1. MODULE 1: INTRODUCTION TO PUBLIC FINANCE CHAPTER 1: CONCEPT OF PUBLIC FINANCE

2. INDEX Sr. No. PARTICULARS 1 INTRODUCTION 2 MEANING 3 SCOPE 4 FUNCTIONS5
PUBLIC FINANCE AND PRIVATE FINANCE

3. (Food, clothing, shelter, etc.)
INTRODUCTION
Public finance is one of the oldest branches of the economic theory. In fact, public finance was born when the concept of state (government) was born.
Human wants were divided into two categories namely the individual wants and the social wants or collective wants.
HUMAN WANTS
Individual Wants
(Food, clothing, shelter, etc.)
Social Wants
(protection of society against external enemies & anti social elements, basic infrastructure etc. )

4. MEANING
Public finance is the study of the role of the government in the economy. It is the branch of economics which assesses the revenue and expenditure of the public authorities.
REVENUE
EXPENDITURE

5. MEANING
Definition:
Sir Hugh Dalton defined public finance as follows “Public Finance is concerned with the income and expenditure of public authorities and with the adjustment of one to the other”.
Prof. R. R. Musgrave defined public finance as follows: “The complex problems that centre around the revenue expenditure process of the government is referred to as public finance”.
Prof. P. E. Taylor defined public finance as follows: “Public finance deals with the finances of the public in an organized group under the institutions of government.”

6. SCOPE
The scope of public finance is very wide. It is not only restricted to public revenue and public expenditure but also explains the impact of the fiscal operations of the government on the growth of the economy. The following is the scope of public finance:
Public Revenue
Public Expenditure
Public Debt
Financial Administration
Economic Stability and Growth

7. SCOPE
Public Revenue
The public revenue refers to the income of the government. Broadly the income of the government can be divided into tax revenue and non-tax revenue. This part explains the:
Types of taxes levied by the government
Effect on taxes on the economy & the people,
Advantages & disadvantage of taxes
Sources of non-tax revenue of the government.

8. SCOPE Public Expenditure
The public expenditure refers to the expenditure of the government. This part of public finance explains the:
Objectives of public expenditure
Classification of public expenditure
Causes of increase in public expenditure
Effects of public expenditure
This part also explains how the government can influence the production of goods and services, through the instruments of public expenditure.

9. SCOPE
Public Debt
Public debt refers to the debt of the government. This part explains the:
Classification of public debt
Burden of public debt
Causes responsible for growth of public debt in modern economies.
It also explains why the government requires loans, how the government manages debt and the methods used by the government for debt redemption.

10. SCOPE Financial Administration
This is a more practical part of public finance. It studies the procedure to be followed by the government in imposing taxes, collecting the taxes, spending the collected money and getting the government income & expenditure audited by the competent authority. It also explains how the government adjusts the two sides of public finance (i.e. public revenue and public expenditure) to each other.

11. SCOPE Economic Stability and Growth
This part of public finance takes us to the objectives of public finance namely, to maintain internal and external economic stability and to expedite the rate of economic growth. The government has to impose/collect taxes and spend the same in planned manner. The government has to maintain the balance between stability and economic growth.

12. FUNCTIONS
The functions of public finance have grown over the years. The functions of public finance are as follows:
Allocation of revenue
Distribution
Economic Growth
Stabilization

13. FUNCTIONS Allocation of revenue
The government earns revenue from various tax and non-tax sources.
This income has to be allocated to various items of expenditure in the economy in a planned manner.
This planned allocation is done through the annual budget which is prepared by the government.
The allocation greatly depends on the stage of the economy (underdeveloped or developing or developed), the predetermined goals of the government and also on the total size of public expenditure.

14. FUNCTIONS Distribution
The government always aims at an equitable distribution of income and wealth among the people.
In developing countries, there is generally an inequality in the distribution of income.
The government tries to reduce this inequality by introducing progressive taxation.
Further, a larger part of the revenue collected by the government is spent on education, health, food etc. which majorly benefits the people with lower incomes.

15. FUNCTIONS Economic Growth
The responsibility of a modern state is not only to preserve the social order but to improve it in all ways.
In less developed economies, the economic growth of the country is given top priority after defence.
Public finance has to provide adequate resources for investing in different sectors and bringing about economic growth.

16. FUNCTIONS Stabilization
Public finance has to adopt measures to regain stability in the economy.
During depression, the public expenditure is increased which helps to increase overall employment, aggregate demand and production.
On the other hand, during boom, an economy faces inflation and the public expenditure is curtailed which helps to bring in control the aggregate demand and production.

