Tag: Public

  • How to Public expenditure is classified in 12 Criteria?

    How to Public expenditure is classified in 12 Criteria?

    What is meant by Public Expenditure? Of the two main branches of public finance, namely, public revenue and public expenditure, we shall first study the public expenditure. How to Public expenditure is classified into 12 Criteria? The classical economists did not analyze in-depth the effects of public expenditure, for public expenditure throughout the nineteenth century was very small owing to the very restricted Government activities.

    The best author gives Public expenditure is classified by the best 12 Criteria.

    The Governments followed laissez-faire, economic policies, and their functions were only confined to defend the country from foreign aggression and to maintain law and order within their territories. But now, the expen­diture of Government all the world over has greatly increased. Therefore, modern econo­mists have started analyzing the effects of public expenditure on production, distribution, and levels of income and employment in the economy.

    The following are the impor­tant classified or classification of public expenditure in the criteria made by different writers:

    Revenue Criteria:

    F.S. Nicholson classified public expenditure according to the amount of revenue the state realizes in return for the services which it per­forms through public expenditure.

    He gives the following four classes of public expenditure:

    • Firstly expenditure without any direct return of revenue, for example, poor relief and also the losses sustained in war.
    • Secondly, expenditure without any direct return of revenue, but indirectly beneficial to revenue. For example free education. Better educated persons are better taxpayers and less expensive citi­zen than paupers and criminals.
    • Thirdly, an expenditure with the partial direct return of revenue, for example, education for which fees are charged.
    • Fourthly expenditure with full return of revenue or even profit. For example investment in public undertakings, railways, posts, and telegraphs, etc.

    This classification is also subject to criticism. This classifica­tion is overlapping. The separation between the items is not clearly marked. This classification failed to bring out the essential differ­ences in kind between the several forms of expenditure.

    For ex­ample, defense and poor relief fall under the first category, however, they also confer an indirect benefit to revenue. By ensuring peace and tranquility defense ensures the smooth growth of productive activity and national income. This, in turn, will benefit public revenue consid­erably.

    Functional Criteria:

    Another classification of public expenditure is proposed by H.C. Adams. Functional classification is based on a classification of the various functions actually performed by public authorities.

    Adams classifies expenditure under three main functions of government:

    • Protective Functions: This includes expenditure on defense, police, judiciary, social disease, prisons, etc.
    • Commercial Functions: In this category include expenditure which helps the development of commerce and trade. Services sold to the citizens for a price (e.g., Post office, Railway, Insur­ance), subsidies and bounties granted, etc., are examples of com­mercial functions
    • Developmental Functions: In this category include expendi­ture that help to develop the resources of the country. Expendi­ture under this category includes expenditure on education, pro­vision of public recreation, public works, public health, etc.

    This division is not free from imperfections. There is no clear cut dividing line between institutions maintaining law and order and those that promote progress. Expenditure incurred for protection is also capable of promoting development Prof. Adams states that with the progress of society, the protective expenditure trend to decline. But this proposition is propositioned by historical facts.

    Benefit Criteria:

    Common classification of public expenditure adopted by the 19th-century writers is based on the principle of Benefits Conferred. Such as the division adopted by Cohn and Plehn.

    They divided public ex­penditure under the following four heads:

    • Firstly, expenditure which confers a common benefit on all citi­zens or taxpayers, for example, defense, universal education is given to the residents free of charge, etc.
    • Secondly, expenditure conferring a special benefit on some per­sons or in certain classes, for example; expenditure on poor relief.
    • Thirdly, that class of public expenditure which confers a special benefit on certain people and at the same time a common ben­efit on all the others, e.g., the administration of justice.
    • Fourthly, those items of expenditure which confer a special ben­efit only on some individuals; e.g., certain industries especially favored by the state (granting subsidy).

    An obvious objection to this classification is that all public ex­penditure is for the common and public interest. It is very difficult to distinguish between special benefits and common benefit con­ferred. The satisfaction of special benefit may lead to the generation of the conm­mon benefit. For example, expenditure on poor relief, which is specifically for the benefit of those immediately concerned, results in a common benefit such as prevention of crime, the satisfaction of the general sense of justice, etc.

    As Nicholson rightly observed “Public expen­diture which does not confer some common benefit or answer some public purpose ought not to exist in a modern state”, Hence Nicholson attempted to give a more scientific classification of expenditure.

