfillment of certain wants. On the other hand, Government are guided by welfare and growth consideration for which expenditure have to be predetermined. Since they have the power to raise fund through taxation, borrowing, deficit financing, they try to adjust their revenues to the predetermined expenditure requirements.
8. Assessment of outcomes: It is much easier to measure and evaluate the outcome of private financial activities than the outcome of public financial activities. In case of private economic units, the outcome may be measured by profits of business, fulfillments of wants of households. In case of public finance, the outcome has to measured and evaluated in terms of multiple parameters. These are social welfare, economic growth, security, Productivity and efficiency.
9. Nature of the budget: Private economic units aim at surplus budget. Having a surplus is considered economically prudent. This is not the case with government budgets. In countries that need to grow and develop rapidly, deficit budgets need to be followed. A long term surplus budget indicates that the government may not be fulfilling some of its obligation.