What is Public Finance? Definition and Meaning

Public Finance Definition & Meaning

The concept of public finance is one of the oldest and most prevalent components of the social-economic theory. The concept of public finance emerged with the formation of governments and public social institutions. Definition of public finance has been provided by various economists and institutions. In totality, if we want to know, what is public finance definition? The following points shall be included:

• When we think of what is public finance? It pertains to the management of financing activities and expenditures of public authorities like central or state governments and all other public governing bodies.
• Public finance implies the study and managing public treasury or commingled funds of society addressing social wants.

Objectives of Public Finance

Public finance strives to achieve societal benefits like higher growth, wealth creation, and sharing, factors controlling the stability of income, property, economy, etc. The objectives of public finance are achieved by managing and drafting policies pertaining to key areas such as taxation, management of public revenue and expenditure, raising and servicing public debt, fiscal administration at various levels.

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Public finance is required at all social levels considering different levels of government, management, and analysis with an eye on key focus areas:

• Financial Management: Collection of revenues from the public and arranging the required finance together with allocation and use of public funds in an efficient and effective manner is the essence of public Finance Management.
• Revenue Management: Government revenues are from both tax and non-tax sources. Effective measures to increase revenue base and improvising revenue collection is important for effective management of public finance.
• Expenditure Management: Appropriating and usage all the expenditures in a proper manner reflects the effectiveness of proper development and maintenance of the project as well as society. Misappropriation of funds by means of inflating bills, unnecessary expensing, allocating funds for discretionary expenses are common while spending public commingled funds.
• Fiscal Policy Amendments: Government finances are mostly burdened by budget deficits and continuous leverage slows down current as well as future growth. Therefore, amendments to fiscal policies are necessary to rationalize and prioritize Government operations for sustainable economic growth.
• Regulatory Changes: Continuous scrutiny and changes to underlying regulations are required to achieve and check targeted development.
• Public Policy: Implementing and laying down sound policies is important for the development of the public as well as private sectors.
• Public Debt Management – All debts either raid raised by the Government or for public projects has direct costs associated inform of interest as well as associated opportunity costs, which burden the expenses. Effective management of public debt through restructuring and rationalization is required to control financing costs.
• Process Improvement: A systematic approach is required to help Governments and public bodies to carry the operations and processes swiftly to achieve maximum societal benefits.
• Management of Information System: Powerful IT system is required in today’s world as correct information supports effective and corrective decision making.
• Capacity Creation: Adequate capacity to serve requirements in times of stress and considering future needs is required at the institutional as well as individual levels.
• Interdepartmental Synchronization: To run a society efficiently and ensure maximum benefits requires synchronization and alignment of working various departments altogether.

Need of effective Public Finance Management

State, as well as central governments formed worldwide, have been witnessed ongoing and continuous fiscal imbalances, financial failures due to underlying complex financial systems and products. Public-finance institutions like state and central governments, public funds, tax authorities, central banks, regulators, public auditors, and rating agencies foresee a lot of manipulations, amendments, and reforms to manage public finances for the existing and future wellbeing of society. Concerned and responsible authorities in the field of public finance are aiming to improve their performance by closing the loopholes and increasing transparency.

In order to quickly fix the adverse event in times of stress societal wellbeing at the current time and for existing members sometimes lead to lethal consequences. Mismanagement of public finances leads to digging much deeper holes in public financial accounts, like:

• Balancing accounts with one-time fixes following aggressive revenues and conservative expenses policy.
• Ignoring long-term costs and consequences associated with current actions.
• Keeping excess assets and funding than required at the sustainable level.
• Overspending current surpluses in the public finance accounts, rather than following a reserve for future deficits or investment requirements.
• Ignoring or manipulating the funding status of pension or future investment obligations.
• Overestimating returns and allocating excess funds on discretionary projects without having proper consensus and analysis of project benefits and opportunity costs.
• Ignoring continuous monitoring and control of public finance accounts on a standalone and consolidated basis.

A great example of public finance is how to value tourist attractions. Check out our Valuation of the Eiffel Tower.

Key Trend in Public Finance

The prevailing and widely accepted means of digital transactions and information storage at individual and group levels mark the need for digitization essential to reshape public finance by upgrading the government’s methods of collecting, processing, sharing, and using information.

Quality and well-managed information systems help in drafting effective public finance policies, and also help in continuous management, administration, and compliance of underlying public finance policies. Government and public associations are required to make effective channels to update and store digital information and content to extract potential benefits of storing, utilizing, and analyzing digital information in the field of public finance. Underlying key risks and challenges like data security, privacy, fraud, and evasion limiting the capacity should be considered while going digital in public finance.

Author: Ankur V. – Sr. Analyst