    Productive and Unproductive Expenditure Criteria:

    Prof. Robinson classified public expenditure into productive and un­productive. Public expenditure is productive if it directly or indirectly helps to develop natural and human resources and help to increase national income.

    Whereas public expenditure is unproductive if it does not add to enhancing the productive capacity of the nation. Unproductive ex­penditure is one that is consumed in the process of rendering the service.

    Economic Criteria:

    In the social accounting sense, most of the countries have adopted economic classification. In this procedure, the expenditure and in­come of public bodies are classified into two heads.

    They are:

    • Revenue Account, and.
    • Capital Account.

    Revenue account includes an ordinary source of income and expenditure. Whereas capital ac­count includes the extraordinary source of income and expenditure. Revenue expenditure includes all current expenditures on administrators including defense and public commercial undertakings.

    Usually, expenditure does not result in the creation of assets treats as revenue expenditure. Whereas capital expenditure includes all capital transactions. These capital payments consist of capital expenditure on the acquisition of assets like land, buildings, machinery, equipment, etc.

    Investments in shares and loans and advances granted by the central government are part of this. This classification also knows as functional classification. This classi­fication provides a more detailed breakdown of revenue and capital expenditures of the government.

    Plan and Non-Plan Expenditure Criteria:

    Plan expenditure means the current development outlays as well as investment outlays. Whereas non-plan expenditure refers to the expenditure which the government is bound to incur and cannot do without it.

    It includes both development and non-development ex­penditure. A broad-based classification of public expenditure as detailed above. Each classification has its own defects and omissions.

    How­ever, the sphere of state activity is dynamically changing in recent years. The nature and form of activities undertaken by the state are varying in length and attitude. Hence a perfect and systematic clas­sification of public expenditure is very difficult to achieve.

    How to Public expenditure is classified in 12 Criteria
    How to Public expenditure is classified into 12 Criteria? #Pixabay.

    According to J.S. Mills:

    J.S. Mill based his division on the wants of the state, which in turn is determined by the functions of the state. He divides expenditure between obligatory or necessary and optional. This classification takes into account the nature of expenditure.

    Expenditure incurred on defense, justice, and maintenance of economic institutions are obligatory. Owing to past contracts and other legal commitments, coupled with the concept of sovereignty, the state is not free to de­cide whether to incur this type of expenditure or not.

    It is mandatory on the part of the government to incur obligatory expenditure. Whereas expenditure on social security measures is optional. The state can postpone or incur this type of expenditure depending upon the availability of resources. It is not compulsory in nature. It can if time warrants can postpone to a future date.

    According to Shirra’s:

    Prof. Findlay Shirras classified public expenditure into;

    • Primary expenditure, and.
    • Secondary expenditure.

    Primary expenditure includes all those expenditures which governments are obliged to undertake, it is mandatory on the part of the government to incur these expenditures. It includes expenditure on defense, maintenance of law and order, civil administration, payment of the debt, etc.

    These types of expenditures are essential for the existence of the state. All other expenditures, other than those under the category of primary expenditure are grouped into secondary expenditure. It includes ex­penditure on education, public health, poor relief, unemployment re­lief, and other expenses on social security measures.

    According to Roscher’s:

    Prof. Roscher classified public expenditure into three groups namely:

    • Necessary.
    • Useful, and.
    • Superfluous.

    Necessary expendi­ture is that which the state has to incur and which cannot post­pone to a future date. The best example is the expenditure on administra­tion.

    Useful expenditure is that which desires but can post­pone.

    Superfluous expenditure is that which the state may or may not occur. It otherwise calls ornamental expenditure.

    According to Dalton’s:

    Instead of following some strictly logical methods, Prof. Dalton gives a practical or empirical classification. According to Dalton, a broad distinction may draw between public expenditure designed on the one hand to preserve the social life of the community against violent attack whether external or internal and on the other, to im­prove the quality of the social life.

    In other words, the object of public expenditure may be either to keep social life secure and ordered or to make that secure and ordered life better worth living whether from an economic or non-economic point of view.

    Hence Prof. Dalton clas­sifies public expenditure into two categories – grants and purchase price. When the state incurs expenditure and does not get any commodity or service in return, the expenditure classifies as a grant.

    For example, expenditure on poor relief, payments of old-age social insurance, etc. are grants. When the state acquires or gets some commodity or service in return the expenditure is a purchase price.

