CHAPTER ONE: BASICS OF PUBLIC FINANCE

1.1 Overview of Public Finance

Governments, all over the world have started number of public projects, such as social security,
protection and other services of public utilities like electricity, water supply, railways, heavy electricity,
atomic energy, etc. To provide social services in the form of education, health and sanitation facilities
and public utilities, the government requires adequate revenue.
o Public Finance, therefore, deals with the income and expenditure of public authorities. It deals
with the financial operations or finances of the government. Central, state and local government
raises revenues from various tax sources and non-tax sources, such as revenue from general,
administrative and economic services, borrowings from individuals, corporations and friendly
foreign countries. The government raises revenue from internal as well as external sources to
incur huge expenditure on various functions the government has to perform. The important ones
being maintenance of law and order, defence, socioeconomic development, etc...
o Public finance is thus concerned with the use and accomplishment of essential monetary
resources of the government. In fact, public finance deals with how and through what different
sources the government gets income, how it spends it and how it controls and administers its
incomes and expenditures. These two activities, i.e. raising of revenue through taxation and other
sources, and spending it on various services plus borrowings from internal as well as external
sources, together constitute “Public Finance.” Therefore, the subject matter of public finance
deals with public revenue, public expenditure, and public debt.

1.2 Definition of Public Finance

o Public Finance deals with the income and expenditure of the public authorities. Here the term
Public means the Government that is central, state and local authorities Public finance is the
study of income and the expenditure of the government. Raising of necessary funds for incurring
expenditure constitutes the subject matter of public finance.
o Public finance also deals with the problems of adjustments of income and expenditure of the
government. It is also known as fiscal operations of the treasury. Thus, fiscal operations and
fiscal policies are integral part of public finance.
o Some of the important definitions of public finance by different authors are shown below.
 According to Prof. Dalton, public finance is one of those subjects, which lie on the
borderline between Economics and Politics. It is concerned with the income and
expenditure of public authorities and with the adjustment of one to another.
 According to Lutz, Public finance deals with the provision, custody and disbursement of
resources needed for conduct of public or government functions.
 „‟Public finance is a science which deals with the activity of the statement in obtaining and
applying the material means necessary for fulfilling the proper functions of the state.”
Definition given by Carl Plehn.
 Findley Shirras defined Public finance as the study of the principles underlying the spending
and raising of funds of public authorities. “Public finance deals with expenditure and
income of public authorities of the state and their mutual relations as also with the financial
administration and control.” Bastable.
All of them say that it is a study of income and expenditure of the central, state, and local governments.
Government performs many functions which the individual cannot or do not perform. Therefore, raising
of funds for the expenditure and their disbursement constitutes the subject of Public finance.

1.2 Scope of Public Finance

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 Public finance deals with the income and expenditure pattern of the Government Hence the substances
concerned with these activities become its subject matter. The subject matter of the public finance is
classifies under five broad categories. They are,
 Public revenue  Financial administration
 Public Expenditure  Economic stabilization
 Public debt
We shall now explain them briefly.

