how does public finance work

How does Public Finance Work?

 Public Finance is a branch of economics that describes the government income and expenditure.”

Public Finance denotes the Government’s financial activities for the well-being of the economy. It gives focus on the taxation and spending policies to tackle the deficit. Public finance affects the whole nation, including the finance industry. At the same time, it remains under direct effect of the international circumstances because every Government has to keep the harmony with the rest of the world. For the well-being of the citizens of the country, public finance ensures strong policies, including some crisis management plans.

Economic growth

Of course, it is the first work of public finance because all other things and strategies depend on this factor. A prosperous economy flourishes well and moves confidently towards future goals. Public finance can be a big reason for the happiness level of a country on the world map.

Elements on which public finance needs to work to ensure economic growth –

  • Inflation
  • Per-capita income
  • Natural resources
  • International trade policy
  • Business strategies
  • Employment opportunities
  • Human resource
  • Quality of life etc.

It is an ongoing process to work on all the aspects of economic growth because, practically, it is not a piece of cake to manage all the elements in an economy. Some or other element of economic growth keeps shaking from its roots. For example – the corona pandemic has thoroughly affected the international trade culture because every country is suffocating in finances. Now, public finance has to face the challenge to bring back everything on track.

Functions of public finance

You can easily understand how vast and varied the responsibilities of public finances are and why its functions are also different.

Distribution of income and resources – To make efficient economic, social, and political policies, the Government needs to do equal income distribution. For this purpose, the resources are distributed into two categories 1) wealth and 2) income

  1. Wealth – is the overall financial assets and physical assets owned by the population of a country.
  2. Income – is the actual and exact financial value of net intake by the population over a selected duration of time.

The biggest challenge in income distribution is to keep an equal share of every region, religion that exists in the country. Every Government has to face some issues and controversies because income distribution becomes a political concern very quickly.

The prime aim of income distribution follows the principles of equality. It makes efforts to ensure the availability of all resources to all parts of demography.

Economy stabilization

Every country has its share of good and bad times. Later, public finance is responsible for creating the actual balance. It needs to either alter existing strategies or invent new ways to strengthen the nation.

Two factors of economic stabilization are –

  1. Deficit budgeting: It works during the time of downfall in the economy. It gives attention to the maximum use of each and every penny and available resources for the faster comeback of normalcy. It aims to remove or at least reduce the effects of the adversities. The Government implements stringent policies at some places as well as flexible ones. For example, we have seen how the Government applied a low rate loan policy to the finance industry. Whether you need personal loans or education loans, the options were available at a lower rate. Due to competition, the finance companies too had to change their plans.
  2. Surplus budgeting: When government earns more than its expenses, it can use the surplus money for many financial reasons. When it plans where to use that additional income, it is called surplus budgeting. Just as we do it at a small scale in our personal finances, public finance does it at a large, in fact, very large scale. The use of the extra money should be done for the well-being of the nation. It helps in the improvement of the sectors that remain detached from the mainstream of development.

Provides government subsidy and benefits

We all know that a huge part of government income is dedicated to the subsidies and government benefits offered to the people who need financial help. There are many examples available –

Subsidies Government benefits
Residential solar set-up subsidy Unemployment benefits
Waste management subsidy Single parent benefits
Start-up refund for entrepreneurs Disability benefits
HSE National service plan on healthcare Illness benefits

No, the list is not complete here. It is just a glance at some of the relatable examples. Government help is available for almost everything. However, it is not destined to serve your financial crisis that emerged due to poor money management. It is like if you are looking for car finance in Ireland but do not have ample deposit amount and you expect the Government will support, it is just a foolish thought. Some people keep this type of thinking because they over expect from the selected Government. But it is an evident fact, any sort of help comes only for those who are financially weak due to any genuine reason.

Reduces Inequality

Public finance is a strong tool to remove inequality. It cannot be biased or one-sided. While focusing on the unequal distribution of income and wealth, public finance can do a lot in creating a smart balance. It needs to focus on all parts of the nation because it can affect the development plans if a particular part remains weak.

  • The weaker parts of the nation also become geographically prone areas to intrude, and the other countries may try to dominate. You can understand that it is more applicable in the regions near or on the country border.
  • The Government needs to study the pattern of production and consumption in different regions of the country. There can be no imbalance in this aspect. Inequality can change the politics of a country through the anger of the people who feel unheard and unattended.
  • The phrase of the rich becomes richer, and the poor become more poor is always a reason of worry for public finance. It can create a massive imbalance in society because everyone wants to feel flourished. No particular sector of society can dominate the other one.
  • Whatever is available in the country should be shared on the parameters of financial background. Those who are already prosperous should not get the benefits because they are equipped, but those who are not should benefit. Equality of opportunity breeds from here only. Have you ever seen that the Government has banned the finance companies that offer the best loan rates in Ireland in the weaker parts of the nation? No, right? Because it cannot do that.

Challenges of public finance

It is effortless to understand that Government handles a vast area that is a nation through public finance. Obviously, it will face many challenges because it can never be as smooth as a cakewalk when anything at such a large scale.

  • Sustainable development: They say that it is easy to achieve success, but it is not easy to maintain it. Exactly is the case with public finance. It may have a great policy for the country that is working well currently. But what about the future? Varied political, social, and international issues keep interrupting the strategies and disturb the smooth entry of development.
  • Balance of income and expenses: Government has to manage money on countless aspects, and while doing that, the expenses can dominate the income anytime. Tax is a big source of income, but the reasons for costs are many. When the world is fighting with the corona chaos, the people worldwide have to compromise in their plans. The money dedicated to some development work must be used for the corona vaccines on a vast scale.
  • Harmony with the international environmental concerns: Due to global warming, the world is trying to make relatable efforts. Reduce in carbon footprint is a big concern. But the developed economies can create an efficient strategy on it, but the developing ones still have to cover many miles for success. Public finance needs to decide the consumption of resources in a way that is friendly to the environment.

Public Finance can be called the food provider for a nation because, without it, the people will have to suffer a lot. Unemployment derailed law and order, weaker economic growth, etc.; issues will emerge and will erase the existence of a nation from the world map. We should all contribute to the Government for nation-building through understanding the concerns of the bigger picture.

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Representative Example

Amount of credit: €5000 for 48 months at €125.56 per month. Total repayment of €6,026.95. Interest: €1,026.95. APR Interest rate: 9.9%.

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