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.
SCOPE OF PUBLIC FINANCE
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.
