Meaning

Public finance deals with income and expenditure or receipt and payment of government. Income of Government is raised through revenue. Expenditure is made on the activities of the community and the terms ‘finance’ is money resource i.e. coins. Public finance in this manner can be said the science of the income and expenditure of the government. According to Adam Smith “public finance is an investigation into the nature and principles of the state revenue and expenditure”

Nature:

Nature of Public finance implies whether it is a science or art or both.

1. Public Finance is a Science: Science is a systematic study of any subject which studies casual relationship between facts. Public finance is a systematically study relating to revenue and expenditure of the government. It also studies the casual relationship between facts. It is not a complete knowledge about human rather it is concerned with definite and limited field of human knowledge. It is a systematic study of the facts and principles relating to government revenue and expenditure. In public finance, scientific methods are used to study public finance and its principles are empirical.

2. Public Finance is an Art: In the words of J.N. Keynes,”Art is the application of knowledge for achieving definite objectives.” Fiscal policy which is an important instrument of public finance makes use of the knowledge of the government’s revenue and expenditure to achieve the objectives of full employment, economic equality, economic development and price stability, etc. To achieve the objective of economic equality taxes are levied at progressive rate. Since every tax is likely to be opposed, it becomes essential to plan their timing and volume. The process of levying tax is certainly an art. Budget making is an art in itself. Study of public finance is helpful in solving many practical problems. Public finance is therefore an art also.

Subject Matter of Public Finance

The economics of public finance is fundamentally concerned with the process of raising and dispersion of funds for the functioning of the government. Nearly all nations are works in union of states framework, then Government has not only to raise and disperse the funds but they also needs precisive distribution to attain the level of welfare state.  For public expenditure, governments also borrow funds from the market as public debt and it need an excellent administration of fund raising, fund distribution and management of debt. Thus the study of public finance is divided in four sub divisions

1. Public Revenue: It deals with the method of raising funds and the principles of taxation. Within the purview of public revenue, we take up the classification of public revenue, canons and justification of taxation, the problem of incidence and shifting of taxes, effects of taxation, etc. All kinds of income from taxes and receipts from public deposit are included in public revenue

2. Public Expenditure: It deals with the principles and problems relating to the expenditure of public funds. It is most important division of the public finance as the expenditure of public funds should be made in such a manner that optimum development and public welfare may be attained within the limited Government’s resources.

3. Public Debt: Government raised loan for public expenditure under deficit budget.  It is the cheapest method of raising public revenue but it has very large frictions. It is prime duty of Government that these loans may not be transformed into debt burden. Therefore, we study the problems of raising loans/debts in this section.  The loan raised by the government in a particular year is the part of receipts of the public authority.

4. Financial Administration: The problem of organisation and administration of the financial mechanism of the Government is studies within the Financial Administration section. Efficient machinery is required for maximizing of public revenue and optimal expenditure of public fund.  It is prime duty of this division that, the public funds should not go to waste or spill off.

Economic stabilization and growth are the two aspects of the Government economic policy which got a significant place in the discussion on public finance theory. The function of the growth branch is to find the steps which are needed to be bringing out for growth of the economy in constant manner.  The decisions of the Government should be matured, otherwise distribution of economic resources is destabilized and there will be fall in resource generation, public revenue and public expenditure, and ultimately, great depression in economy. So, economic stabilisation shall be confine into the decisions as to what should be done to secure price stability and to maintain full employment level.