    Another example:

    The salaries of government employees, the price paid for purchasing a typewriter, etc., are the purchase price.

    To quote Dalton,

    “Payments by a public authority to any of its employees by way of salaries and wages or to contractors whom it employs, are pur­chase prices. On the other hand payments of old age, social insur­ance is granted.”

    Dalton says that some public expenditure may be partly a purchase price and partly a grant. This is so when the state pays a price higher than what a private buyer would pay. The differ­ence between the two is the element of grant at a purchase price.

    Dalton thinks that interest on public debts and pensions grant if looked at from the point of view of the present, as in the present the state secure no commodity or service by incurring this expenditure.

    However, if this expenditure looks at from a longer point of view then the state pays interest in return for the loans that secure in an earlier period. Similarly, pensions are a payment for service ren­dered in the past.

    Dalton also made a distinction between direct and indirect grants. Direct grants are those whose benefits accrue to the persons who secure the grants, for example, poor relief. On the other hand, indirect grants are those where part of the benefit accrues to a person other than the recipient of the grant, for example, subsidies. Part of the sub­sidy may pass on to the purchaser of the commodity in the form of lower prices.

    According to A.C. Pigou’s:

    Pigou has classified public expenditure into the transfer and non-transfer public expenditure. Pigou in the revised edition of his book on public finance emphasizes the distinction between Transfer Expen­diture which merely redistributes the money incomes of the mem­bers of the community and non-transfer expenditure which determines directly the uses to which part of the community’s productive resources shall be put.

    He says that expenditure of money by government authori­ties may conveniently separate under two heads, the expenditure that purchases current service of productive resources for the use of these authorities and expenditure which consist of payments made either gratuitously or in the purchase of existing property rights to pri­vate persons.

    The former group includes expenditure on navy-army, Civil service, educational service, judiciary, etc. The latter includes expenditure on the payment of interests on governmental debt, pen­sion, etc. In the first edition of his book, the former type of expenditure, he called, exhaustive, while in the second edition he called it real expenditure.

    In the third edition of he says,

    “It is perhaps better to call them simply non-transfer expenditures. The latter type must call transfer expenditures.”

    Non-transfer expenditure implies the actual using up of com­modities and services which would otherwise have been available for some other purpose. In the social accounting sense, non-transfer expenditure always gives rise to the creation of output and equivalent money income.

    For instance when the state pays salary to a sol­dier, then the soldier can utilize his service for no alternative pur­pose. In the absence of this expenditure, his service would have been available for some other purpose. Whereas transfer expenditure does not create any income or output.

    According to Pigou,

    “It implies only a transfer from the state to the recipients, of command over commodities and services.”

    For example, social expenditure on the old-age pension, poor relief, etc.

    According to Mehta’s:

    Prof J.K. Mehta made a two-way classification of public expendi­ture. He categorized public expenditure into;

    • Constant expendi­ture, and.
    • Variable expenditure.

    Mehta says,

    “Constant expenditure is that, the amount of which does not depend upon the extent of the use by the people, in whose interest it is incurred and upon the service that is financed by it.”

    The expenditure on defense is a clear example of constant expenditure. Variable expenditure is that which increases with every increase in the uses of public services by the people, whose benefit it incurs. Expenditure on postal service is an example of variable expenditure.

    Variable expenditure varies with the number of people using the service provided by the state. The essential feature of Mehta’s classification is that he uses the element of cost and not benefits as the basis of classification.

    He also recognized the fact that every item of public expenditure cannot place wholly under one or another class and hence a clear-cut distinction cannot draw between them.

  • Public Expenditure: Meaning, Definition, Classification, Types, and Principles

    Public Expenditure: Meaning, Definition, Classification, Types, and Principles

    What does Public Expenditure mean? Expenditure is the action of spending funds. Public expenditure refers to the expenses which the Govern­ment incurs for its maintenance as also for the economy as a whole. The Concept of Public Expenditure: Meaning, Definition, Classification, Types, and Principles.

    Here are explained the Concept of Public Expenditure with their point of Meaning, Definition, Classification, Types, and Principles.

    Public expenditure can define as, “The expenditure incurred by public authorities like central, state and local governments to satisfy the collective social wants of the people is known as public expenditure.” Earlier it was thought that “Every tax is an evil” and public expenditure is “unproductive”.

