Public finance deals with the government's revenue and expenditures. It has expanded in scope from just covering administrative and defense costs to also promoting citizen welfare through various economic and social functions. The subject matter of public finance includes studying the effects of taxation, spending, borrowing, and deficits on economic goals like growth, stability, equity, and efficiency. It also analyzes the fiscal policies used to achieve these objectives. Public finance has traditionally been divided into four parts - public revenue, public expenditure, public debt, and financial administration.

1. Introduction
1.1Meaning ,Concept and Development of Public Finance
Public finance, according to the traditional definition of the subject, is that branch of Economics
which deals with, the income and expenditure of a government. In the words of Adam Smith:
"The investment into the nature and principles of state expenditure and state revenue is called public
finance".
The earlier economists were perfectly justified in giving this definition of the science of public finance
because the functions of the public authorities in those days were simply to raise revenue by
imposing taxes for covering the cost of administration and defense.
The scope of the science of public finance now-a-days has widened too much. It is due to the fact
that modern states have to perform multifarious functions to promote the welfare of its citizens. In
addition to maintaining law and order within the country and provision of security from external
aggression, it has to perform many economic and commercial functions.
Due to the increased activities of the state, there has taken place a vast increase in the expenditure
of the public authorities. The sources of revenue have also increased. Taxes are levied not for raising
the revenue alone but are used as an important instrument of economic policy.
Public finance now includes the study of financial administration and control as well. We, therefore,
agree with Professor Bastable when he defines public finance as that:
"Branch of economics which deals with income and expenditure of public authorities or the state and
their mutual relation as also with the financial administration and control the term public authorities
includes ail bodies which help in carrying on the administration of the state)".
The study of public finance is split up into four parts; (1) Public Expenditure (2) Public Revenue, (3)
Public Debt and (4) Budgeting etc.
Meaning:
In public finance we study the finances of the Government. Thus, public finance deals with
the question how the Government raises its resources to meet its ever-rising expenditure. As
Dalton puts it,” public finance is “concerned with the income and expenditure of public
authorities and with the adjustment of one to the other.”
Accordingly, effects of taxation, Government expenditure, public borrowing and deficit
financing on the economy constitutes the subject matter of public finance. Thus, Prof. Otto
Eckstein writes “Public Finance is the study of the effects of budgets on the economy,

2. particularly the effect on the achievement of the major economic objects—growth, stability,
equity and efficiency.”
Further, it also deals with fiscal policies which ought to be adopted to achieve certain
objectives such as price stability, economic growth, more equal distribution of income.
Economic thinking about the role that public finance is expected to play has changed from
time to time according to the changes in economic situation.
1.2 Nature and Subject matter of Public Finance
The economics of public finance is fundamentally concerned with the process of raising and
dispersion of funds for the functioning of the government. Thus, the study of public revenue
and public expenditure constitutes the main division in the study of public finance.
But with these two symmetrical branches of public finance, the problem of organization
of raising and disbursing of resources also arises. It has also to solve the question of what is
to be done in case public expenditure exceeds the revenues of the state. In solving the first
problem, “financial administration” comes into the picture. In the latter problem, obviously,
the process of public borrowings or the mechanism of public debt is to be studied.
Since both public debt as well as financial administration gives rise to a number of special
problems, these are conventionally treated as a separate branch of the subject.
As such, we have four major divisions (traditionally set) in the study of public finance:
1. Public Revenue, which deals with the method of raising funds and the principles of
taxation. Thus, within the purview of public revenue, we take up the classification of public
revenue, canons and justification of taxation, the problem of incidence and shifting of taxes,
effects of taxation, etc.

3. 2. Public Expenditure, which deals with the principles and problems relating to the allocation
of public spending. Here we study the fundamental principles governing the flow of public
funds into different channels; classification and justification of public expenditure;
expenditure policies of the government and the measures adopted for general welfare.
3. Public Debt, which deals with the study of the causes and methods of public loans as well
as public debt management.
4. Financial Administration, under this the problem of how the financial machinery is
organised and administered is dealt with.
The Scope of Public Finance:
The scope of public finance is not just to study the composition of public revenue and public
expenditure. It covers a full discussion of the influence of government fiscal operations on
the level of overall activity, employment, prices and growth process of the economic system
as a whole.
According to Musgrave, the scope of public finance embraces the following three
functions of the government’s budgetary policy confined to the fiscal department:
(i) The Allocation Branch,
(ii) The Distribution Branch, and
(iii) The Stabilisation Branch.
These refer to three objectives of budget policy, i. e., the use of fiscal instruments:
(i) To secure adjustments in the allocation of resources,
(ii) To secure adjustments in the distribution of income and wealth, and

4. (iii) To secure economic stabilisation.
Thus, the function of the allocation branch of the fiscal department is to determine what
adjustments in allocation are needed, who shall bear the cost, what revenue and expenditure
policies to be formulated to fulfill the desired objectives.
The function of the distribution branch is to determine what steps are needed to bring about
the desired or equitable state of distribution in the economy and the stabilisation branch shall
confine itself to the decisions as to what should be done to secure price stability and to
maintain full employment level.
Further, modern public finance has two aspects:
(i) Positive aspect and (ii) Normative aspect. In its positive aspect, the study of public finance
is concerned with what are sources of public revenue, items of public expenditure,
constituents of budget, and formal as well as effective incidence of the fiscal operations.
In its normative aspect, norms or standards of the government’s financial operations are laid
down, investigated, and appraised. The basic norm of modern finance is general economic
welfare. On normative consideration, public finance becomes a skillful art, whereas in its
positive aspect, it remains a fiscal science.