With an emphasis on current policy issues, Public Finance: Principles and Practice offers a thorough and accessible introduction to the philosophy and practice of public finance. This book combines theoretical clarity with real-world application to teach fundamental topics such as public spending, taxation, fiscal policy and public debt, among others.
The book is intended for undergraduate and graduate students studying economics, public administration and commerce. This book is also helpful for students who are preparing for competitive examinations like the Union Public Service Commission (UPSC) civil service exam, Staff Selection Commission (SSC) and other similar exams. It combines theoretical frameworks with practical examples, especially from the Indian context. It looks at important topics such as budgetary procedures, taxation, expenditures, managing deficits, and the role of government in fostering equity and growth.
The book offers current statistics and policy discussions in an organized and student-friendly manner to assist students in gaining a comprehensive grasp of how public finance functions in real-world situations. For students, teachers and policymakers interested in the changing dynamics of public finance, it functions as a core textbook as well as a helpful reference.
Here is an excerpt from the book:
1.1 INTRODUCTION
According to Adam Smith, ‘Public finance is an investigation into the nature and principles of the state revenue and expenditure.’ This chapter introduces the subject matter of public finance and related aspects of public finance. Public finance is a branch of economics that deals with the financial matters of the government. Public finance is the study of government sector economics. It deals as an economic theory package to solve certain policy problems of the economy through the mechanisms of taxation and expenditure, and other interrelated policies like subsidies, fees, investments, etc. Therefore, public finance deals with taxation, public expenditure, and all other matters related to taxation and expenditure of the government. It is an applied economics in the context of the government’s financial matters, where the theories and concepts of economics are applied. In the present, economists and faculty of economics have started to call it public economics, simply because public finance deals with the economic matters of the government. Therefore, the students of economics should not get confused when they hear public economics in place of public finance. Both terms are usually used interchangeably. However, although both public finance and public economics terms are used interchangeably, there are subtle differences between the two. Public finance, for instance, is more of a practical and accounting-oriented field that deals with fiscal operations and policy implementations. It is more of positive economics. Whereas public economics is more theoretical and normative. For instance, why and how the government should intervene based on economic theory and models is dealt within public economics.
Table 1.1: Basic difference between public finance and public economics
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Feature
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Public Finance
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Public Economics
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Public finance is essentially the study of the government’s revenue and expenditure to achieve the desired objectives of any government, such as optimal economic growth and development, and thus maximizing the welfare of citizens. Therefore, in essence, public finance is the branch of economics where the theories of economics are applied in the financial management of the government. Thus, public finance falls under the domain of applied economics.
Public finance deals with the government’s efficient allocation of resources, the government’s efficient distribution of resources, and the stabilization function of the government in the economy. Therefore, Professor Musgrave (who is also considered to be the father of public finance) rightly described the functions of the government in three important areas of the economy, i.e.,resource allocation, resource distribution, and stabilization of the economy, so that any given economy functions efficiently without too many fluctuations in the price level. These three important concepts of public finance will be dealt with more elaborately in the subsequent chapter. However, it is significant for the students of economics to understand clearly that public finance facilitates the government activities to be more efficient in their functioning to achieve higher economic welfare of the citizens through economic growth and development. Carl C. Plehn said, ‘The term public finance has come, by accepted usage, to be confined to a study of funds raised by governments to meet the costs of government.’ Therefore, public finance deals with the fiscal aspects of the government, such as the tax systems, allocation and expenditure, budget procedures, and deficit financing, stabilization instruments, matters of debt at the centre, states, and grassroots levels of the government.
According to Prof. Dalton, ‘Public finance is one of those subjects that lies on the borderline between economics and politics. It is concerned with income and expenditure of public authorities and with the mutual adjustment of one another.’ Thus, public finance integrates the theories of economics and political administration into the management of government finance, i.e., revenue and expenditure. Public finance primarily deals with the government’s revenue and expenditure. When the government revenue falls short of expenditure, there is a deficit. Therefore, fiscal deficit is another subject matter of public finance. The government tries to fill this gap (fiscal deficit) through various available options (like borrowing from both domestic and international institutions/countries or printing new money, etc.). This is another subject matter of public finance.