    Such ideas are no more nowadays. It means that the least amount of tax is to collect to meet “Three duties of the sovereign”. The three duties are the maintenance of internal law and order, defense from foreign attack and issue of currency.

    Nowadays, public authorities have to incur expenditure on the protection of citizens as well as of public welfare and the promotion of socio-economic development. However, after the great depression of 1930 and war and post-war years, increasing attention was paid to the study of public expenditure. So, they refer to the expenses of public authorities like the central, state and local governments.

    Meaning of Public Expenditure:

    To carry on their functions, governments must obtain the services of labor and other factor units and (except in a completely socialist economy) acquire goods produced by private business firms.

    Public expen­diture consists of expenditure by the central government, state governments, and local authorities (such as municipalities and public corporations), with the central government accounting for the major portion of such expenditure.

    Thus, the state is required to maintain good roads, bridges, defense activi­ties, canals, and harbors, to protect trade, to maintain the coinage and to provide social security, education, and religious instruction.

    As well as, Government expenditure:

    They refer to the expenditure incurred by the central government. There are different types of such expenditure. The usual distinction is between consumption expenditure and investment expenditure. Another distinction is between revenue expendi­ture and capital expenditure.

    The main items of government spending are the following:

    Social services such as education, health and welfare and social security; defence, that is the cost of maintaining the armed forces; environmental services, that is, spending on roads, transport services, law and order, housing and the art; national debt interest, that is, interest payments on money borrowed by the government. At present, this is about one-third of India’s national income.

    Since national income is a fixed number, spending in one direction can achieve only at the expense of spending elsewhere. Thus, if the govern­ment spends a larger part of the national income on defense, less will remain with the people for their consumption, thereby leading to a reduction in their standard of living.

    Similarly, too large an expenditure on the social services at the expense of defense expenditure may put a threat to national security – and social security is meaningless if it is at the expenses of national security. As a result, the actual amount spent in each direction represents a compromise between competing desires. So, there is always a need for careful planning of public expenditure.

    Definition of Public Expenditure:

    The theory of public expenditure has been more or less confining to that of generalities in terms of the effects of public expenditure on employment and price level. Even though public expenditure has increased rapidly during the last two centuries, in almost every state the area of them re­mains relatively unexplored.

    Further, the level of public expenditure depends on government programs, which are the outcome of po­litical decisions.

    Gerhard Colm points out,

    “The determination of gov­ernment programmes is a political procedure and as such is carried on in a milieu, usually called ‘Politics’ which includes vote gathering, pressure by lobbies, log rolling and competition among political ri­vals.”

    Classification of Public Expenditure:

    It is conventional in every textbook of public finance to classify public expenditures into various economic categories. Also, The classification of public expenditure refers to the systematic arrangement of differ­ent items of state expenditure, on some specified economic basis.

    Classification is always done on some logical and rational economic basis. Classification of public expenditure is important to understand the nature and effect of public expenditure. Through this classifica­tion, the state executive maintains effective control over them and prevented public funds leakages and wastages, di­versions and misappropriations.

    Classification of public expenditure is good for auditing and public funds can better safeguard against misappropriation. Classification of expenditure helps us to understand the relative importance of each head of expenditure at different times.

    According to Prof. Shirras, the test of public expenditures not the aggregate expenditure but it is the relative amounts which are as­signed to different heads from time to time. Hence classification of expenditure is important for a clear understanding of the nature and effects of them.

    Economists have proposed various methods of classifying pub­lic expenditures. However, the methods differ widely from one an­other. This is because; there is little agreement between authorities of public finance regarding the best way of arranging the various kinds of state outlays.

    Hence a completely satisfactory method is yet to emerge. Hence Mill, Roscher, Plehn, Nicholson, and Bastable have their methods. In this context, Shulz observes “Nineteenth-century fiscal writers devoted considerable space to the subject of the proper classification of government expenditure, but no two even agreed upon the same classification”.

    Extra Classifications:

    There are a variety of ways in which they can classify but broadly it is classifying under the following heads:

    According to the authority which spends the money viz;

    • Federal or Union or Central expenditure.
    • State or Provincial expenditure, and.
    • Local expenditure or expenditure of municipalities and other local bodies.

    According to the object of expenditure viz;

    • Development activities like providing subsidies, electric power, transport service, welfare activities, employment opportunities, and price stability, etc.
    • Non-developmental activities like money spent on administrative machinery, law and order, interest payment on public debt and defense, etc.

