Economics is one of the widest subjects of study in modern universities. And this is mainly because it touches all the main areas of human activities and relationships. Public finance can be defined in terms of economic growth and development. There is a lot of fuss about the meaning of public finance, with different experts coming up with varying definitions. However, the most important aspect of this subject is that public finance affects the general economy.
Government activities have always been a major influence on economic growth and development. And this is why studying them makes a lot of sense. When there is too much government spending, it may either boost or bring down the economy, just like if there were too little spending. Also, public debt, taxation, and issues of currency inflation touch the main areas of economic development, all of which can be associated with public finance.
The term public can be defined as that which concerns general citizenship. In other words, this is a shared resource that every citizen has a right to, and should not be charged or overcharged as the case of private items. When we talk about the public, we are talking about resources or activities that many people are involved in within a certain economy. For instance, a public park is where anyone is free to go and relax without being charged with anything.
In this article, we shall be talking about the concept of public finance. As you may have already guessed from the definition of public, it has something to do with the financial expenditure of a nation. However, it is not what the people do with public funds but rather has the government uses these funds to boost economic development. Public finance aims at identifying ways in which the government can intervene in the current economy.
We will be introducing you to the issues of public finance, the basic concept of the topic, and how public finance is linked to the general economy. The main goal here is to help you understand this topic, which is among the main areas of economic studies. Later, we will have to create a framework for understanding government expenditure, but it all starts with understanding public finance. Finance is already a very sensitive topic for many people and economies. It is the engine that drives and measures the extent of economic development.
As stated above, public finance is all about how the government uses public resources for the development of an economy, ensuring that everything is under control and the public is happy about what they are doing. Hence, this term can be best understood from government activities that touch the financial resources of an economy, which affects the general public. This may include spending, deficits, and taxation.
This subject aims to answer three crucial questions about government spending and the use of public resources:
1. When does the government need to intervene in the current economy?
2. How does the government intervene?
3. And why should the government intervene in an economy?
Consider the 2006-2009 Great Recession, for instance. Many markets in the USA and around the globe were falling, bringing down the economy to levels that were never seen before. Just a few months before this, there was a bubble in the economy, making everyone feel comfortable with everything around them. But that was not to last long, considering how the financial markets collapsed drastically, pulling down everything else with it. Something that could have been fueled by mistakes in the financial sector spread fast, affecting the whole US economy and the rest of the world. Governments had to act quickly, coming up with various fiscal and monetary policies that could shield the economy from falling further. Such decisions included lowering the lending rates in banks, offering bonds to hold firms in place, creating more job opportunities, and many other decisions that could restore everything back to normal. We can say the economy has not fully recovered yet, and it has been affected too by some unforeseen situations, like pandemics and natural disasters. But the point here is, the government plays one of the main roles in general economic development, and policymakers must understand the main ways of dealing with economic rises and falls.
Apart from answering these three questions, public finance also aims at helping us understand the possible outcomes of making changes in the market. Markets are where households and firms meet to serve each other. One offers the supply of goods, and the other delivers the demand needed for these goods and services. There would be no markets without a good relationship between these two aspects. The actions of one side affect the actions and decisions of the others. For instance, if firms decide to raise the prices of common commodities, it may make them lose some customers, which affects the level of demand and supply. On the other hand, too much demand may lead to scarcity, which initiates a rise in the prices.
Public finance can also involve issues that are not directly linked to the economy, such as accounting, law, and public finance management. It is all about what public finance professionals. They are tasked with understanding governments' role and how changes may affect the economy, giving alternative solutions that can make things better.
Government interventions and actions can be classified into one of these three categories:
Economists are tasked with evaluating a variety of resources to determine how they can be well shared and how they can affect the general economy. This is one of the main areas of creating sustainable development while ensuring that every resource has been well achieved. Efficiency can be achieved using a formula of ratios and generated outcomes. Economic efficiency should not be confused with technical efficiency. The main difference comes in terms of the relationship of values people place on material things. On one side, values in technical efficiency may be subject to individual preferences. What one person may find interesting may not be the same for another person, hence the variations in valuing things. And on the other hand, economic efficiency is all about eliminating waste to provide as much value as possible. Also, technical efficiency aims to bring out maximum values, which calls for the sacrifice of as much as is necessary to create the best initiative.
