Direction (Qs.1 to 10): Read the passage carefully and answer the following questions.

According to the traditional definition, Public finance is that branch of Economics which deals with, the income and expenditure of a public sector organization, normally government or federal organization. In the words of Adam Smith “The investment into the nature and principles of state expenditure and state revenue is called public finance”. The earlier economists were perfectly correct in giving this definition of the science of public finance because the functions of the public authorities in those days were simply to raise revenue by imposing taxes for covering the cost of administration and defense. The scope of public finance now-a-days has widened too much. It is due to the fact that modern states have to perform multifarious functions to promote the welfare of its citizens. In addition to maintaining law and order within the country and provision of security from external aggression, it has to perform many economic and commercial functions. Due to the increased activities of the state, there has been vast increase in the expenditure of the public authorities. The sources of revenue have also increased. Taxes are levied not for raising the revenue alone but are used as an important instrument of economic policy.

Modern concept of Public finance defines the role of the government in the economy. It 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. 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 etc. Public finance is a concept that includes public expenditure, public debt, public revenue, financial administration and economic Stabilisation. Public revenue is exactly income generated from sources of government in order to meet requirements of expenses of public. Public revenue generally refers to government revenue. Some important sources that are included in public revenue consist of taxes, fees, sale of public goods and services, fines, donations, etc. Fee is a payment to defray the cost of each recurring service commence by the government, primarily in the public interest.

A license fee is paid in those instances in which the government authority is invoked simply to confer permission or a privilege. It is the considerable part of public revenue. The profits of Public Sector Units (PSUs) are another source of revenue for the government of India. Tax is a duty and not a penalty. Most part of revenue income is generated from tax by the central government.

Fines and penalties are the charges imposed on persons as a punishment for contravention of a law. The main purpose of these is not to raise revenue from the public but to force them to follow law and order of the country.

Gifts are voluntary contribution from private individuals or non-government donors to the government fund for specific purposes such as relief fund, defence fund during war or an emergency. However, this source provides a small portion of government revenue. Like public revenue, public debt has also become a prominent feature of modern public finance. Sometimes public debt is, also referred to as government debt, represents the total outstanding debt of a country’s central government. Public debt is an important source for a government to finance public spending and fill holes in the budget. Public debt as a percentage of GDP is usually used as an indicator of the ability of a government to meet its future obligations. Financial administration also comes under the scope of public finance. Under this, the problem of how the financial machinery of government is organized and administered is dealt with.  The analysis of public finance also includes the concept of public expenditure. Public expenditure studies how the government distributes the resources for the fulfillment of various responsibilities. It also studies principles that the government should keep in view while allocating resources to various sectors.

On the other hand, different from public finance, private finance deals with the income and expenditure of the private sector or it can be said that private finance means the financial concerns of individual economic unit, i.e., a household, a shop, a firm etc. Modern economies are monetized, that is goods and services are exchanged through a medium of money and both public & private sector create and use financial claims. Both are engaged in activities that involve purchase, sales and other transactions. Both are thus engaged in production of goods and service, exchange goods & services, save capital and invest capital to create more wealth and capital.