1.2.1. Public Revenue

Public revenue is very necessary for the government to perform its various functions for the welfare of
the society. Increasing activities of the government are the cause of increasing public expenditure.
Methods of public revenue and their volumes have significant impact on production & distribution of
wealth & income in the country. It has effects on the nature and the volume of economic activities
and on employment. According to Dalton, the term “public revenue” has two sense- wide and narrow.
 In its wider sense it includes all the incomes or receipts which a public authority may secure
during any period of time.
 In its narrow sense, it includes only those sources of income of the public authority which are
ordinarily known as “revenue resources”.
 To avoid ambiguity, thus, the former is termed “public receipt” and the latter “public revenue”.
 As such, a receipt from public borrowings is mainly excluded from public revenue.
Public revenue is the means for public expenditure. Various sources of public revenue are:
a. Tax revenue, and
b. Non-tax revenue
Tax revenue: Taxes are compulsory payments to government without expectation of direct return or
benefit to tax payers. It imposes a personal obligation on the taxpayer. Taxes received from the
taxpayers, may not be incurred for their benefit alone. Tax revenue is one of the most important sources
of government revenue. Taxation is the powerful instrument in the hands of the government for
transferring purchasing power from individuals to government. The objectives of taxation are to reduce
inequalities of income and wealth; to provide incentives for capital formation in the private sector, and to
restrain consumption so as to keep in check domestic inflationary pressures. From the above discussion
we can conclude that the elements of taxation are as follows:
o It is a compulsory contribution
o Government only imposes taxes
o In payment of tax an element of sacrifice is involved
o Taxation is aimed at welfare of the community
o The benefit may not be proportional to tax paid
o Tax is a legal collection.
The various types of taxes can be listed under three heads.
 First type can be titled taxes on income which include income tax, corporate tax/business income
tax etc. The second is taxes on property and capital transactions. They are taxes on specific forms
of wealth and its transfers such as estate duty, wealth tax, gift tax, house tax, land revenue and
stamps and registration fees, etc.
 The third head, called taxes on commodities and services includes taxes on production, sale,
purchase, transport, storage, and consumption of goods and services such as excise duties,
customs duties, sales tax, service tax etc.
 These three types can be reclassified into direct and indirect taxes. The first two types belong to
the category of direct taxes and the third type comes under indirect taxes.

Non-tax revenue: This includes the revenue from government or public undertakings, revenue from
social services like education and hospitals. To sum up, non-tax revenue consists of:
 National lottery income

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  Interest receipts
 Dividends and privatization proceed from public Enterprise
 revenue from social services(like education and hospitals)

1.2.2 Public Expenditure

o The term “Public Expenditure” is used to designate the expenditure of government. Public
expenditure is incurred by public authorities --Central, State and local Governments either for the
satisfaction of collective needs of the citizens or for promoting their economic and social welfare.
It differs from private expenditure in that governments need not pay for themselves or yield a
pecuniary profit.
o Public expenditure is not only the most important but also the central part of public finance. It is
incurred by the government for the attainment of public good. Every government has to maintain
law and order, armed forces for providing protection, public parks, schools, health of the people.
Government has to perform certain other welfare measures like maternity protection, arranging
for cheap food, cloth and low-cost housing for the poor and so on. All these various activities
which are increasing every year require huge funds. Therefore public expenditure, deals with the
expenditure which a government incur for its own maintenance, the society and the economy and
helping other countries.
o Dalton divided the aims of public expenditure into two parts:
(i) Security of life against the external aggression and internal disorder and injustice.
(ii) Development or up gradation of social life in the community.

 Public expenditure is done under two broad heads viz., developmental expenditure and non-
developmental expenditure. The former includes social and community services, economic
services, and grants in aid. The latter mainly consists of interest payments, administrative
services, and defense expenses.
 Most governments also classify public expenditure into two: (i) Current expenditure, and (ii)
Capital expenditure. All sorts of administrative and defence expenditure and debt services are
called current expenditure. They are also referred to as non-developmental expenditure. Revenue
expenditure relates to those, which do not create any addition to assets, and covers activities of
government departments‟ services, subsidiaries and interest charges. On the other hand, capital
expenditures contribute to increased productive capacity of the nation and therefore, are known as
development expenditure. Capital expenditure involves that expenditure, which results in creation
of assets. Expenditures on construction of dams, public works, state enterprises, agricultural and
industrial development etc., are instances of capital expenditure.

1.2.3 Public Debt

This category deals with the causes, methods and problems of public borrowings and its management. A
public authority can obtain income through loans and public borrowings. The loans raised in a particular
year constitute receipts for that year. It is an income of a capital nature, while the provision for
repayment of the capital sum for the year constitutes expenditure of a capital nature. The study public
debt also includes:
(i) Methods and objectives of public borrowings;
(ii) Management of public debt; and
(iii) Burden of public debt
 public debt are an important instruments for securing economic stability by increasing public
borrowings during the periods of inflation and repayment of public debt during the period of
depression, borrowings from the people during inflation and borrowings from banks during
depression and so on.
 There are two types of debt: internal debt and external debt.

