Public finance is a discipline that relates to the management of funds that are required to satisfy the public needs as well as to the improvement of the economy. This branch is specifically concerned with how governments raise revenue, disburse cash and develop fiscal measures which can foster sound macroeconomic management and development. An understanding of public finance is important because it helps to know how governments finance essential things such as schools, hospitals, and roads as well as how they handle problems like recession, inflation and national debt.
Governments primarily receive cash through taxes which includes income taxes, sales taxes, corporate taxes, and property taxes. They even make their money through charges, penalties, and even through taking loans. Taxes are important and their impact cuts across people especially as imposed by a particular government for the general economy. Again more taxes enable the provision of more services such as free health or free education like in Sweden. But high taxes can sometimes act as a retardant to the essential flow of spending and investment that are so important to the economy. Lower taxes, however, can make both businesses and individuals incorporate more but at the same time public services such as health or infrastructure, are underfunded. Studying these trade-offs is perhaps the principal task of public finance.
Once money is collected, governments decide how to allocate it. Spending, also known as expenditures, is directed toward a variety of areas, including education, healthcare, defense, social programs, and infrastructure. Spending on education and healthcare, for example, improves people’s quality of life and helps create a healthier, more skilled workforce. Investment in infrastructure—such as building roads, bridges, and public transportation—makes it easier for businesses to operate and for people to access jobs and services. Defense spending is another critical area, as it ensures national security, but it can sometimes divert resources away from social programs. Governments must carefully plan their budgets to address these competing priorities effectively.
Source: BoldBusiness
Compliance to general public policies on finance remains significantly vital especially at certain critical stages within recessionary periods. Recession normally takes place when the economy cools down resulting in individuals being fired and buying fewer goods. This in its turn negatively affects businesses and also brings less revenue under the government’s taxes. In these periods, government expenditures usually rise as part of an effort to boost the economy. For example, they might undertake employment through financing big public works to create employment or making cash transfers to families and businesses experiencing losses. This kind of spending is called stimulus spending because it allows people and businesses to rise again and foster economic development. A good example is the COVID-19 pandemic when governments all over the globe provided billions of dollars into relief efforts that were directed toward individuals, hospitals, and businesses.
Source: Legislative Analyst's Office - CA
Besides spending and taxes, the next significant factor of public finance is borrowing. There is the case of lending money to investors through bonds which are similar to loaning money but in the latter the government promises to repay the money borrowed plus an interest. Through borrowing, governments can get finances for the big investments, such as construction of highways or even projects that will alleviate damage from disasters. On the other hand, if one borrows too much, he or she ends up with high levels of debt that can squeeze future budgets. It is very important that countries be very careful in borrowing money because it can become out of hand.
Public finance also plays a role in global economics. In today’s interconnected world, decisions made by one country can have significant impacts on others. For example, when the United States raises interest rates, it can affect borrowing costs for other countries that trade with or rely on the U.S. dollar. Similarly, international trade policies, like tariffs or sanctions, influence global supply chains and economic stability. Public finance experts must consider these global factors when advising governments on how to manage their resources.
In conclusion, public finance is not about simply collecting funds and expanding them, it is about making choices affecting the economy, the built environment and society. It aids governments in its provision of basic services, during emergencies and disasters and for investment on future development. Realizing the way public finance functions can help comprehend the role of this concept, making us understand the various ways through which decisions can be made in the future. Being said, as you proceed with this current course, you will discover concrete mechanisms and instruments that governments employ to contain public funds and impacts of these monies on other facets of economy.
Works Cited:
Investopedia. "What Is Public Finance?" Investopedia, 12 Oct. 2023, https://www.investopedia.com/terms/p/public-finance.asp.
Musgrave, Richard A., and Peggy B. Musgrave. Public Finance in Theory and Practice. McGraw-Hill Education, 1989.
Tax Policy Center. "How Do Taxes Affect the Economy in the Short and Long Term?" Tax Policy Center, Urban Institute and Brookings Institution, https://www.taxpolicycenter.org/.
World Bank. "Public Finance: Achieving Sustainable Growth and Equity." World Bank, https://www.worldbank.org/en/topic/publicfinance.
Organisation for Economic Co-operation and Development (OECD). Revenue Statistics 2023. OECD Publishing, 2023, https://www.oecd.org/tax/revenue-statistics.htm.
Title Image: Valiant Group