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Public Finance: Concept, Definition and Importance for Country's Development

Technical Report · July 2020

DOI: 10.13140/RG.2.2.25473.48481

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Ishwor Thapa Public Administration Campus, Tribhuvan University, Nepal

Public Finance: Concept, Definition and Importance

for Country’s Development
Ishwor Thapa

MPA Student, Public Administration Campus, Tribhuvan University, Balkhu, Kathmandu, Nepal

Summary:
This article tries to analyze the concept, definition of public finance and its importance for the
country’s development. Public finance is the study of the role of the government in the
economy. It is the branch of economics which assesses the government
revenue and government expenditure of the public authorities and the adjustment of one or the
other to achieve desirable effects and avoid undesirable ones. public finance has to play a special
role of promoting economic growth in the developing countries besides maintaining price
stability. Public revenue, public expenditure, public debt, financial administration and Public
budgeting are the main major subject matter of the public finance. It is obvious that the
government of a country can push up the industrial and economic development of the country,
provide more employment opportunities, encourage investments and savings in the desired
direction and increase social benefits through public expenditure. It therefore, affects the overall
economic and social system of the country.

Meaning of Public Finance:

Public finance is the branch of economics. It is made of two words as public and finance. The term
public means government and finance means science of management of money. So literally public
finance means the study of allocation of economic resources for achieving the goals of public
affairs. Thus, public finance is the study of allocation and management of resources and
technology for achieving the goals of public organization.

However, literally it seems to have narrow meaning but its scope and definition has been widening
and changing through the time. In public finance we study the finances of the Government. Thus,

An Article “Public Finance: Concept, Definition and Importance for Country’s Development”
Ishwor Thapa Public Administration Campus, Tribhuvan University, Nepal

public finance deals with the question how the Government raises its resources to meet its ever-
rising expenditure.

Public finance is the study of the role of the government in the economy. It is the branch
of economics which assesses the government revenue and government expenditure of the public
authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable
ones. As Dalton puts it, “public finance is “concerned with the income and expenditure of
public authorities and with the adjustment of one to the other.” Accordingly, effects of
taxation, Government expenditure, public borrowing and deficit financing on the economy
constitutes the subject matter of public finance.

Thus, Prof. Otto Eckstein writes “Public Finance is the study of the effects of budgets on the
economy, particularly the effect on the achievement of the major economic objects—growth,
stability, equity and efficiency.” Further, it also deals with fiscal policies which ought to be
adopted to achieve certain objectives such as price stability, economic growth, more equal
distribution of income. Economic thinking about the role that public finance is expected to play
has changed from time to time according to the changes in economic situation.

Before the Great Depression that gripped the Western industrialized countries during the thirties,
the role of public finance was considered to be raising sufficient resources for carrying out the
Government functions of civil administration and defense from foreign countries. During this
period, the classical economists considered it prudent to keep expenditure to the minimum so that
taxing of the people is avoided as far as possible.

Further, it was thought that Government budget must be balanced. Public borrowing was
recommended mainly for production purposes. During a war, of course, public borrowing was
considered legitimate but it was thought that the Government should repay or reduce the debt as
soon as possible.

Concept of Public Finance:

But under the impact of the Great Depression of thirties and the Keynesian explanation of it, the
thinking about and role of public finance underwent a sea change. The classical view of public
finance could not meet the requirements of the then prevailing situation. In order to increase
An Article “Public Finance: Concept, Definition and Importance for Country’s Development”
Ishwor Thapa Public Administration Campus, Tribhuvan University, Nepal

aggregate effective demand and thereby raise the level of income and employment in the country,
public finance was called upon to play an active role. During the Second World War and after, the
Western economies suffered from serious inflationary pressures which were attributed to the
excessive aggregate demand.

So, in such inflationary conditions, the public finance was expected to check prices through
reducing aggregate demand. Thus the budget which was previously meant to raise resources for
limited activities of the Government assumed a functional role to serve as an instrument of
economic regulation.

