Finance is a subfield of economics that deals with the arrangement, management, and deployment of money in an optimal manner. It is divided into two main branches: private finance and public finance.
What is public finance?
The finances of public bodies, whether national, state or local, used to carry out their functions are referred to as public finance. It oversees how the government raises funds and how such funds are utilized.
The role of public finance in economic development lies in increasing the growth rate of the economy, providing more employment opportunities, raising incomes and standard of living, reducing inequalities of income and wealth, encouraging private entrepreneurial initiatives, and bringing about regional balance in the economy. All of this is accomplished through investments in public works, agriculture, industry, transportation and communications, power, financial and banking institutions, social services, and so on.
Public finance can play a critical role in reducing economic inequalities, which are a source of dissatisfaction, class conflict, and poverty, among other things. The state can levy high taxes on the richer sections of society and use the proceeds to provide food, low-cost housing, free medical care, and other services to the poorer sections of society. Similarly, heavy taxes can be levied on the consumption of harmful commodities such as harmful drugs, wine, and so on.
What is private finance?
On the other hand, private finance concerns the income and expenditure activities of individuals and private businesses.
It can be classified into two categories – personal finance and business finance.
Personal finance is concerned with the process of optimizing finances by individuals such as people, families, and single consumers. A great example is a person who uses a mortgage to finance his or her own car. Personal finance entails financial planning at the most basic individual level. It includes savings accounts, insurance policies, consumer loans, stock market investments, retirement plans, and credit cards.
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Similarly, the process of optimizing finances by business organizations is referred to as business finance. It entails the acquisition of assets as well as proper allocation of funds to business operations in order to maximize the achievement of set goals.
Comparing the two
While public finance deals with the management of money at a macro level by the government, private finance is all about the management of finances at an individual or business level.
Similarities between public and private finance
Both public and private finance share some similarities. These are:
The primary goal of both public and private finance is to satisfy human desires. The primary goal of public finance is to satisfy social desires, while the primary goal of private finance is to satisfy individual desires.
The principle of maximum social benefits is the guiding principle that the government follows when spending its money. An individual also follows the principle of maximum satisfaction when spending out his given income.
Income, Expenditure, and Borrowing
Both the government and individuals have limited resources or income with them. In the event of a shortage, borrowing can be done for both, and both are obligated to repay the borrowed money.
The effectiveness and success of measures adopted by both – the private and public sectors – depend on the administrative machinery. If the administrative machinery is inefficient and corrupt, it will become a cause of losses and wastages.
Differences or Dissimilarities between public and private finance
The following are the major points of difference between public and private finance:
The most significant distinction between the two types of finances is in terms of size and magnitude. Households and businesses have fewer resources available to them, so their budgets are relatively smaller in size than those of governments.
Personal budgets of households are a private matter that is not made public. In the case of business finance, the budget of a company is made available to stakeholders and the general public for information and scrutiny. And in the case of public finance, every budgetary decision must be communicated to the people of the country.
Adjustment between Income and Expenditure
An individual determines his or her spending based on his or her earnings. He creates a monthly budget for his family on the basis of his expected income. The government, on the other hand, first estimates its expenditures to be made across various sectors before determining how to generate the necessary revenue. It first predicts the amount of money it will spend on various areas and then evaluates how to raise the necessary funds.
Elasticity of Finance
Public finance is more elastic than private finance. There is not much scope for changes in private finance while drastic changes can be made in government finance. For example, a private individual cannot implement any special increase in his income immediately. As against this, the government can instantly increase its revenue by levying fresh taxes on the people.
Moreover, there is another source of income open to a government, i.e., deficit financing. A government can obtain more money by printing more currency notes.
Differences in Objectives
The objectives of private and public finance are fundamentally different. Private expenditure is motivated by personal gain, whereas public expenditure is motivated by social gain. An individual is always looking for ways to save money, and a business is always looking for ways to make a profit. However, the government has no such considerations other than public welfare. Although there are some public enterprises that are run on profits, however, that money too is utilized for public welfare.
Nature of Expenditure
There are differences between the two in terms of the nature of expenditure. An individual’s expenditure is influenced by his habits, customs, fashion, etc. On the other hand, the government expenditure depends on its economic and social policies, such as eliminating unemployment and poverty, reducing income disparities, providing infrastructure facilities, among other things.
In public finance, there is a compulsion. People are required to pay taxes. If they do not pay, they face a fine and imprisonment. However, an individual or company cannot compel anyone to pay him money. He has the option of filing a lawsuit in court. Even so, he might not get his money back. The same is true for loans. During a time of war or emergency, the government can compel the citizens to lend money. However, an individual cannot compel anyone to lend him money.
Present Vs Future
An individual is more concerned with his immediate needs and attempts to satisfy them. Because life is uncertain and short, he is mostly concerned with his immediate gain or profit. Government, on the other hand, is a permanent organization; only the ruling party changes. It is concerned not only with the well-being of the current generation but also with the well-being of future generations. As a result, it engages in and spends on activities that also benefit future generations.
Nature of the Budget
A surplus budget is always beneficial for a private individual. But a surplus budget may not be good for the government. It implies two things: (i) the government is levying more taxes on the people than is necessary, and (ii) the government is not spending as much on the welfare of the public as it should.
Furthermore, the government budget is approved by the parliament. However, an individual’s or company’s budget is a private matter with no controlling authority.
In addition, for public authorities, the unit of time for the budget is one year. However, an individual attaches no special significance to the period. He is not required to balance his budget by a specific date or within a specific time frame.
Nature of Borrowing
In the case of an individual, there can be no internal borrowing. An individual cannot borrow from himself. He can only borrow from outside sources (or a third party). The state, on the other hand, has the ability to borrow from both internal as well as external sources. It borrows not only from its own citizens but also from foreigners, for example, through the issuance of bonds.
Comparison table – Difference between public finance and private finance
|Basis of difference||Public finance||Private finance|
|Magnitude||Huge budgets||A smaller amount of resources|
|Public scrutiny||Every budget has to be made known to the nation||Budgeting is a private affair|
|Adjustment between Income and Expenditure||Income is adjusted according to expenditure||Expenditure is adjusted according to income|
|Elasticity of Finance||Drastic changes can be made in income||Not elastic|
|Differences in Objectives||Social benefit||Personal benefit|
|Nature of Expenditure||Governed by economic and social policies||Governed by habits, customs, fashion, etc.|
|Compulsion||People have to compulsorily pay taxes||Cannot force anyone to pay|
|Present Vs Future||Long-term planning motive||More concerned with present needs|
|Surplus budget||It may not be good for the government||Always good|
|Budget period||One year||No specific date|
|Borrowing||Internal as well as external sources||External sources|
|Currency||Authority to print notes||No authority|
In conclusion, when we talk about private finance, we may say that an individual’s sources of revenue are limited. However, in the case of public finance, the government can use its authority to levy taxes, issue coins, and print currency notes. Moreover, while private finance caters to the motives of an individual or firm, public finance caters to the motives of the public at large.
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