Public Finance: What It means, 4 Types & Functions?

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Public finance is a sub-field of finance that deals with the monetary activities of the government in managing the country’s economy. It includes the country’s revenue and expenditure as well as budget. It seeks to regulate the inflow and outflow to achieve a balanced result, while also avoiding undesirable results.

One significant aspect of every country’s economy lies in trying to manage its finances. This is why public finance has to play a special role in financial development. Although, there are some major issues to expect in public finance which includes:

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Public income – this is revenue generated through various sources. It becomes an issue when the government through its public finance department fails to generate income for its residents. Thus, they may go borrowing which can lead to a failed economy.

Expenditure – the government must ensure the adequate distribution and tolerable use of funds. This is to ensure communal needs and wants.

Budgetary – the government has to carry out its monetary activities through the process of annual budget. Otherwise, the accounts and records might fail to meet transparency.

Obligation – the government must meet up with any payment or outstanding debts with either its residents or other countries.

Good knowledge of public finance can help the government of a country to push up its mechanical and financial development. By this, it could provide enough opportunities such as investments, more business openings, employment, and an increase in social benefits.

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Types of public finance

All the different types of public finance seek to arrive at a reasonable solution, which is, that a particular government produces, and maintain a stable balance in the economy. Public finance divides into four areas: public income, public expenditure, public debt, and financial administration.

Public Income

The government has a pause, this pause represents a piggy bank where all money that is channeled to the government is accounted for. The two ways government generates money for its pause are through tax income and non-tax income.

Tax income – individuals of a country easily distinguish tax income from the normal personal tax they usually pay. This includes A percentage deduction of salaries from workers, wages, business sales, and other individual earnings.

Non-income tax – while on the other hand, we recognize taxes that fail under non-income as:

Lending to other countries – this can help generate income that is utilized to maintain and stabilize the economy. It could also reduce the rate of individual income tax.

Various donations from other countries – this could be foreign aid,   inform of humanitarian and trade incentives. They can use this assistance to improve the demands of the country.     

Rents from government properties – individuals or corporate bodies hire such assets as land, buildings, and agencies that directly belong to the government. We also regard the proceeds as income.  

Public expenditure

The expenditure of the government refers to various expenses that government make to ensure the growth and development of its citizens and the country in general.  This spending includes payment of workers’ salaries, healthcare services, basic amenities, education, Production, and employment.

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Public debt

Sometimes, in the government sector, as with any individual the expenditure might exceed income. When this becomes the case, borrowing from other countries becomes the only option to satisfy the demand.

The countries to borrow from could be those that have met a high level of development. The government can as well borrow from World Bank. However, this method is not encouraging as it hurts the country’s economy.

Financial Administration

The financial administration is the department that takes up the responsibility of preparing for all levels. The preparation includes budgets and collecting funds meant for the government. In summary, it is a department that sees to the financial accountability of the government revenue and expenditure.  

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The roles/functions of public finance

You may try to ask or seek to understand why the government of a particular country decides to handle certain roles. You may also try to ask the reason why the various states that make up the country are unable to maintain such responsibility.

The answer is that no country’s state can govern the other, try to accept the other policy, or control the other states territory. For this reason, the need to have a central authority becomes very important. This central authority plays a vital function that benefits all the states in general.

Therefore, in this regard, while the government controls the public finance of its country, it represents the central authority with the following functions:

The government creates and manages the balance of payment;

This process summarizes the collective transaction of the citizens of a country with other countries, usually on annual basis. It comprises receipts and payments from both sides. Thus, when the revenue and expenditure become equal it means there is a balance of payment.   

Balance of payment becomes very necessary in other to control and manage the country’s economy. It also helps to avoid unnecessary borrowing from other countries. Three categories in the balance of payment consist of current, capital, and financial account.

Balance distribution of revenue

The government uses revenues like income tax, sales of government properties, and other forms of proceeds to fund important projects. They organize a scheme that will benefit the country generally without bias.

For instance, providing free security, free health care services, and the construction of roads and bridges. Such services give a balance distribution of revenue because every resident of the country will partake in it.  

Price stabilization of goods and services

The public finance department in the government sector ensures that the price of goods remains stable by managing the domestic currency to preserve its purchasing power.

With this it may avoid inflation but not totally, price increases may occur but at a low and stable rate. Public finance ensures that the country’s present economy does not lose its value.

Resource allocation

In public finance, the government allocates revenue in such a manner that supports the country’s strategic planning goals. It includes managing all forms of revenue, debt, and expenses and encouraging investors.

Maintain transparency

In terms of public finance role, the residents of a country expect its government to play transparency in the management of its funds. Again, keep an accurate record of its income and expenditure analysis.

Management of debt and investment

From time to time once the economy of a country is favorable, investors would prefer to show patronage. The public finance in government handles this task and again takes responsibility for timely debts.

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