It came to be realized that government’s taxing and spending policies could go a long way in
mitigating economic fluctuations. Balanced budgets are no longer considered sacrosanct and the
governments can spend beyond their resources without offending canons of sound finance to
restore the health of the economy. Public borrowing and consequent increase in public debt at the
time of depression raises aggregate demand and thereby helps in raising the level of income and
employment. Therefore, deficit budget and increase in public debt at such times is a thing to be
welcomed.

It was further demonstrated by Keynes that deficit financing by the government could actives a
depressed economy by creating income and employment much more than the original amount of
deficit financing through the process of multiplier.

Thus, after Keynesian revolution public finance assumed a functional role of maintaining
economic stability at full employment level. Therefore, the present view of public finance is not
one of mere resource-raising for the Government but one of serving as an instrument for
maintaining stability through management of demand. Therefore, this present view of public
finance has been described by A.P. Lerner as one of “Functional Finance”.

In developing countries, public finance has to fulfill another important role. Whereas in the
developed industrialized countries, the basic problem in the short run is to ensure stability at full
employment level and in the long run to ensure steady rate of economic growth, that is, growth
without fluctuations, the developing countries confront a more difficult problem of how to generate
a higher rate of economic growth so as to tackle the problems of poverty and unemployment.

An Article “Public Finance: Concept, Definition and Importance for Country’s Development”
Ishwor Thapa Public Administration Campus, Tribhuvan University, Nepal

Therefore, public finance has to play a special role of promoting economic growth in the
developing countries besides maintaining price stability. Further, for developing countries mere
economic growth is not enough; the composition of growing output and distribution of additional
incomes ought to be such as will ensure removal of poverty and unemployment in the developing
countries.

Therefore, public finance has not only to augment resources for development and to achieve
optimum allocation of resources, but also to promote fair distribution of income and expansion in
employment opportunities. This is the functional view of public finance in the context of the
developing countries.

Definition of Public Finance:

Actually, to know the answer of the questions like, what is public finance? Which dimension and
scope it includes? it is necessary to analysis the view and opinion of some economists.

1. “public finance is one of those subjects which lie on the borderline between economics and
politics. It is concerned with the income and expenditure to the public authorities and with the
adjustment of one to the other”. Accordingly, effects of taxation, Government expenditure,
public borrowing and deficit financing on the economy constitutes the subject matter of public
finance.
-By Dalton
2. Public finance deals with the finance of the public as organized group under the institution of
the government. It therefore, deals only with the finance of the government. The finance of
the government includes the raising and disbursement of government funds. Public finance
concerned with the operation of the fiscal science, its policies are fiscal policies, its problems
are fiscal problems. Thus, “Public Finance is the part of political economy which discusses
the way in which government obtains revenue and manages them”.
- F.E. Taylor
3. “Public finance is the science which is concerned with the matter in which public authorities
obtain their income and spend it.”
- Findlay Sirras and C.F. Bastable:

An Article “Public Finance: Concept, Definition and Importance for Country’s Development”
Ishwor Thapa Public Administration Campus, Tribhuvan University, Nepal

4. “Public finance is the science which deals with the activity of the statesman in obtaining and
applying of the materials means necessary for fulfilling he proper functions of the states.”
- C.C. Plehm:
5. The discipline of public finance describes and analyses government services, subsides and
welfare payments and the methods by which the expenditures of these ends are covered
through taxation, borrowing, foreign aid and creation of new money.
- C.S. Shoup and O.H. Brownlee and R.D. Allen:

There are more economists who put their opinion on public finance. Through the change course of
time, changing nature of government and its activities, the definition of public finance is also keep
on changing and modifying.

The economics of public finance is fundamentally concerned with the process of raising and
dispersion of funds for the functioning of the government. Thus, the study of public revenue and
public expenditure constitutes the main division in the study of public finance. But with these two
symmetrical branches of public finance, the problem of organization of raising and disbursing of
resources also arises. It has also to solve the question of what is to be done in case public
expenditure exceeds the revenues of the state. In solving the first problem, “financial
administration” comes into the picture. In the latter problem, obviously, the process of public
borrowings or the mechanism of public debt is to be studied.