Every government needs to know the total number of its population for the sake of sharing public resources. The distribution of incomes comes in as calculating the wealth of a nation once divided by its total population. A government may order a series of statistical studies to discover how much wealth people own in their nations and a foreign nation. Note that wealth and income are different entities in an economy. Wealth stands for the general value placed in the physical possession of a population. When gathering this data, policymakers may seek to understand what possessions fall under every citizen, making it possible for them to lead a happy life. On the other hand, income is the exact value of the net intake of a population within a specific period. Such information as from the wealth and income of a country could be a valuable resource in answering various political, social, and economic questions.
The development and growth of fiscal and monetary policies, laws, and regulations are crucial for measuring how economically developed a country is. We know that nations grow by making treaties and good economic relations with other nations. This aspect comes down to the stabilization and growth of the economy as monitored through the development of these factors. There is no economic growth without economic stabilization. In other words, stabilization is the foundation and pillar of economic growth and development. But how can a government achieve stabilization? Buy ensuring a balance between government budgeting, domestic commerce, banking operations, international trade, and governing institutions. The markets must be managed to ensure proper rotation of interest rates, business cycles, and demand with the economy are steady.
Public finance can also be understood better in identifying specific financial relations and functions between bodies that deal with public administration and institutions. The state is the public sector entity. If this relationship creates a mutual operation, letting them work as one party in perfect harmony with other parties like private entities, then proper public finance can be achieved. These relationships can be better understood in terms of:
- Procurement of public goods where proper production and provision is achieved
- Arranging and funding different transfers, especially in the social context
- Directing parties with an economy to socially desirable behaviors, which involves actions like taxing, penalties, subsidies, and other similar changes that stimulate economic growth.
To fund these areas and arrange them probably, there is a need to come with a fiscal system that will collect the expected amount of revenue, which serves in different levels of public budgets and public expenditures. Public expenditures and revenues, especially taxes, are considered the heartbeat of public finance. Economic development (deficit, public debt, budgetary policy, and fiscal policy) must be discussed and implemented.
Public finance is well connected to economic mechanisms. We are living in a world where human needs are unlimited and yet require to be fulfilled by limited resources. For this reason, public finance has to be well integrated into an economy as it helps create an effective and fair allocation of these resources. Allocation issues were dealt with through different mechanisms historically, which included cultural traditions and customs. The economic theory suggests that human beings are naturally rational decisional makers. They make choices based on what offers the most beneficial outcome. Hence, finding a way to share limited resources could not have been a big issue. As the population increases, so do the scarcity of these resources, so finding a proper way of dealing with an allocation is crucial. The advent of social and economic development transferred the role of customs and traditions to the state, making the allocations of these scarce resources more effectively.
The role of the state in economic development is well pronounced today, as seen since the 1930s. It is more important than ever today that the state takes over the control of allocating resources. As such, the state's traditional functions, which include legislative, social, security, and many others, have been supplemented with economic functions. These are sometimes referred to as the fiscal function or public finance function. Here, the government is responsible for allocation, redistribution, and stabilization activities, which affect economic growth and development. The state applies its other functions to maintain these activities. For instance, legislative and executive powers, as well as its own public administration bodies, are used to implement these functions.
Apart from this, the state has enforcement powers, which makes it a crucial economic entity. It is no wonder that we cannot talk about economic growth and development without mentioning the role of the state. It determines the rules, as well as enforces their observance through every tool at their disposal. It is safe to say that the state's economic function has become predominant in certain areas such as schools, health care, social services, and social security. In terms of economic sectors, individualist theorists reject the state interventions as undesirable for the economy, whereas collectivist theorists advocate for them.
It is easy to note that public finance relates to financial operations, relationships, and tools for implementing the allocation of public goods. It also deals with the transfers and stimulation of economic entities to observe specified behaviors. The term public sector is quoted in this definition, which stands for a certain aspect of the national economy. Every institution and organization within the public sector is funded in whole or in part with public funds, which connects them to fiscal systems as well. Other features like ownership, management systems, provision of their products to consumers, among others, point to their function within an economy. Aside from this, the public sector coexists with the private sector in pluralistic economies. Therefore, studying public finance is crucial in understanding the role of the government in economic growth and development.
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