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  Internal debt: Loan from domestic source in the form of treasury bills, bond issuance
etc.Increasing need of government for funds cannot be fully met by taxation alone in under
developed and developing countries due to limited scope of taxation. Government
therefore has to resort to alternate sources. Raising of debt is one such source. Debt,
though involves withdrawal of resources by curtailing private consumption, has certain
advantages. Debt raised for productive purpose will not have a burden on the economy.
 External Debt: Loan from abroad (international source like international financial
institution, foreign country). External debt reported as Bilateral loan ( loan from US gov‟t ,
China gov‟t) and multilateral loan( loan from World bank, IMF, African dev‟t bank). In
under developed and developing countries, internal sources are limited. Under developed
and developing countries, therefore go for external debt. The transfer of capital at
international level may take the form of: financial aid through grants and loans, commodity
aid and technical assistance. External debt is an immediate source of funds for
development and help to achieve faster growth. However, such debt has following
drawbacks: political subordination, other obligation and excess supply of goods and
services in debtor country.

1.2. 4 Public Financial Administration and control

The scope of public finance is not confined only to public revenue, public expenditure and public debt.
We have to examine the mechanism by which the above processes are carried on. Without a study of
relevant dimensions of financial administration, the subject of public finance remains incomplete. Thus
financial administration and control include the following:
 Study of budgets and their procedure.
 Budget as an instrument of securing certain objectives, such as promotion of employment,
economic growth with stability, welfare of the weaker sections, infrastructural development for
promoting private investments, etc.
 Financial and physical controls through different fiscal tools for controlling private expenditure in
the economy to avoid the effects inflation deflation, recession etc.
This category includes the preparation of financial budget, the control and administrations of the budget,
and auditing etc. The term budget includes „Annual Financial Statements‟ which incorporates all the
annual statements of receipts and expenditures of the government.

1.2.5 Economic Stabilization and Growth

The study of public finance includes fiscal policy of the government in dealing with inflationary and
deflationary situations, instability of the price level, promotion of full employment, growth of economy,
welfare of the people, etc. It has a wide scope to play especially in the less developed countries.

1.3 The Role of Government in the Economy

The participation of the government in the economic activities is essential to accomplish the goals of any
welfare state. Classical economists advocated minimum functions for the government. Subsequently, the
economists Keynes demonstrated that it was possible through fiscal activities of the state/government to
increase employment and to maintain it at high level. This realization led to emphasis on the active
participation of the state/government in the economic activity.
 The governments of advanced countries are committed to stability and full employment.
In case of under developed countries the government aims at accelerated economic
development. Government sector can play a decisive role in shaping and charting the path
of any economy. Depending on the level of development of each country, the roles of
government sector differ. However, in all cases the aim is to attain full employment and
economic development through the development of agriculture, industry and service
sector.

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  Distinction between private and public goods is important in the study of public finance.
To what extent should the government participate in the economy? It depends on nature of
goods/service the society demanded.
 Good and service can be: can only provided by the government(public goods), can only
Efficiently provided by private sector(private goods), and Can be provided by both ( Mixed
goods) side by side independently Or provided through private-public partnership
 How can we categorize goods/service the society demanded: two criteria's are used in
theory: consumption criteria and exclusion criteria

Criteria Exclusion
Easy Difficult
Consumption Individually(rival) Private goods Common pool goods

