Public Finanace

Public Finance
Meaning and Concept of Public Finance
In public finance we study the finances of the Government.

Thus, public finance deals with the question 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, 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 objectsgrowth, 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 industrialised 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 defence 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.
The Concept of Functional 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 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 realised that governments 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 activise 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 industrialised 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.
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.

Public Finanace

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Public Finance

Meaning and Concept of Public Finance

In public finance we study the finances of the Government.

Accordingly, effects of taxation, Government expenditure, public borrowing

Further, it was thought that Government budget must be balanced. Public

The Concept of Functional Finance:

It came to be realised that governments taxing and spending policies could

Public borrowing and consequent increase in public debt at the time of

It was further demonstrated by Keynes that deficit financing by the

Thus, after Keynesian revolution public finance assumed a functional role of

Therefore, public finance has to play a special role of promoting economic

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