Public Finance :
Public finance is the study of the income and expenditure of public authorities.
Here, the public authorities refer to all kinds of government – ranging from local bodies like municipal boards, district boards to state and national governments.
These public authorities perform various functions such as maintenance of law and order, production of goods and services, undertaking investment and promoting economic development.
The government needs large funds to meet public expenditure to perform all these functions. So the government raises funds through taxes, fees, sales of goods and services and loans. These different sources of income constitute the revenue of the public authorities or government.
Thus, Public finance is the study of revenue and expenditure of the government at the centre, state and local levels.
According to Dalton, “Public finance is the branch of knowledge which is concerned with the income and expenditure of public authorities.”
Public finance not only deals with the operation of public authorities but also deals with the different policies which the public authorities might adopt like fiscal policies.
Fiscal Policy:
- Fiscal policy is defined as the policy under which the government uses the instruments of taxation, public spending and public borrowing to achieve various objectives of economic policy.
- Fiscal policy is concerned with the use of taxation, government expenditure and public borrowing to influence income, production, employment and the level of economic activity in the economy.
- Fiscal policy is largely based on ideas from British economist John Maynard Keynes.
- Keynes believed that government could stabilise the business cycle and regulate economic output by adjusting spending and tax policies to make up for the short falls of the private sector.
- An effective and good fiscal policy uses various fiscal tools like taxation, expenditure and public borrowing in a proper combination soi as to achieve the best possible results in terms of the desired economic objectives such as maintaining economic stability, achieving high level of employment and accelerating economic growth.
- The objective of fiscal policy in developed and developing countries are different from each other.
- The main objectives of fiscal policy in developed countries is to maintain economic stability where the main objective of fiscal policy in developing countries is to accelerate economic development.
1. Economic Stability
2. To Achieve Full Employment
3. Economic Growth
4. Price Stability
5. Reducing Inequalities in Income and Wealth
6. Attaining External Equilibrium
1. Economic Stability :
- Economic stability means that economic activity is maintained at a stable level so that there are no fluctuation in output and employment.
- Economic stability requires to eliminate the fluctuation in business cycles.
- Business cycle refers to fluctuation in the level of output and employment with alternating periods of booms and recessions.
- During the period of boom, output and employment are at high levels, whereas during recession, output and employment fall.
- During depression ( i.e., extreme form of recession), the level of output and employment is very low, which results in huge unemployment in the economy.
- Economic stability requires to regulate the cyclic fluctuation.
- Booms are undesirable because they result in sharp rise in prices. While the period of depression needs to be averted because they lead to severe unemployment in the economy.
- Full employment refers to a situation when all those persons who are willing to work at the existing wage rate are able to get work.
- Full employment is a situation when involuntary unemployment is zero.
- Maintaining full employment in the developed countries and creation of more employment opportunities in the underdeveloped countries is the main objective of fiscal policy.
- Attainment of the objective of full employment means the economy is able to produce the maximum level of output with the available resources.
- Economic growth is traditionally defined as the process where by the real per capita income of a country increases over a long period of time.
- Economic growth is one of the most important objectives of economic policy in developing countries.
- Economic growth enables the economy to produce more goods and services thereby raise the standard of living of the people.
- A higher rate of economic growth helps in solving the problems of poverty and unemployment in the developing countries like India.
- Therefore, policy makers everywhere are concerned with accelerating the rate of economic growth.
- Price stability is another important objective of fiscal policy in developing economies.
- In developing countries, there is a tendency of prices to rise due to the large total expenditure in economy without a corresponding increase in production during early phases of economic development.
- Price stability does not means that prices remains absolutely stable, but a mild dose of inflation acts as a stimulant of inflation. Thus, price stability means that price changes are kept within a modest range.
- Price stability is needed because it keeps the value of money stable, eliminates economic fluctuation brings stability in the economy, checks arbitrary redistribution) f income and wealth and promotes economic welfare.
- Developing countries generally suffer from marked inequalities in income and wealth.
- Majority of people struggle hard to make both ends meet, a small number of people roll in luxuries.
- No amount of economic development will increase economic welfare unless the benefits of economic development in an economy are shared by all.
- A welfare state committed to social equality and economic justice can not allow large inequalities in income and wealth.
- Attaining external equilibrium is an important objective of fiscal policy.
- External equilibrium stands for the equilibrium in the balance of payments.
- An equilibrium in the balance of payments implies that, as far as possible imports should be equal to exports.
- Particularly the situation of deficit in the balance of payments i.e., excess of imports over exports should be avoided.