What does Public and Private Finance mean? Public and Private Finance: Differences, Similarities, and Dissimilarities; what their meaning? Public finance is the finance sector that deals with the allocation of resources to meet the set budgets for government entities. Private Finance can classify into two categories the public or personal finance and business finance. Personal finance deals with the process of optimizing finances by individuals such as people, families, and single consumers.
The Concept of Public and Private Finance; explain into Differences, Similarities, and Dissimilarities.
Public finance has several branches; public revenue, public expenditure, public debt, budget policy, and fiscal policy. This branch of economics is responsible for the scrutiny of the meaning and effects of financial policies implemented by the government. This sector examines the effects and results of the application of taxation and the expenditures of all economic agents and the overall economy. Richard Musgrave, a renowned Economics professor, terms Public Finance as a complex of problems that are centered around the income and expenditure processes of the government.
Personal Finance deals with the process of optimizing finances by individuals such as people, families, and single consumers. A great example is an individual financing his/her car by the mortgage. Personal finance involves financial planning at the lowest individual level. It includes savings accounts, insurance policies, consumer loans, stock market investments, retirement plans, and credit cards.
Business Finance involves the process of optimizing finances by business organizations. It involves asset acquisition and proper allocation of funds in a way that maximizes the achievement of set goals. Businesses can require finances on either of the three levels; short, medium, or long term.
Differences between Public and Private Finance:
The following differences are explained into two sections; A) Basic, and B) Advanced.
A. Basic differences part one are;
About the differences between private and public finance.
- The pattern and volume of expenditure of an individual are influenced by his total resources income and wealth but in the case of government, expenditure determines income. Moreover, government expenditures determine people’s income. If the government spends money on road construction, some employment is automatically generated.
- Private individuals or firms are mainly concerned with private consumption or profits. The government aims at promoting the welfare of society rather than that of the individual. The individual (or a firm) is mainly concerned with his (its) present gains and prospects, not with that of the distant future. The government has to serve society generation after generation.
- Private firms derive income by selling goods and they pay to factors of production according to the quantity or quality purchased. The services of governments are usually made available to individuals quite irrespective of the cost and often at rates that do not cover full costs.
- A public authority can vary the amount of its income and expenditure within limits, of course, but more easily than an individual. An individual cannot easily double his income or halve his expenses even if he would be better off that way. But this is not so difficult in the case of Governments.
A. Basic differences part two are;
About the differences between private and public finance.
- A public authority usually does not discount the future at as high a rate as an individual. The reason is obvious. The life of a man is counted in years and his foresight is limned. A-State is supposed to live forever. Hence, future satisfactions do not appear so small against present utilities to a State as they do to an individual. He always prefers a bird in hand to two in the bush even though the two in the bush may be fairly certain tomorrow.
- A wise man is he who, after meeting his needs, saves something to lay by. Not so with a State. A State should not ordinarily try to hoard but should repay to the people in services all that it receives in taxes. A heavily surplus budget is for this reason as bad as, and perhaps even worse than, a heavily deficit one. The deficit budget may propose to incur the deficit for the promotion of mass welfare, while the surplus budget is only an extra burden on the tax-payer.
- There is no fixed period over which an individual balances his budget. State budgets are -generally made for one year. But the income and expenditure of an individual are continuous and cover the whole period of his life.
- Individual finance is kept a secret, whereas State finance is made public. The budget is published and every citizen is welcome to scrutinize it and comment on it. An individual will not let anybody have a peep into his financial position.
B. Advanced differences;
The following differences below are;
The government can borrow from itself, it can simply go back to the people to ask for loans in whichever financial asset e.g. bonds when shortages arise. However, an individual can’t borrow from itself.
The public sector’s main objective is to create social benefits in the economy. The private industry seeks to maximize personal or profit benefits.
The government is in charge of all aspects related to currency. This involves the creation, distribution, and monitoring. No one in the private sector allows to create currency, this is illegal and most countries classify it as a capital offense.
Present or future Income:
The public sector is more involved with future planning and making long-term decisions. The government makes decisions that will bear fruits in the long-term even ten years. These investments could include the building of schools, hospitals, and infrastructure. The private industry makes financial decisions on projects with a shorter return waiting time.
Income and Expenditure Adjustment:
The government adjusts the income according to the expenditure budget. The private sector including individuals and private businesses adjust their expenditure according to the income or future estimates. The government first creates an outline for the expenditure then devices means of acquiring the monetary budget needed. Private finance involves cutting your coat according to your cloth.
