Public finance refers to the study of income, expenditure, and debt of the government. It is concerned with the financial activities of government and also its impact on the overall economy. public finance as being connected with the income and expenditure of public authorities, with the adjustment of one to another. Tax revenue and non-tax revenue are the two sources of income.
Public finance is concerned with the methods of raising and allocating funds between various activities of the government. Important branches of it:
- Public revenue
- Public expenditure
- Public debt
- Budgetary policy
- Fiscal policy
Public revenue: It refers to the income or earnings of the government of any country. Public revenue consists of tax and non-tax revenue.
Public expenditure: It deals with various types of expenditures required for the proper functioning of the government.
Public debt: When the planned expenditure of the government of a country exceeds its total revenue, the government has to borrow money from various organizations and individuals. This is called public debt.
Budgetary policy: It deals with the type of financial statement made by the government with respect to its anticipated revenue and expenditure during any particular year. If the government expenditure exceeds its revenue, there arises a deficit in the budget.
Fiscal policy: The fiscal policy affects the revenue and expenditure of the government. Fiscal policy instruments are government expenditure, imposition of taxes, subsidy provision, and public debt.
Nature of Public Finance
Positive and normative are the two aspects of modern finance. Classical economists believed in the market mechanism and they dealt with the theory of public finance only with public revenue, public expenditure, and public debt without considering their impact on welfare. This aspect is called the positive aspect of public finance. Welfare economists strongly believed in the welfare aspects of public revenue and public expenditure. No government can afford to tax the people without ensuring economic welfare. Hence, they try to transfer incomes from the rich to the poor through fiscal operations. This aspect is called the normative aspect of public finance.