Public finance studies the role of the government in an economy. It assesses the government expenditure and revenue and the adjustment of one or another public institution to achieve desirable effects while avoiding undesirable ones.
Public finance in some form can be said to be as old as civilization itself. When the human population started to grow during then Middle Stone Ages period, there arose a need for people to organize themselves into groups and have governing bodies. The regulatory bodies, on the other hand, needed resources to carry out the duties vested in them such as ensuring fairness and justice. As such, ways of financing governments were coined, and the major one was through taxation. As time went by, these groups evolved and organized themselves to the present day states which are complex and have enormous responsibilities vested in them.
The application of public finance differs from one economy to another, depending on the form of its governmental legislation regarding market regulations that bind them. However, there are certain aspects which are common across the board. In any economy, the governing body collects money from its subjects using tools such as taxation and tariffs. Other sources of income include borrowing, grants, dividends, licenses, and the sale of government bonds. The government then allocates the resources into different sectors and distributes it. The mode of allocation varies from one country to another depending on the level of growth and the prevailing local conditions. The government is also entrusted with the function of supervision and oversight. Another function of the government is ensuring the stability of the economy.
Evolution Over Time
Public finance has evolved from the simple ancient tax collections from emperors to run their kingdoms to the present day governments who have greatly widened their scope of revenue-making. For example, the government of the United States gets most of its revenue from taxation which includes income tax, value-added taxes (VAT), trade tax, sales tax, and tariffs on imports. The usage of the money collected has also widened and used to pay public servants, finance the military, financing educational and research institutions, aid to underdeveloped countries, and also a percentage is sent directly to the states. The government also makes a deliberate effort to bridge the gap between the rich and the poor by subsidizing essential products. The study and analysis of public finance has over time become one of the most marketable career courses in universities and other learning institutions worldwide. In the United States, the public investment has been divided into subjects such as government spending, public revenue, public debt, financial administration, and federal finance.
Praises and Criticisms
Proponents of studying public finance argue that it is the most effective tool for ensuring equality and dong away with social class disparities. It also ensures collective development which in the long run is more effective than individual development. Or example, the governments will collect taxes from the individual ad invest in security or building of a tarmac road. This is more effective than if each person employed his security guard or builds his part of the road. It has also encouraged specialization and capitalism. The government is also enabled to provide essential products to the citizens who are either too costly for entrepreneurs to provide or have very little profits. On the other hand, critics have argued that public finance has encouraged civil wars as different groups fight over the control of public resources. In some parts of the world, governments concentrate on some areas and neglect others hence causing massive regional imbalances and some of the citizens feeling left out. For example, in Rwanda, the minority community felt that the government was sidelining them in development projects and took arms to fight for their rights. This led to a bloody genocide which left over two million people dead.
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