Coercion to getting Revenue:
The government can use force to get revenue from individuals. This could involve the use of force to get taxes. The private sector, however, doesn’t have this authority.
Surplus Budget Concept:
Excess income or surplus budgets is a great virtue in the private sector, this is however not the case in public finance. The government is expected to only raise what is needed for a fiscal year. Of what use would it be to have surplus budgets? It would be much easier to offer tax reliefs to the tax-payers to offset the surplus.
Ability to Make Huge and Deliberate Changes:
The public finance sector can make huge decisions on income amount without any consequences. For example, it can effectively and deliberately increase or decrease the income amount instantly. Businesses and individuals can’t make these decisions and implement them immediately.
Similarities between Public and Private Finance:
While the individual is concerned with the utilization of labor and capital at his disposal, to satisfy some of his wants, the state is concerned with the utilization of the labor and capital and other resources to satisfy social wants. It will observe that both private and public finance have broadly, the same objective, namely the satisfaction of human wants.
However, while private finance emphasizes individual interests public finance attempts to promote social welfare. From this, it may though that public finance is only an extension of private finance and that the rules and regulations which apply to private finance will also apply to public finance.
The following similarities below are;
Borrowing is a common element both in private and public finance. Just as an individual borrows from different sources when current incomes are insufficient to meet the current expenditure, the public authority also resorts to borrowing, when its revenue fall short of aggregate expenditure.
Problems of Adjustment of Income and Expenditure:
Both public and private finance always face the problem of the adjustment of income and expenditure. Hence the problem of choice is common in both types of finance. Both kinds of finance have income and expenditure. Both try to balance their income and expenditure.
Private and public finance are based on rational behavior. The resources at the disposal of private individuals and public authority are limited. Therefore in both cases, maximum care is taken to ensure better utilization of scarce resources. A rational individual tries to maximize personal benefits from his expenditure. Likewise, a rational government seeks to maximize social benefits from public expenditure.
The scarcity of Resources:
Both have limited resources at their disposal. Both public and private individuals are required to match their income and expenditures in such a way that both make the optimum use of scarce resources.
Loans are Repayable:
Both private and public loans are required to repay. An individual borrows money from various sources to meet personal requirements. But that too cannot unlimited. He has to repay his loans. Like individuals, the government cannot live beyond its means. It can temporarily postpone repayment of loans, but it is obligatory to repay the loans. Thus, public finance may regard as an extension of private finance. This, however, is not true.
Dissimilarities between Public and Private Finance:
One can notice fundamental dissimilarities between public and private finance.
The important differences are:
Public Budget is not Necessarily Balanced:
An individual tries to maintain a balanced budget and maintenance of a surplus budget is a virtue. Instead of a balanced or surplus budget, it is desirable to have a deficit budget of a government to increase the country’s productive power. In other words, a surplus budget may not stimulate economic activities. On the contrary, a deficit budget often makes to finance economic development.
The scope of Study:
Public finance studies the complex problems that center around the revenue – expenditure process of government. Private finance, on the other hand, confines to the study of those aspects of the economy that arise in the course of operation of private households in the sphere of financial transactions and activities. Hence in terms of scope of study private finance has a limited sphere of operation.
There are certain items of expenditure that the state can neither avoid nor postpone. Irrespective of the availability of resources, this type of expenditure should incur.
According to Prof. Findlay Sierras,
“Another characteristic of public expenditure is its compulsory character.”
The expenditure on defense, civil administrations, etc. is compulsory. Likewise, the state can compel people to purchase and consume a particular variety of cloth, wheat, or other commodities at a price fixed by the state.
Nature of Resources:
There is a difference between private and public authorities as regards the nature of resources. While the individual has only limited resources at his disposal, the public authorities can even draw upon the entire wealth of the community, by raising a force, if necessary.
Tax payment is a personal responsibility of the taxpayer. Nobody can refuse to pay taxes if it is imposing on him. Besides tax revenue, the public authorities can borrow funds from the general public and if needed, from outside the country.
The government can even resort to deficit financing, as and when the financial situation worsens. As compared to this, individuals and business houses have only a limited source of resources.
Coercive Authority of the Government:
An individual cannot raise coercive methods to raise his income. But the government can use force to collect the necessary revenue. Since the public authority possesses coercive power, it can raise the rate of taxes, add new taxes to the existing system, and force taxpayers to pay taxes promptly. Moreover, during the financial crisis, the government can introduce, the compulsory deposit of funds, using the coercive authority of the state.