Jointly(non-rival) Collective or Pure Public goods

club goods

Private good:
 Private goods refer to all those goods and services, which are consumed by people to satisfy their
personal and private wants or needs. They relate to articles of food, clothing, shelter, recreation,
transportation, communication etc. These goods are priced in the market on the basis of their cost
of production on the one side and the nature of demand on the other. All those who want them
and are willing to pay the market price will buy them. Those who do not want them or who are
not in a position to pay for them will be excluded from the consumption of these goods. In other
words there is no compulsion that everyone will have to buy them. Thus, distribution of these
goods is based on effective demand and market price. Private goods are subject to the principle of
exclusion; in the sense that price mechanism excludes the group of people who are not able to pay

for a particular good.
 But price mechanism or market mechanism may fail whenever private goods are associated with
the concept of externalities. Now, externalities refer to favorable and unfavorable effects which
are associated with the production of those goods. The setting up of a factory in a backward
region will help to develop it; this is an example of an externality in the form of an economic
gain. On the other hand, an atmospheric and water pollution of a chemical and fertilizer factory in
an area is an example of unfavorable economic effect. The externalities are also referred to as
spillover effects, neighborhood effects or third party effects.


 The economic gain or economic loss associated with externalities cannot always be priced in the
market and cannot be allocated to particular parties. For example, it is not possible to find out
exactly how much is the benefit of a new factory set up in a backward region or the exact extent
of economic loss due to ash and smoke nuisance of a thermal power station using coal. These are
examples of non- market external effects. In case, external effects, favorable or unfavorable, can
precisely be calculated, in terms of money, and can be made part of the cost of production; then
they can be passed on to those who get those external efforts – this will be the case of market
external efforts.
 Rival in consumption and easy in exclusion
 Example: bazar goods, foods, clothes, equipment, supermarket goods, and service such as
cafeteria and hotel. etc.
 Note such goods/service theoretically can be efficiently provided by the market mechanism b/c
exclusion is possible

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 Public goods:
 Collective wants are those which are demanded by all members of the community in equal or
more or less equal measures. Defense, education, public health, infrastructure facilities like
power, transportation and communication, etc., are examples of collective wants. Goods and
services produced to satisfy collective wants are known as public goods. These goods are
produced and supplied by the society to meet its collective wants for increasing social welfare.
These goods are supplied by the government to all its citizens. For example medical and
educational facilities are made available for all the people of Ethiopia.
 It is important to recognize two features of public goods. First, they cannot be divided and their
benefits cannot be shared between the people on the basis of each man‟s requirements. In other
words, unlike private goods, public goods are not divisible but have to be collectively consumed.
If public goods are made available to meet collective wants, the question is: who will pay for
them or in what proportion they will bear the cost of production of these goods and services.
Secondly the principle of exclusion easily associated with private goods is not applicable in the
case of public goods since they are not consumed distributive. Hence these goods will not be
produced by the private sector. On the other hand, they will have to be produced and supplied by
the public authorities to meet collective wants. The price mechanism does not apply and these
goods cannot carry a price tag. As everyone is a beneficiary - directly or indirectly of the public
goods, everyone is asked by the public sector authorities to pay towards the cost of production of
the public goods. No one can refuse to pay for the supply of public goods because they are not
direct beneficiaries. For example, childless cannot refuse to pay towards the expenditure on
education.
 Since the public goods are supplied to all the people irrespective of their ability and willingness to
pay for them, the pricing system is useless and therefore, a method of compulsory payment will
have to be designed to finance their cost of production.
 Consumption is jointly and exclusion is impossible.
 Market totally fails to provide these goods b/c exclusion is not easy.
 Totally government provides such goods.
 Justification for the needs of the government.
 Example: peace and security, political administration, general infrastructure( street light and
roads)

Common pool good:

 Such goods are characterized by Il-defined ownership(Collective ownership of resource)
 Consumption is private/ rival but exclusion is not possible
 There is rivalry among consumers.
 Example: Fishing from open sea, Hunting from Jungle forest, Common pasture (grating land) etc.
 Cannot provide by the market b/c exclusion is Impossible
 Such goods are commonly obtained through the act of nature (i.e they are natural resource.
 The role of government here are:
 To insure proper consumption,
 Provide control/protection
 Ensure fair/equitable distribution

