The importance of public finance not only lies in the increasing functions of the state but also in the effect of fiscal operations on the economic life of the nation.
Public finance can be used as a powerful instrument to bring about desired social and economic changes.
‘Money makes the mare go’ is a very common saying. Everybody realizes the necessity of money in all he does. If the importance of money is great to an individual it is greater still to a government. We are aware of the money functions which we expect a modern government to perform. The importance of public finance thus arises from increasing functions of the state. It is obvious that, for the performance of these functions, money is needed. The strength of a nation is reflected in its budget. The extent of state activity and its efficiency are primarily dependent upon the length of its purse.
We often complain that educationally India is very backward, that the system of medical relief is utterly inadequate and that agriculture and industry in India are still backward. Why is it so? There is only one answer: lack of funds. The amounts spent on social and developmental services in India are ridiculously small. With the meagre resources placed at the disposal of these services, no spectacular progress can be expected. “The revenue of the state”, it has been said, “is the State.” Everything depends upon it. Kautilya, the earliest of Indian economists, writing more than 2,000 years ago, said: “The beginning of every undertaking is finance.”
The importance of public finance not only lies in the increasing functions of the state but also in the effect of fiscal operations on the economic life of the nation. Public finance can be used as a powerful instrument to bring about desired social and economic changes.
For instance, the system of public finance in a country affects the entire economic field. Public finance is no longer considered as a mere means of raising the state revenues. To use Colbert’s words, it is no longer considered simply “the art of so plucking the goose as to cause the least amount of squealing.” On the other hand, public finance is now regarded as a powerful instrument of social justice; it is employed by modern governments to bridge, as far as possible, the gulf between the rich and the poor. An equitable system of public finance would tax the rich and spend the proceeds in the supply of such services as are calculated to benefit the poor primarily.
The power to tax is really the power to regulate economic activity; it can retard it or stimulate it. The effect of taxation is felt not merely when revenues are raised but also when they are spent. Taxation and public expenditure can be so arranged as to encourage production or guide production along the desired lines.
Certain industries can be exempted from taxation or given protection through import duties. Social and development expenditure can stimulate economic growth. As Buchler observes, “And the burdens or benefits resulting from a particular tax policy are not simply monetary, they are also psychological, affecting emotions, the reasoning and the economic behaviours of the tax payers and the community.”
In modern times, thus, taxation has a dual purpose:
(a) To raise funds for the state, and
(b) To achieve its social and economic objectives.
Such purposes of public finance have today assumed a very great importance.
The importance of public finance lies in the following:
(i) It is one of the most effective instruments of state control over the economy. It is not merely a means of collecting state revenues and making disbursements.
(ii) The state activities, which have to be financed by public revenues, are ever expanding. This has added to the importance of public finance manifold.
(iii) Growing significance of fiscal policy in tackling economic problems has also increased the importance of public finance.
(iv) The study of public finance is specially important for the underdeveloped countries. Only a prudent management of state finances is essential to break the vicarious circle of poverty in which the underdeveloped countries are involved. Fiscal policy is a powerful tool for increasing capital formation, accelerating economic growth, increasing national income and raising the level of employment.