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Week 10 : Public Finance


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LEARNING

Students who successfully complete this module will be able to:

  • Demonstrate a good understanding of the fiscal framework for taxing and spending and of fiscal policy principles.
  • Analyse critically tax reforms and policy choices in developed and developing countries.
  • Research, and examine key issues and challenges in fiscal policy in a particular development or country context.
  • Present in depth written analysis of key issues and challenges in fiscal policy in a particular development or country context.

Introduction

In public finance we study the finances of the Government. Thus, public finance deals with the question how the Government raises its resources to meet its ever-rising expenditure. As Dalton puts it,” public finance is “concerned with the income and expenditure of public authorities and with the adjustment of one to the other.”

Accordingly, effects of taxation, Government expenditure, public borrowing and deficit financing on the economy constitutes the subject matter of public finance. Thus, Prof. Otto Eckstein writes “Public Finance 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.”

Further, 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. Economic thinking about the role that public finance is expected to play has changed from time to time accordingto the changes in economic situation.

Before the Great Depression that gripped the Western industrialised countries during the thirties, the role of public finance was considered to be raising sufficient resources for carrying out the

Government functions of civil administration and defence from foreign countries. During this period, the classical economists considered it prudent to keep expenditure to the minimum so that taxing of the people is avoided as far as possible.

Further, it was thought that Government budget must be balanced. Public borrowing was recommended mainly for production purposes. During a war, of course, public borrowing was considered legitimate but it was thought that the Government should repay or reduce the debt as soon as possible.