Collective/club good:
 Consumption is jointly and exclusion is possible.
 Example: (Merit wants (e.g. Health service and education service), telephone service,
transportation service, pure water supply and watching game in stadium.
 Such goods are called mixed goods because they can be provided by both market(since exclusion
is possible) and the government(since sometimes the market fails to provide such goods due to
mismatch between demand and supply)

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  The government also participate in their provision since some of such goods possess the nature of
natural monopoly and are important for fiscal policy and development purpose.

Merit Wants: Certain types of collective wants such as educational facilities have been called as merit
wants since they command overwhelming importance in the attainment of social welfare. Provision of
public goods meant to satisfy such wants will help the economy to achieve a high level of efficiency and
welfare. If education is left to the private sector and accordingly educational facilities are supplied by the
private sector on the basics of cost of production, the educational facilities will cost so much that many
people in the lower income brackets will not be able to get them. Many an intelligent but poor student
will be denied educational facilities. This will reduce economic efficiency and social welfare of the
community. In the same way, if hospital facilities are provided by the private sector units, they will be so
expensive that only the rich will be able to make use of them and vast majority of people belonging to
middle and lower income groups will be denied these facilities. It is for this reason that the state should
either supply these goods to the community like government schools and colleges or at least supplement
private effort like subsidizing education to make it within the reach of everybody.

Summarizing the role of the government

The three basic reasons for the need of the government are:
 It undertakes certain activities even better than the market or where the market fails.
 It create enabling environment for the market to operate efficiently.
 Market operation creates disparity which needs the intervention of the government
The role of the government can be listed as follow:
 Provision of pure public goods
 Correcting the effect of externalities
 Participating in provision of natural monopolies
 To fill the gap created by market in private goods due to large capital requirement for investment
(insufficient supply) and insufficient demand. For example: sugar and cement factory in
Ethiopia)

1.4 Functions of Modern Government and Fiscal operations

It was only in the 20th century and particularly after Keynes demonstrated the necessity of
state/government interference for stabilizing an economy and to bring about full employment that the full
importance of fiscal operations of tax, public expenditure and public debt policy was appreciated. We
should know the role of the government to enable us to appreciate the importance of government sector.
Government of a modern state generally undertakes the following functions:
Allocation Function: The government operations basically involve the efficient provision of
government funds in maximizing the welfare of the community. The government taxes the public and
uses the amount in providing certain facilities and services considered essential by the people and the
community. These facilities are such that they could not be provided by the people themselves such as
defense, or they could be provided but only at a high cost such as education and medical care. Fiscal
operations of taxation and public expenditure have the effect of transferring resources form the public
which would have been used for consuming private goods to produce public goods which would satisfy
collective wants. The objective of fiscal operations is to provide for the proper allocation of resources
between private and public goods so as to maximize social welfare.
Distribution function: In a free enterprise economy, distribution of income and wealth is unequal and
many times it is grossly unequal resulting in exploitation of the lower income groups. Inequality of
income and concentration of economic power in the hands of a few are responsible for distorting
production in favor of the rich and for reducing the social welfare of the community. Fiscal operations

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have been used to reduce the incomes and wealth of the rich (through progressive taxation) and using the
money collected to raise the income and standard of living of the lower income group (through public
expenditure}. The use of fiscal policy to reduce inequality of incomes and wealth has been quite common
in many countries.
Stabilization Function: Modern economies are subject to fluctuations, viz., business boom and
inflations on one side and business recessions and depressions on the other. Such fluctuations are not in
the interest of the country. Fiscal operations have been used to moderate these fluctuations and if
possible to eliminate them altogether. For instance, business booms and inflations are sought to be
controlled through heavier taxation while business recession is sought to be checked through public
expenditure.

