Definition and scope of Public Finance

The economics of public finance is fundamentally concerned with the process of raising and
dispersion of funds for the functioning of the government. Thus, the study of public revenue
and public expenditure constitutes the main division in the study of public finance.

 It has also to solve the question of what is to be done in case public expenditure exceeds the
revenues of the state. In solving the first problem, “financial administration” comes into the
picture.

1. Public Revenue, which deals with the method of raising funds and the principles of taxation.
Thus, within the purview of public revenue, we take up the classification of public revenue,
canons and justification of taxation, the problem of incidence and shifting of taxes, effects of
taxation, etc.

2. Public Expenditure, which deals with the principles and problems relating to the allocation of
public spendings. Here we study the fundamental principles governing the flow of public funds
into different channels; classification and justification of public expenditure; expenditure
policies of the government and the measures adopted for general welfare.

3. Public Debt, which deals with the study of the causes and methods of public loans as well as
public debt management.

4. Financial Administration, under this the problem of how the financial machinery is organised
and administered is dealt with.

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.

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

(i) To secure adjustments in the allocation of resources,

(ii) To secure adjustments in the distribution of income and wealth, and

(iii) To secure economic stabilisation.

Thus, the function of the allocation branch of the fiscal department is to determine what
adjustments in allocation are needed, who shall bear the cost, what revenue and expenditure
policies to be formulated to fulfill the desired objectives.

The function of the distribution branch is to determine what steps are needed to bring about
the desired or equitable state of distribution in the economy and the stabilisation 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:

(i) Positive aspect and (ii) Normative aspect. In its positive aspect, the study of public finance is
concerned with what are sources of public revenue, items of public expenditure, constituents
of 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, public finance becomes a skillful art, whereas in its
positive aspect, it remains a fiscal science.