Importance of Public Finance

Public Financing

Public Finance is an aspect that deals with the study of government’s role in an economy. It is the branch of economics that deals with and assesses the revenue and expenditures of the government. Public financeing is very important because it deals with the study of the financing of the public enterprises or governments. It studies the questions on how government revenues is generated in the economy to meet government’s daily expenditures. This is concerned with the income and expenditures of public enterprises.

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Taxation effects, government expenditures, deficit financing and public borrowing in an economy are some of the few terminologies involved in the theory of public finance.

The importance of public financing are;

  • Efficient allocation of resources
  • Macroeconomic stabilization
  • Distribution of income

Government gets revenues in accrued in a manner of ways to meet their daily expenditure. Some of the methods of revenue generation for government expenditure include;

  • Tax
  • Government borrowing
  • Grants and aids
  • Inflation
  • Revenue from government own corporations

Public Finance - Importance, Types, Scope


The main objective of taxation is for funding and revenue generation for government expenditure. Taxes can be defined as the specific amount of money levied on an individual or firms to be paid to the government for goods sold or bought. Taxation related to applying taxes on different goods and services on both any company or an individual person.

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There are different types of taxes as per their behaviour like, the direct tax and the indirect tax. The direct tax is paid directly to the government by the firms and individuals and this is relative to income or the tax which applied on the yearly income of that person or company. The indirect tax is levied on a good or service that is purchased. The person the good is purchased from will be the one to pay the tax which takes us back to direct tax.

Indirect tax is differential in nature. There are also other categories of tax which include; stamp duty, excise duty for production for sale, road tax, duties and like GST or Goods & Services tax in India and also on some other countries.

Government borrowing

Government borrows money and gets aid from other countries and from the World Bank to generate revenue. The money borrowed is invested by the buying of bonds and selling it to members of the public to get money for the economy expenditure.


This is a phenomenon which occurs as a common problem in public financing. This is the continuous increase in the price level of goods and services without corresponding increase in the value of money.

Government expenditures

GOVERNMENT EXPENDITURE includes all government spending on investment, income distribution, transfer payments and government consumption. Government total consumption on expenditure is covered by different number of taxes applied on public like income tax and other indirect taxes. And the expenditure of these taxes are to satisfy common public with their services in Government.

Transfer payments

Transfer payments in public finance deals with government expenditure that are not acquisition of goods and services and instead just represent the payments of money such as social security payments. These payments are considered to be wastage as they do not add to the government but rather absorb resources from the governments.

Income distribution

Income distribution is the structured work which is handled by central government. In this distribution, government gives financial help to the needy people like who got suffered in natural disasters like floods or earthquake etc. Government also distribute some amount as pension for old age in the country to make them survive a good living.

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Also some income of central government is used to give some extra financial support to other countries who are suffering from different kind of economic crisis.

Infrastructure and investment (gross fixed capital formation)

This is intended to create future benefits. Infrastructure investment, or research spending is called gross fixed capital formation.

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Harish is the editor at howto Finance. Here we publish high quality trending news topics on Business, Finance, Loans and Credit-Cards etc. Our editorial includes worldwide topics.

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