Figure 1.1 Subject matter of public finance
1.2 NATURE AND SCOPE OF PUBLIC FINANCE
Public finance is primarily concerned with the revenue and expenditures of the government. For example, public revenue, the types and kinds of taxes, the optimal levels of taxation, and the tax system itself are all discussed in public
finance. Public finance provides guidelines to the government regarding tax collection so that the burden of taxation on the public is minimal. Similarly, public finance guides the government about the optimal public expenditure for
the optimal development of the economy. The expenditure aspects deal with the types of expenditures and the optimal level of expenditures to maximize the welfare of the citizens.
1.2.1 Nature of Public Finance
The nature of public finance is about whether it is a science or an art. Further, if public finance is a science, then does it qualify to be a positive and normative science? Therefore, before establishing whether public finance is a science or an art, or both, it is important to know the definitions of public finance, art, and science. Once these definitions are clear, we will be able to establish whether public finance is an art, a science, or both art and science.
Public Finance as a Science
Science is a systematic and unbiased observation and experimentation of the phenomena concerning the physical world and its other related aspects. It is about the pursuit of knowledge to find out the truth of happenings, the cause
and effects of any fundamental laws, whether in physics, chemistry, or any other branch of study. Therefore, science can be defined as a branch that makes a systematic study of facts.
Similarly, public finance deals with the factual relationships between income (i.e., tax and non-tax revenue sources) and expenditures of the government. Therefore, public finance is concerned with the government finance that deals with the income and expenditure, and how these two factors correlate with each other to achieve the maximum welfare of the citizens of any given country. Thus, Philip E. Taylor rightly said, ‘Public finance deals with finance of the public as an organized group under the institution of government. It thus deals only with the finances of the government. The finances of the government include the raising and disbursement of government funds. Public finance is concerned with the operation of fiscal, or public treasury. Hence, to the degree that it is a science, it is the fiscal science; its policies are fiscal policies, its problems are fiscal problems.’
Therefore, comparing the definition of public finance with the definition of science, we can rightly say that public finance is a science. However, the question is why and how public finance can be called a science? We can call
public finance a science because just as any science is a systematic study of facts, public finance is the factual study of facts like the government’s revenue expenditure and their relationships, both in the short run and long run.
Public Finance as Positive Science and Normative Science
Science is of two types, i.e., positive science and normative science. By positive science, it means ‘what is,’ i.e., positive science describes the situations or facts as they are; it is an objective study and does not prescribe any norms or laws to be followed to change or correct any factual situations. However, normative science is ‘what ought to be,’ and it is subjective. It advances norms or ideals. It has value judgement, i.e., what is wrong and correct.
Public finance deals with the factual information about the government’s finances of revenue and expenditure without giving any value judgement. Therefore, public finance can be considered as a positive science. Furthermore, in the study of public finance, it can be learned what the quantum of the government’s revenue and expenditure is to be, to achieve certain levels of economic growth and development. Quantum of taxes and which taxes to be imposed are dealt with in public finance. How much and where to make the public expenditures are also dealt with in public finance. Public finance, therefore, can also be considered as a normative science. Thus, from the above discussions, it has been revealed that public finance is a science, and it is both a positive science and a normative science.
Public Finance as an Art
The British economist John Neville Keynes described ‘Art is the application of knowledge for achieving definite objectives.’ In public finance, fiscal policy is an important instrument to govern the government’s finances. This fiscal policy deals with taxes and expenditures to achieve growth and development with price stability. Achieving the success of this fiscal policy is a challenge for the government and the policymakers. Therefore, it is important that knowledge
of revenue and expenditure of the government finances is used to achieve the objectives of the fiscal policy, like full employment, economic development, economic growth with minimum developmental inequality among different sectors and various sections of the people, and economic growth with stability. Thus, it is clear that public finance is an art. From the preceding discussions, therefore, it has been made clear that the nature of public finance is both science
and art. And as a science, it is both a positive science and a normative science.
Figure 1.2 Nature of public finance
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