Functions of modern governments are broadening due to socio-political reasons. Therefore, to discharge
these increasing functions, the government has to increase its expenditure. To meet out the enormous
amount of expenditure it has to mobilize funds with the help of public finance policy. Hence public
finance has developed into an important branch of economics.

Fiscal policy: It is also called as budgetary policy. In broad terms, fiscal policy refers to that segment of
national economic policy, which is primarily concerned with the receipts, and expenditures of the
government. Fiscal policy relate to those activities of the state that are concerned with raising financial
resources and spending them. Fiscal policy relates to the government‟s decision making with respect to
the following: (i) Taxation, (ii) Government spending, (iii) government borrowing and (iv) management
of government debt. The policy relates to government decisions, which influence the degree and manner
in which funds are withdrawn from private economy. Basically fiscal policy in these different facets deal
with the flow of funds out of the private spending and saving stream into the hands of government and
the recycle funds from government into the private economy. The government by its fiscal policy,
regulated taxation and government expenditure can influence the economic activities and development.

Role of Fiscal Policy in the Economic Development

o In under developed and developing countries development is the main concern. The primary task of
fiscal policy in an under developed and developing countries is to allocate more resources for
investment and to restrain consumption.

o The fiscal policy should reduce the economic inequalities of income and wealth. This can be
achieved by taxation and public distribution measures. Poverty and unity cannot co-exist. Therefore
fiscal policy should attempt economic development of the socially unfortunate to bring about national
unity. Private section is not interested in investing in social and economic overheads. Investments in
social and economic overheads like education, medical facilities, infrastructure, dams etc. are very
essential to accelerate the rate of economic growth.

o In under developed and developing countries the requirement of growth demands that fiscal policy
has to be used progressively for raising the level of investments and savings rather than keeping the
consumption level. In under developed and developing countries fiscal policy has to be used as an
instrument of resource mobilization. In order to attain growth with stability the goal of fiscal policy
should be promotion of highest possible rate of capital formation and should reduce the actual and
potential consumption. Further fiscal policy should encourage private investment and attract foreign
funds for development projects.

o The existing pattern of investment may differ from the optimum pattern of investment. Thus it
becomes a responsibility of government to undertake investments in such a way that it is most
beneficial for the people of the country.

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o Fiscal policy should control inflation within tolerable levels since inflation mostly affects the poor. In
under developed and developing countries there exist regional imbalances in addition to social
inequalities. Fiscal policy should aim at reducing both regional and social imbalances by directing
investments to less developed regions. Their marginal propensity to consume is very high.
Therefore, a small increment in investment can bring manifold employment due to multiplier effect.

o Fiscal policy should direct available resources for providing basic physical, infrastructural needs like
irrigation, roads, basic industries, railways, ports, telecommunications etc. Fiscal policy should
assign high priority to the creation of overhead capital. Spending of the government should also take
care of education and health of the community. Returns on these investments are long-term and
private sector cannot provide above investments.

o Therefore government of a country through its fiscal policy is able to increase rate of investment and
also alter the pattern of investment. It follows that the main role of fiscal policy in an under
developed and developing countries is to expand productive capacity by raising the level of real
capital including skills as well as plants and equipment and to check the demand generating effect of
expanding investment. In developed countries its role is to expand both production capacity as well
as the level of aggregate monetary demand in relation to their economic growth. In under developed
countries the better approach is to transfer resources to capital formation without inflation.

o Fiscal policy through its different measures such as taxation policy budgetary policy, public debt
policy and a co-ordination with monetary policy can direct the economic destiny of a nation. Fiscal
policy can be used to mitigate the effects of trade cycles such as inflation and depression.

1.5 Public Finance Vs Private Finance

Finance in general means public as well as private finance. Public finance relates to the money-raising
and income-expenditure functions of the government. Public finance deals with the collective wants and
their satisfaction. Private finance refers to the income-expenditure phenomenon of an individual or
private business firm. The Private finance deals with the wants and the satisfaction of households and
firms. There are both similarities and differences between public finance and private finance. Let us
discuss the similarities first.

