Public Finance: Meaning and Concept of Public Finance!

Meaning:
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 objects—growth, stability, equity and efficiency.”
ADVERTISEMENTS:
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.
ADVERTISEMENTS:
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 government’s 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.