    According to the nature of expenditure via;

    • Revenue Expenditure, and.
    • Capital Expenditure.

    Revenue Expenditure is current expenditure e.g. administrative and maintenance expenditure. This expenditure is of a recurring type which Capital Expenditure is of capital nature and is incurred once for all. It is non-recurring expenditure e.g. expenditure for building multipurpose projects or a setting up big factories like steel plants, money spent on land, machinery, and equipment.

    Types of Public Expenditure:

    The main bases of Types of public expenditure are as follows:

    Capital And Revenue Expenditure:

    Capital Expenditure of the government refers to that expenditure that results in the creation of fixed assets. Also, They are in the form of investment. They add to the net productive assets of the economy. Capital Expenditure is also known as development expenditure as it increases the productive capacity of the economy. It is an investment expenditure and a non-recurring type of expenditure.

    For example; Expenditure, on agricultural and industrial development, irrigation dams, public -enterprises, etc, are all capital expenditures. Revenue expenditures are current or consumption expenditures incurred on civil administration, defense forces, public health and, education, maintenance of government machinery, etc.

    Development And Non–Developmental Expenditure/Productive And Non–Productive Expenditure:

    Expenditure on infrastructure development, public enterprises or development of agriculture increase productive capacity in the economy and bring income to the government. Thus they are classified as a productive expenditure. All expenditures that promote economic growth development are termed as development expenditure.

    Unproductive (known–development) expenditure refers to those expenditures which do not yield any income. Expenditure such as interest payments, expenditure on law and order, public administration, do not create any productive asset which brings income to the government such expenses are classified as unproductive expenditures.

    Transfer And Non-Transfer Expenditure:

    Transfer expenditure refers to those kinds of expenditures against there is no corresponding transfer of real resources i.e., goods or services. Such expenditure includes public expenditure on; National Old pension Scheme, Interest payments, subsidies, unemployment allowances, welfare benefits to weaker sections, etc. By incurring such expenditure, the government does not get anything in return, but it adds to the welfare of the people, especially to weaker sections of society. Such expenditure results in redistribution of money incomes within the society.

    The Non-transfer expenditure relates to that expenditure which results in the creation of income or output The Non-transfer expenditure includes development as well as Non-development expenditure that results in the creation of output directly or indirectly. Economic infrastructure (Power, Transport, Irrigation, etc.), Social infrastructure (Education, Health and Family Welfare), Internal law and order and defense, public administration, etc. By incurring such expenditure, the government creates a healthy environment for economic activities.

    Plan And Non-Plan Expenditure:

    The plan expenditure incurs on development activities outlined in the ongoing five-year plan. In 2009-10, the plan expenditure of the Central Government was 5.3% of GDP. Plan expenditure incurs on Transport, rural development, communication, agriculture, energy, social services, etc.

    The non-plan expenditure incurs on those activities, which are not included in the five-year plan. It includes development and Non-development expenditure. It includes; Defence, subsidies, interest payments, maintenance, etc.

    Other types of Public Expenditure:

    Mrs. Hicks classified the types of Public Expenditure based on duties of government. It is as follows:

    Defense Expenditure: It is expenditure on defense types of equipment, wages, and salaries of armed forces, navy, and air-force, etc. It incurs by the government to provide security to citizens of the country from external aggression.

    Civil Expenditure: Government/incurs this expenditure to maintain law and order and administration of justice.

    Development Expenditure: It is expenditure on the development of agriculture, industry, trade and commerce, transport and communication, etc.

    Public Expenditure Meaning Definition Classification Types and Principles
    Public Expenditure: Meaning, Definition, Classification, Types, and Principles, #Pixabay.

    Principles of Public Expenditure:

    As the public is an important part of fiscal policy, certain principles or canons are laid down to which public expenditure should conform.

    These principles of public expenditure or canons are as follows:

    The principle of Maximum Social Advantage:

    The government’s expenditure should so arrange as to secure the greatest possible net advantage, i.e., it should maximize the difference between the addition to welfare obtained by its expenditure and the social cost involved in obtaining the money. This principle has been calling by Dalton the Principle of Maximum Social Advantage.

    The principle of Economy:

    This principle says that the government should economies its expenditure and avoid wasteful and extravagant expenditure. The principle requires that the revenue collecting from the tax-payer should be judiciously spent. As too much they lead to inflation and adversely affects savings, the economy in government expenditure is cardinal.