Similarities
(1) Satisfaction of Human Wants: Both the public and private finance have the same objective, i.e., the
satisfaction of human wants. Public finance is concerned with the satisfaction of social or collective
wants, whereas private finance is concerned with the satisfaction of personal or individual wants.
(2) Maximum Advantage: Both the public finance and private finance try to secure maximum
advantage or maximum benefit. An individual or a corporation or a private business firm tries to obtain
maximum advantage from his expenditure. Similarly, the government also tries to obtain maximum good
of the people by incurring expenditure on the society.
(3) Borrowings: Another similarity between the public and private finance is that many times both have
to be obtained from the market in the form of borrowings whenever the expenditure of either the
government or any individual or firm exceeds their income/revenue.
(4) Engagement in Similar Activities: Both the private and public sectors are engaged in activities that
involve lots of purchases, sales and other transactions. Similarly, they are engaged in production,
exchange, saving, capital accumulation, investment, and so on. In order to finance these operations, the
government, creates money, raises loans and makes payments etc. Similarly, a private economic unit
lends, borrows, receives payments, and makes payments and so on. In these respects, therefore, both the
public and private finance are quite similar to each other.

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(5) Scarcity of Resources: The scarcity of resources is also an important factor which is common to
both. They have unlimited objectives, whereas the resources are limited.
(6) Problem of Adjustment of Income and Expenditure: Another similarity between public and
private finance is that both the public as well as private sectors face the problem of adjustment of income
and expenditure.

Dissimilarities
(1) Motive: The motive of private finance is personal interest or benefit, whereas the motive of public
finance is social benefit or public welfare.
(2) Adjustment Approach of Income and Expenditure: Another difference between the individual‟s
private finance and the government‟s public finance is that every individual tries as far as possible to
adjust his expenditure to his income because his expenditure depends on his income. Conversely, the
government first prepares its budget. In other words, the government first determines its expenditure and
then devises ways and means to raise the requisite revenue to meet its expenses.
(3) Nature of Resources: The resources (private finance) of an individual are more or less limited,
whereas the resources of the government (public finance) are enormous. Government can raise resources
from tax sources as well as non-tax sources. The government can borrow from internal as well as
external sources.
(4) Coercive Methods: An individual (private finance) cannot use coercive methods to raise their
income.
Whereas, the government (public finance) can use forceful methods to collect revenue. In other words, to
collect revenue, the government imposes taxes at a high rate on the people irrespective of their capacity
to pay. Private individuals or bodies have no such powers.
(5) Secrecy of Budget: Public finance is an open affair as the government gives utmost publicity to its
budget by publishing it in newspapers and by showing it on television. For example, the Ethiopian
government tells to the public the yearly approved budget by parliament, whereas private finance is a
secret affair. An individual tries to keep his/her accounts secret as he/she does not want his competitors
to know his real financial position.
(6) Long/Short-term Consideration: Another point of difference between private and public finance is
that the private individuals incur expenditure in those areas of business which give quick returns. They,
as individuals keep in view short-term considerations. On the contrary, government incurs expenditure
keeping in view the long-term considerations, such as construction of dams, multipurpose hydro-electric
projects, etc.
(7) Elasticity of Finance: Public finance is elastic in nature-as compared to private finance. Public
finance can be increased by imposing various taxes as public finance is open to drastic changes. Private
finance on the other hand, cannot be increased as there is not much scope for changes in private finance.
(8) Deliberation in Expenditure: The pattern of expenditure of an individual is governed by habits,
customs, status, personal needs etc. On the contrary, the pattern of public expenditure is governed and
controlled by deliberate economic policy of the government.
(9) Right to Print Currency: The government has a right to print currency which is legal, whereas
private individual does not enjoy such a right.

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