17. PUBLIC FINANCE AND PRIVATE FINANCE
Public Finance is defined as a study of income and expenditure of the government. Private finance is the study of income and expenditure of an individual, household or business organization.
SIMILARITIES
THE ECONOMIC PROBLEM
THE AIM
THE PROCEDURE TO ACHIEVE THE AIM
BALANCING INCOME AND EXPENDITURE
NEED FOR BUDGETING
DIFFERENCES
SIZE AND SCALE
SOURCES OF INCOME
SOURCE AND SIZE OF BORROWING
ACCOUNTABILITY TO PUBLIC
BALANCING INCOME AND EXPENDITURE
WELFARE PRINCIPLE AND MARKET PRINCIPLE
TIME HORIZON
TYPE OF BUDGET

18. PUBLIC FINANCE AND PRIVATE FINANCE
SIMILARITIES
The Economic Problem
Both, an individual and a country face the economic problem.
The wants are unlimited and the resources available for satisfying those wants are limited.
As a result, both, the individual as well as the country (government) have to arrange the wants in an order of importance and satisfy them.

19. PUBLIC FINANCE AND PRIVATE FINANCE
SIMILARITIES
The aim
The aim of private finance is satisfaction of the wants of the individual while the aim of public finance is satisfaction of the wants of the entire society.

20. PUBLIC FINANCE AND PRIVATE FINANCE
SIMILARITIES
The procedure to achieve the aim
The government distributes its income on different items of expenditure in such a way that the marginal utility of money spent on different items to the community is equal.
An individual also follows the same procedure in distribution of his income. He distributes his income on different items of expenditure in such a way that marginal utility of money spent on different items should be equal.

21. PUBLIC FINANCE AND PRIVATE FINANCE
SIMILARITIES
Balancing income and expenditure
The income and expenditure of the government need not balance every year.
Income > Expenditure = Surplus budget.
Income < Expenditure = Deficit budget
Similarly, the income and expenditure of an individual need not balance every month.
Income > Expenditure = Savings.
Income < Expenditure = Borrowings

22. PUBLIC FINANCE AND PRIVATE FINANCE
SIMILARITIES
Need for budgeting
Both private and public finance need a proper budget in order to ensure that the expenditure does not go overboard and also to ensure that resources are utilized in the best possible manner.
The methods adopted for budgeting may, however, be different.

23. PUBLIC FINANCE AND PRIVATE FINANCE
DIFFERENCES
Size & Scale
The size and scale of private finance is generally much smaller as compared to public finance.

24. PUBLIC FINANCE AND PRIVATE FINANCE
DIFFERENCES
Sources of Income
The government earns revenue from various tax and non-tax sources. The government may also borrow funds internally as well as externally.
An individual depends upon salary, rent, interest, profit which are sources of his income. He can also take a loan.
Individual
Salary
Rent
Interest
Profit
Tax
Non- Tax
Government Revenue

25. PUBLIC FINANCE AND PRIVATE FINANCE
DIFFERENCES
Source and size of borrowing
The government can take an internal loan i.e. loan from its own citizens or an external loan i.e. loan from some other nation.
An individual can borrow from friends, relatives or moneylenders. He may also borrow from a bank as per the terms & conditions of the bank.

26. PUBLIC FINANCE AND PRIVATE FINANCE
DIFFERENCES
Accountability to public
As the name suggests, public finance has to be made available in the public domain. Every citizen of the country must have access to it.
Private finance refers to the finance of an individual, households and private business organizations. The budgets of these units are private and not a public affair. It does not have to be made available in the public domain.

27. PUBLIC FINANCE AND PRIVATE FINANCE
DIFFERENCES
Balancing income and expenditure
The government first calculates likely expenditure during a particular period in future and tries to raise the required amount of money through taxation and other sources. Thus the government adjusts income to expenditure.
The individual first takes into consideration the size of his income and arranges to fit his expenditure within that income. Thus expenditure is adjusted to income.

28. PUBLIC FINANCE AND PRIVATE FINANCE
DIFFERENCES
Welfare Principle and Market Principle
The government is guided by ‘welfare principle’ and hence it does not provide a service with a profit motive. Whether the cost of service is covered or not covered, the government goes on rendering the services to the citizens if they are necessary. E.g.: Railways, electricity, water etc.
An individual is guided by the ‘market principle’. He would produce a commodity or a service and render it to someone else only if the price received covers the cost of production and expected profit.

29. PUBLIC FINANCE AND PRIVATE FINANCE
DIFFERENCES
Time Horizon
An economy has a very long life, it is almost eternal. Therefore, the government can take a very long term view of its finances.
The vision of an individual is limited. A person can look to at the most the next generation but not beyond that.

30. PUBLIC FINANCE AND PRIVATE FINANCE
DIFFERENCES
Type of budget:
A budget may be of three types:
Balance budget (Revenue = Expenditure)
Surplus budget (Revenue > Expenditure)
Deficit budget (Revenue < Expenditure)
Private Finance – generally always a surplus budget
Government – has to choose the type of budget depending on the conditions in the economy.