Government Finance with Scope and Importance

Concept of Government Finance

Government finance is a science that studies the income and the expenditure of public authorities or government. It is often called public finance. The word 'Public' indicates the people as a whole represented by the government and 'Finance' denotes the financial activities. Therefore, government finance is related to the financial activities of the government.

Prof. Dalton says, "Public finance is concerned with the income and the expenditure of public authority with the adjustment of the one to the other."

The most comprehensive and scientific definition of public finance has been given by Bastable. According to him, "Public finance deals with the expenditure and the income of public authorities of the state and their mutual relations as also with financial administration and control."

In short, public finance is related to the dealing of the government income and the expenditure as well as the financial administration and control.

Scope of Government Finance

The scope of government finance can be explained under the following headings:

a) Government revenue: It includes the study of the principle of taxation and methods of raising government revenue by the government.

b) Government expenditure: It includes the study of principles and problems related to government expenditure.

c) Public debt: It includes the study of the methods of raising public debt, its repayment, and management.

d) Financial administration: It includes the study of formulation, implementation, and auditing of budget and fiscal policy.

Importance of Government Finance

Government finance is regarded as the most useful and powerful tool of public authorities to accelerate and direct the course of economic activities in a country. It aims to maintain economic stability, ensure equitable distribution of income and social justice, remove economic maladies, and stimulate healthy economic growth. Some major roles or points of importance of government finance can be highlighted as follows:

1. Efficient allocation of resources: Government finance can play an important role in the efficient allocation of resources in productive sectors. The government collects a large fund from various sources and invests it in the productive sectors to increase the output of the country. Further, it directs and regulates the resource allocation of the private sectors through the measures of taxes, subsidies, price control, quantitative restrictions, etc.

2 . To maintain economic stability: Financial policy of the government determines the rate of inflation, the balance of payments, and the economic growth of the country. Higher direct taxes can reduce the pressure of inflation. At the time of depression, the government can increase its expenditure and facilitate effective demand, which helps the recovery of the economy. In this way, economic stability can be maintained by means of public finance.

3. Social goods and infrastructures: Government enterprises can produce and supply social goods like electricity, drinking water, services of transport and communication, etc. Similarly, social infrastructures required for education, training, health services, etc. are also constructed and supplied through public finance.

4. Capital formation: The government can increase the public saving by means of tax. The rate of saving should be increased for the higher level of investment. A large fund is collected through government finance and it can be invested for the formation of physical and human capital

5. Redistribution of income and wealth: Government finance can play an important role to redistribute the income and the wealth of the society and reducing the economic inequalities among the people. Government can impose progressive taxes on the high level of income earned by the rich people and invest that fund for the welfare of the poor.

6. Efficient mobilization of resources: The resources of the country should be mobilized from non-productive to productive sectors for the rapid economic development of the country. For such development, the government can discourage the non-productive expenditures of the people by imposing higher taxes on such activities and encourage the productive sectors by providing facilities and subsidies. This policy of public finance can help to mobilize the resources towards productive investment.

7. Economic development: Government finance can play an effective role to change the economic and social structure of a country. The government can allocate and utilize the resources of the country in the best manner for the construction of physical and human capital, which can accelerate economic development.

8. Correct balance of payments: Government finance helps to correct the balance of payments. The imposition of higher taxes can reduce imports and the provision of facilities can increase exports. When the value of export is increased and the value of imports is decreased, the balance of payments is corrected.