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Money Money Money! Everywhere around us, money is the most helpful resource to move forward, enjoy and work efficiently in life. Earning money and using it properly has been one of the greatest motivations of man. This is what finance and financiers do every day, and hence it is taught in schools and colleges.
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Public finance is essential for the country's development as it manages various civic organizations' tax collection and expenditure. Moreover, it considers it a fundamental function in acquiring the monetary assets needed by an economy to meet its social welfare. There are many ways by which public finance is equipped to influence a country's economy. Some of them are revenue, expenditure, a deficit of the public sector etc. In addition, adding to the stability of a nation, public finance helps decide factors like inflation rate, current account deficit, rising national debt, etc.
Additionally, public finance guarantees the economy's growth by influencing utilization rates, reserve funds, and physical and human capital investments. When we talk about the microeconomic level, public finance measures taxes, subsidies and purchases of goods. Therefore, it contributes to the rise and use of goods affecting every economic segment. The significant role of public finance can be seen in construction as in modern nations. Therefore, it can be assumed that public finance plays a fundamental role in developing an economy.
The main components of public finance include collecting revenue, spending to support society, and implementing a financing strategy (such as issuing government debt). Main components include:
Tax collection is the primary revenue source for the governments. Examples of government taxes include GST, income tax (a progressive tax), and wealth tax. Other types of revenue of this sort include duties and charges on imports and revenue from any public services that are not free.
A budget is a plan of what the government plans to do as an expenditure in a financial year. It estimates revenue and expenditure over a specified period, usually in the future.
If the government spends more than it accumulates in revenue, there is a deficit in that year. Conversely, there is a surplus if the government has less expensive than it collects in taxes.
Sustainable Economic Growth: To ensure sustained economic growth, the government depends on fiscal instruments like taxes, public debt, expenditure, etc. These tools help promote both the demand and supply of a product.
Hard prices: Public finance has proved to be an essential tool the government uses to address the challenges of inflation and deflation. In the case of inflation, it reduces indirect taxes and expenditure; it also maximizes direct taxes and capital expenditure. Conversely, in the case of deflation, the policy reverses.
Economic Balance: To maintain financial stability, fiscal instruments are most popular among the governments of different countries. The government imposes a higher tax by raising the internal public debt to pay off foreign debt as a common practice. However, in the event of a recession in an economy, the whole process reverses.