    The principle of Sanction:

    According to this principle, expenditure should incur only if it has been sanction by a competent authority. It usually sees that unauthorizing spending leads to extravagance and overspending. But when a competent authority looks into the pros and cons and then gives its verdict to incur the expenditure it means that the expenditure incurred will provide genuine utility and serve its definite purpose.

    The principle of Elasticity:

    This principle states that it should be possible for public authorities to vary the expenditure according to need or circumstances. It means that they should be fairly elastic and flexible but not rigid. Rigidity proves to be a handicap in times of trouble alternation in the upward direction is not difficult but elasticity also needs in the downward direction.

  • Public Finance: Meaning, Definition, Scope, and Divisions

    Public Finance: Meaning, Definition, Scope, and Divisions

    What does Public Finance mean? It is a study of income and expenditure or receipt and payment of government. Meaning, Definition, Scope, and Divisions – The concept of Public Finance. Professor Bastable, an English economist defines public finance as a subject that deals with the expenditure and income of the public authorities of the state. Both the aspects (income and expenditure) relate to the state’s financial administration and control. Read and share the given article in Hindi.

    Here explains the concept of Public Finance; its points – Meaning, Definition, Scope, and Divisions.

    Dalton defined the subject as one which concerns itself with the income and expenditure of public authorities and the adjustment of one to the other. Also, It learns that the study of the subject chiefly centers around different aspects of government revenues and government expenditure about the state’s economy and people.

    It deals with the income raised through revenue and expenditure spend on the activities of the community and the term “finance” is a money resource i.e. coins. But the public collects names for an individual within an administrative territory and finance.

    Meaning of Public Finance:

    In public finance, we study the finances of the Government. Thus, it deals with the question of how the Government raises its resources to meet its ever-rising expenditure. 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, the effects of taxation, Government expenditure, public borrowing, and deficit financing on the economy constitute 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 was thought that the Government budget must balance. 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. Public authorities undertake activities for individuals living within an administrative territory. Also, Finance usually means income and expenditure.

    So it means income and expenditure of the public authorities and adjustment of one to the other.

    So we knew that:

    • When we talk of public we mean public authorities.
    • Public authorities include central government, state government, and local governing bodies.
    • When we talk about finance, we mean income and expenditure.
    • It is the fiscal science that implies the science of public treasury.
    • So it is a study of income and expenditure of the public authorities and adjustment of one to the other, and.
    • Objectives of public finance (objectives like higher growth, better distribution of wealth, income, property, economic stability, etc) can secure through taxation, public expenditure, public debt management fiscal federalism, and fiscal administration. Also, Public revenue, public expenditure, public debt management, fiscal administration, and fiscal federalism are the main branches of public finance.

    Definition of Public Finance:

    Different economists have defined public finance differently. Some of the definitions are given below.

    According to R.A. Musgrave says,

    “The complex problems that center on the revenue-expenditure process of government is traditionally known as public finance.”

    According to prof. Dalton,

    “Public finance is one of those subjects that lie on the borderline between economics and politics. It is concerned with the income and expenditure of public authorities and with the mutual adjustment of one another. The principal of public finance are the general principles, which may be laid down with regard to these matters.”

    According to Adam Smith,

    “Public finance is an investigation into the nature and principles of the state revenue and expenditure.”

    According to Findlay Shirras,

    “Public finance is the study of principles underlying the spending and raising of funds by public authorities.”

    According to H.L Lutz,

    “Public finance deals with the provision, custody, and disbursements of resources needed for the conduct of public or government function.”

    According to Hugh Dalton,

    “Public finance is concerned with the income and expenditure of public authorities, and with the adjustment of the one to the other.”

    The scope of Public Finance:

    The scope of public finance is not just to study the composition of public revenue and public expenditure. It covers a full discussion of the influence of government fiscal operations on the level of overall activity, employment, prices, and growth process of the economic system as a whole.

    According to Musgrave, the scope of public finance embraces the following three functions of the government’s budgetary policy confined to the fiscal department:

    • The Allocation Branch.
    • The Distribution Branch, and.
    • The Stabilisation Branch.

    These refer to three objectives of budget policy, i. e., the use of fiscal instruments:

    • To secure adjustments in the allocation of resources.
    • To secure adjustments in the distribution of income and wealth, and.
    • Also, To secure economic stabilization.

