Saturday, June 5, 2010

Public Finance & Private Finance

Public Finance deals with the question how the government raises its resources to meet its ever-rising expenditure.

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

Major Function of Public Finance:

· Allocative Function: Allocative function deals with the question what are the sources of government revenue, i.e. how much amount government will earn from each earning source.

· Distributive Function: Distributive function deals with the question what are the categories of government expenditure, i.e. how much amount government will spend for each common benefit for the people of the country.

· Stabilization Function: Stabilization function deals with the fiscal policies which ought to be adopted to achieve certain objectives such as price stability, economic growth, more equal distribution of income.

Importance of Public Finance or Reasons for Increase in Public Expenditure:

· Increase in area and population: The increase in public expenditure is due to the fact that the physical boundaries of the countries have been widened. Even if the area has not increased, the population figures have considerably gone up. Governments have, therefore, to cater to the needs of millions of more people scattered perhaps over a much wider area.

· Equal development: If the development of a country depends on individual or group of individual, they will inspire to develop only their own area. So, Government has to take initiative for the development which ensures proper development throughout the country.

· Expansion in social services: In modern times, there has been a remarkable expansion in social services like education, public health measures and medical aid. Expansion in educational facilities has led to the establishment of schools, colleges and technical institutions in very large numbers. The number of hospitals and medical colleges has multiplied manifold. Public health and sanitary measures are taken on a vast scale. Expenditure on these social services leads to importance of public finance.

· Welfare activities: All modern countries wish to make liberal provision for social security schemes or social insurance, e.g., free medical aid, free education, old-age pensions, provident fund schemes, etc. All such schemes have substantially pushed up the government budgets.

· Law and order situation and war: To maintain internal law and order situation and also protection against aggression from external, large amounts are being spent now.

· Expansion of public sector: As private sectors are not interested in huge investments from which they will not get profit in short-time, Government has to take initiative on these matters. This results in the expansion of the public sector. As a consequence, public expenditure has gone very high.

· Requirements of full employment: A modern country is anxious to underwrite full employment. To provide employment for all, the Government must launch ambitious schemes of public works and public undertakings. Naturally, the public expenditure must shoot up.

· Economic development: Economic development is a very costly affair. Lot of money has to be spent on economic and social overheads and many costly projects have to be undertaken. Measures have to be taken for the development of agriculture and industry and so on.

· Equal distribution of income: In any country there are some portions who earn more and who earn less. To eradicate this inequality of income government imposes such a fiscal policy ensures equal distribution of income.

Similarities and Dissimilarities between Public and Private Finance:

Similarities:

· Wants are unlimited and resources are limited- this concept is true for both individual and Government. Both individual and Government have to use their limited resources to meet up ever-rising expenditure.

· Both individual and Government emphasize on their own welfare. Individual earns and spends for his/her and family’s benefits and government earns and spends for maximum social and economical benefits.

· Both individual and Government can borrow money according to their needs.

· In the budget of individual and government have a balance whatever zero, positive or negative balance.

Dissimilarities:

No.

Particulars

Public Finance

Private Finance

1

Adjustment of income and expenditure

At first Government determines its expenditure, and then tries to collect money to meet up the determines expenditure

Individual determines its expenditure according to his/her income

2

Objectives

Public finance is mainly related to social welfare

Private finance is mainly related to his/her and family’s welfare

3

Timing

Government prepares budget for 1 year

Generally, there is no specific time-table for preparing budget in case of individual

4

Concealment of income and expenditure

There is no scope to conceal the income and expenditure of Government

There is possibility to conceal the income and expenditure of individual if he/she wishes

5

Determinants

Public expenditure depends on the fulfillment of specific social and economic objectives

Private expenditure depends on his/her consumption pattern, social status, living standard etc

6

Debt

Government can borrow from both internal and external sources

Individual can only borrow from external source

7

Issue of note

If necessary, Government can issue notes to meet up its expenditure

There is no scope to issue note in case of individual

8

Focus on

Government emphasizes on long-term project which will give benefit after a long period

Generally individual emphasizes on short-term plan which will give benefit within a short-period

9

Loan defaulter

There is no scope to be loan defaulter. Because Government collects money from public

Individual can be load defaulter

10

Marginal utility of money expenditure concept

All the times marginal utility of money expenditure is not maintaining in case of public expenditure

All the times individual try to maintain marginal utility of money expenditure

11

Deficit budget

Deficit budget is common phenomenon in case of Government budget

Individual always prepares surplus budget

12

Burden of debt

Burden of public debt is not imposed directly on Government. Government collects it from the public of the country

Burden of individual debt is directly imposed on individual

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