Public Finance | Importance and Principles

What is Public Finance?

The government of every country needs to perform certain functions for the betterment of society. Obligatory functions and optional functions are two major types of functions that the government of every country undertakes. Obligatory functions are the functions that are necessary for the government to perform, which include, protection of the country from external aggression, internal distortion, maintenance of peace and security, etc. Optional functions are the functions in the absence of which a country can survive. The fund required for such functions is acquired, maintained, and used through the medium of Public Finances. Public finance is the science that deals with the income and expenditure of the public authorities. The public authorities include all types of governments, namely district, state, and national level governments.

According to Mr. Dalton, “Public finance is one of those subjects which lie on the borderline between economics and politics.”

Importance of Public Finance

In the 19th century, the importance of public finances was not very wide as the government did not intervene in public finances, and the tax imposition was very low. The main aim of the government at that time was to protect the country from internal disorders and external aggressions. But in modern times, the importance of public finances has widened. The government started to intervene in the public finances, and various strategies have been set up by the government to manage the same. Some of the importance of public finances are:

• Subsidies and Grants: The government these days gives subsidies and grants to facilitate industries with monetary support to increase the production of essential goods in the domestic country.
• Taxation: The government levies taxes on some harmful things as well, like cigarettes and alcohol, which are injurious to health. This practice is considered for the welfare of the public as a whole.
• Protection of Infant Industries: The domestic infant industries are often provided with protection from foreign industries through tariffs, quotas, and embargoes.
• Optimum Utilisation of Resources: Pubic finances put an effort to optimise the utilisation of resources, which is a major concern of developing and under-developed countries.
• Employment Opportunities: Public finances also undertake the goal of increasing the level of employment, especially during the depression. The government has to spend increasing amounts on public works to afford employment opportunities for unemployed people within the country.

Principles/Doctrines of Public Finance

1. Principle of Minimum Taxation

The Principle of Minimum Taxation broadly suggests two things, the first is that the government expenditure should be negligible, and second, the tax imposed by the government on the public should be least/negligible.

According to French Economist, J.B. Say, “The best financial management is that where the government expenditure is almost negligible. Likewise, the best tax is the tax which imposes the least burden on the people.”

In the 19^th century, almost every economist supported this principle of public finance because at that time the trend of individualism was very strong. It was believed that individuals should be left alone to operate their finances and that the government should not intervene in their business. Also, the majority of economists considered government expenditure to be completely useless. But modern thinking is comparatively different from that of the past. Now, there is no trend of laissez-faire left, and the government intervention in public finances has widened.

• Government expenditure is no longer considered useless as it includes expenditure on necessities like healthcare, education, industry, agriculture, etc.
• Tax levied by the government is not considered as a financial burden anymore. The government levies taxes on some harmful things as well, like cigarettes and alcohol, which are injurious to health. This practice is considered for the welfare of the public as a whole.

2. Principle of Minimum Collective Sacrifice

This principle suggests that the government should divide its burden of expenditure on different sectors to minimise the tax burden on the public. This principle is the same as the Principle of Minimum Taxation in the aspect of minimum/negligible taxes. Tax levied by the government on the general public was considered bad under this principle. This principle, too, in modern times, became obsolete. The expenditure of the government has widened over time due to the inclusion of various activities. The government now needs to divide its expenditure largely to cover its expenses.

3. Principle of Economy

According to this principle, it was believed that the government is less considerate towards its expenditure in comparison to an individual. Most of the government expenditures were considered to be useless and not necessary. Hence, it was considered essential for the government to keep in mind the principle of economy while arranging its expenditures. This principle, too, has lost its importance in the growing times. It is now not believed that all the expenses of the government are waste. Government expenditure is no longer considered useless as it includes expenditure on necessities like healthcare, education, industry, agriculture, etc. Also, it can not be said that an individual is always careful of his/her finances and expenditure. There is always a possibility of carelessness from the end of individuals too.

4. Principle of Maximum Social Advantage

A well-known British economist, Hugh Dalton, gave this principle by saying that the system of public finance is the best, which secures maximum social advantage to the community. The fiscal operations of the state should, therefore, be determined by the principle of maximum social advantage. The State should always keep this principle in view while raising revenues or incurring expenses on various heads. As the modern state influences all the sectors, either by levying taxes or spending to provide amenities to various sectors.

• Taxation naturally involves some social burden, so it is considered a social sacrifice made by the taxed groups of the community.
• Public expenditures confer benefits on those sections on whom it is incurred, so it is considered a social benefit flowing from public expenditure.

The fiscal operations thus involve both social sacrifice and social benefit simultaneously. The principle of maximum social advantage requires that the revenue and expenditure of the state should be managed in such a way that maximum net advantage accrues to society, taking into account the social sacrifice involved in taxation and the social benefit flowing from public expenditure. Note: The net social advantage shall be maximum only at the point where the social sacrifice equals the social benefit.

Depiction of Maximum Social Advantage through schedule and graph-

No. of Units of Money Taxed and Spent	Marginal Social Sacrifice (MSS)	Marginal Social Benefit (MSB)
1	10	90
2	20	75
3	30	65
4	40	55
5  (Point of Maximum Social Advantage)	50	50
6	60	35
7	70	25

MSS is the marginal social sacrifice curve sloping upwards from left to right. This rising curve suggests that the marginal social sacrifice goes on increasing with every additional dose of taxation. MSB is the marginal social benefit curve sloping downwards from left to right, indicating the fall of marginal social benefit with every additional dose of public expenditure. The two curves MSS and MSB interact with each other at point P. PM represents both marginal social sacrifice and marginal social benefit.