    Thus, the function of the allocation branch of the finance department is to determine what adjustments in allocation need, who shall bear the cost, what revenue and expenditure policies to be formulated to fulfill the desire objectives.

    The function of the distribution branch is to determine what steps need to bring about the desired or equitable state of distribution in the economy and the stabilization branch shall confine itself to the decisions as to what should be done to secure price stability and to maintain full employment level.

    Further, modern public finance has two aspects:
    • The positive aspect, and.
    • Normative aspect.

    In its positive aspect: The study of Government finance is concerned with what are sources of public revenue, items of public expenditure, constituents of the budget, and formal as well as effective incidence of the fiscal operations.

    In its normative aspect: Norms or standards of the government’s financial operations are laid down, investigated, and appraised. The basic norm of modern finance is general economic welfare. On normative consideration, it becomes a skillful art, whereas, in its positive aspect, it remains a fiscal science.

    The main scope of public finance may summaries’ as under:

    • Revenue.
    • Expenditure.
    • Debt.
    • Financial Administration, and.
    • Economic Stabilisation.

    Now, explain;

    Public Revenue:

    Public revenue concentrates on the methods of raising public revenue, the principles of taxation, and its problems. In other words, all kinds of income from taxes and receipts from the public deposit include in public revenue. It also includes the methods of raising funds. It further studies the classification of various resources of public revenue into taxes, fees, and assessment, etc.

    Public Expenditure:

    In this part of Government finance, we study the principles and problems relating to the expenditure of public funds. This part studies the fundamental principles that govern the flow of Government funds into various streams.

    Public Debt:

    In this section of public-finance, we study the problem of raising loans. The public authority or any Government can raise income through loans to meet the shortfall in its traditional income. The loan raised by the government in a particular year is the part of receipts of the public authority.

    Financial Administration:

    Now comes the problem of organization and administration of the financial mechanism of the Government. In other words, under financial or fiscal administration, we are concerned with the Government machinery which is responsible for performing various functions of the state.

    Economic Stabilization:

    Now, a day’s 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. This part describes the various economic policies and other measures of the government to bring about economic stability in the country.

    Public Finance Meaning Definition Scope and Divisions
    Public Finance: Meaning, Definition, Scope, and Divisions, #Pixabay.

    Divisions of Public Finance:

    Public finance broadly divides into four branches. These are Public Expenditure, Public Revenue, Public Debt, and Financial Administration. Under Public Expenditure, we study the various principles, effects, and problems of expenditure made by the public authorities.

    Under the branch of Public Revenue, we study the various ways of raising revenues by the public bodies. We also study the principles and effects of taxation and how the burden of taxation distribute among the various classes in society. Public Debt is the study of the various principles and methods of raising debts and their economic effects.

    It also deals with the methods of repayment and management of public debt. The branch of Financial Administration deals with the methods of budget preparation, various types of budgets, war finance, development finance, etc.

    Need for Public Finance:

    We all know that the existence of a large and growing public sector is a reason enough to study public-finance. Adam Smith in his monumental work. The Wealth of Nations laid out the basic jobs of the government.

    The government is to play an important role in providing for the defense of the nation, the administration of justice, and in the provision of those goods and services not wholly to be the result of the ordinary private activity. Adam Smith also had an acute awareness of the problems that would associate with raising the funds needed to finance these obligations.

    His four maxims of taxation remain today a guide in designing a nation’s revenue structure. The four maxims focus attention on matters of economic efficiency as well as equity.

    Conclusion:

    So, The word public refers to general people and the word finance means resources. So public finance means resources of the masses, how they collect and utilize. Thus, Public Finance is the branch of economics that studies the taxing and spending activities of government.

    The discipline of public finance describes and analyses government services, subsidies, and welfare payments, and the methods by which the expenditures to these ends cover through taxation, borrowing, foreign aid, and the creation of money. From the above discussion, we can say that the subject matter of public finance is not static, but dynamic which is continuously widening with the change in the concept of state and functions of the state.

    As the economic and social responsibilities of the state are increasing day by day, the methods and techniques of raising public income, public expenditure, and public borrowings are also changing. Because of the changed circumstances, it has given more responsibilities in the social and economic field.  Read and share the given article (सार्वजनिक वित्त: अर्थ, परिभाषा, क्षेत्र और विभाजन) in Hindi.