Since both public debt as well as financial administration gives rise to a number of special
problems, these are conventionally treated as a separate branch of the subject. Public revenue,
public expenditure, public debt, financial administration and Public budgeting are the main major
subject matter of the public finance.

Importance of Public finance:

Thus, it is evident Public finance is very important for the growth and development of a country.
It is obvious that the government of a country can push up the industrial and economic
development of the country, provide more employment opportunities, encourage investments and
savings in the desired direction and increase social benefits through public expenditure. It

An Article “Public Finance: Concept, Definition and Importance for Country’s Development”
Ishwor Thapa Public Administration Campus, Tribhuvan University, Nepal

therefore, affects the overall economic and social system of the country. The major importances
of public finance are listed below as:

1. Steady state economic growth:

Public finance is important to achieve sustainable high economic growth rate. The government
uses the fiscal tools in order to bring increase in both aggregate demand and aggregate supply. The
tools are taxes, public debt, and public expenditure and so on.

2. Price stability:

The government uses the public finance in order to overcome form inflation and deflation. During
inflation it reduces the indirect taxes and genera expenditures but increases direct taxes and capital
expenditure. It collects internal public debt and mobilizes for investment. In case of deflation, the
policy is just reversed.

3. Economic stability:

The government uses the fiscal tools to stabilize the economy. During prosperity, the government
imposes more tax and raises the internal public debt. The amount is used to repay foreign debt and
invention. The internal expenditures are reduced. During recession, the case is just reversed.

4. Equitable distribution:

The government uses the revenues and expenditures of itself in order to reduce inequality. If there
is high disparity it imposes more taxes on income, profit and properties of rich people and on the
goods they consume. The money collected is used for the benefit of poor people through subsidies,
allowance, and other types of direct and indirect benefits to them.

5. Proper allocation of resources:

The government finance is important for proper utilization of natural, manmade and human
resources. For it, on the production and sales of less desirable goods, the government imposes
more taxes and provides subsidies or imposes taxes lightly on more desirable goods.

6. Balanced development:

An Article “Public Finance: Concept, Definition and Importance for Country’s Development”
 Ishwor Thapa Public Administration Campus, Tribhuvan University, Nepal

The government uses the revenues and expenditures in order to erase the gap between urban and
rural and agricultural and industrial sectors. For it, the government allocates the budget for
infrastructural development in rural areas and direct economic benefits to the rural people.
7. Promotion of export:

The government promotes the export imposing less tax or exempting form the taxes or providing
subsidies to the export oriented goods. It may supply the inputs at the subsidized prices. It imposes
more taxes on imports and so on.

8. Infrastructural development:

The government collects revenues and spends for the construction of infrastructures. It has to keep
peace, justice and security too. It has to bring socio-economic reformation too. For all these things
it uses the revenues and expenditures as fiscal tools.

Reference:

1. Adhikari, Hari Prasad (2007); Public finance, Kathmandu, Renuka Kattel.

2. http://www.businessdictionary.com/definition/public-finance.html
3. https://www.villanovau.com/resources/public-administration/components-of-public-finance/
4. http://www.yourarticlelibrary.com/economics/public-finance-meaning-and-concept-of-
public-finance/
5. Anthony B. Atkinson and Joseph E. Stiglitz (1980). Lectures in Public Economics, McGraw-
Hill Economics Handbook Series
6. Alan S. Blinder, Robert M. Solow, et al. (1974). The Economics of Public Finance, Brookings
Institution. Table of Contents.
7. James M. Buchanan, ([1967] 1987). Public Finance in Democratic Process: Fiscal Institutions
and Individual Choice, UNC Press.
8. Wikipedia contributors. (2020, July 3). Public finance. In Wikipedia, The Free Encyclopedia.
Retrieved 02:49, July 13, 2020.

An Article “Public Finance: Concept, Definition and Importance for Country’s Development”

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