Scope and function of public finance

                  Scope and function of public finance.

Public finance is that branch of general economics which deals with financial activities of the state or government at national, state and local levels. It is a study of income and expenditure of central, state and local government and the principles underlying them. According to Dalton “Public Finance is concerned with the income and expenditure of public authorities and with the adjustment of the one to the other. The economics of public finance is fundamentally concerned with the process of rising and Disbursement of funds collection of revenue and its spending for the functioning of the government. Professor Richard Musgrave defined Public Finance as, “The complex of problems that centers on the revenue-expenditure process of Government is referred to traditionally as public finance.” According to Taylor, public finance studies the manner in which the state through its organ, the government, raises and spends the resources required. Public Finance is thus concerned with the operation and policies of the fiscal public treasury. The definition of Public Finance by U.K. Hicks in Public Finance highlights the satisfaction of collective wants which in turn leads to the need to secure necessary resources carry out their purposes.


Prof. Dalton categories the scope of public finance into four areas which includes public income, public expenditure public debt and financial administration.

(a) Public revenue: The study of various sources of government’s income, the principles guiding the raising of income (e.g. canons of taxation), their relatives merits and demerits and their effects on the economy (e.g. impact and incidence of taxation).

(b) Public expenditure: The study of the manner in which public expenditure is classified, the principles guiding public expenditure (canons of public expenditure), causes of growth and effects of public expenditure.

(c) Public debt: The study of public debt forms a very important part of public finance in modern times as governments are increasingly resorting to debt to meet the growing needs of the people. Public finance studies the sources, burden and impact of public debt.

(d) Financial administration: This includes the study of the preparation, passing and implementation Of the budget, budgetary policies and their socio-economic impact, inter-governmental financial relations, fiscal management and fiscal responsibility.

                          FUNCTIONS OF PUBLIC FINANCE.

The functions of public finance all activities with regard to collection of revenue and expenditure on various activities .Earlier theories public finance narrow definition of the functions to be carried out by public authorities. It is clear that the area of state activity has enlarged over the past two decades which increased the functions and scope of public finance.

1) Economic activities of the state The scope of public finance was confined to the traditional functions of the state, that is, provision of defense, law and order, justice and civic amenities. But with the emergence of welfare states the scope of public finance was broadened public finance now includes the use of the budget as a tool to correct distortion in the economy, to mobilise resources, to maintain price stability create employment prevent market failure, achieve growth equity and maximize social welfare.

2) Functional Finance The government should maintain a reasonable level of aggregate demand at all times by using the budget. Most developed economies followed functional finance policies in order to control trade cycles. Developing countries followed such policies to promote economic growth.

3) Fiscal Operations The scope of public finance includes fiscal operations and their objectives. Fiscal operations refer to raising public revenue, spending to achieve certain goals and financial administration. For such operations, the government uses fiscal tools like taxation, public expenditure and public debt.
The following are the objectives of fiscal operations;

(a) Allocation of resources: The most important objectives of fiscal operations is to determine how the Country’s resources will be allocated to different sectors of the economy in order to achieve predetermined goals. The national budget determines how funds are allocated to different heads of expenses. The policy of public expenditure is used by the government to directly undertake resource allocation for different sectors. On the other hand, the government can use taxation and subsidies to indirectly influence resource allocation.

(b) Distribution: Fiscal operations can be effectively used affect the distribution of national income and resource Taxation and public expenditure policies are used by the government to reduce inequalities. Progressive direct taxation impose heavier burden on the rich than the poor. Public expenditure on social infrastructure and subsidies on food housing, health and education help reduce income inequality.

(c) Stabilisation: Developed economies experience business cycles. Economic stability implies absence of sharp cyclical movements in the form of booms and depressions. To bring about such stability, counter-cyclical fiscal operations are adopted. To counter depression and recession, government expenditure is increased to generate employment and taxes are reduced to encourage consumption and investment. During inflation, public expenditure is reduced and taxes are raised.

(d) Economic growth: In developing and underdeveloped economies, the objectives of fiscal operations are more promotional in nature. The basic focus of fiscal operations in such economies is the use of budgetary operations to achieve growth and development. This is done by encouraging capital formation and investments through public expenditure and tax incentives to private sectors.

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