Some of the most important differences between public and private finance are as follows:
Before we study public finance, we may well compare it with individual or private finance.
Individuals and States are similar in that they both need resources. Both have to secure maximum results from their resources. Both attempt to get the best out of all items of expenditure.
There are, however, some important differences between private and public finance. They are:
(i) An individual’s income determines his expenditure, while a State’s proposed expenditure determines its income: A person cuts his coat, as they say, according to the cloth he has. A Government, on the other hand, arranges for cloth according to the length of the coat it proposes to have. Thus, the State first decides the nature and scale of its expenditure and then proceeds to find funds to meet it, an individual knows his income and he has to plan out his expenditure accordingly. An individual adjusts his expenditure to his income, whereas the State adjusts its income to its expenditure.
(ii) 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.
(iii) 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.
(iv) 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.
(v) There is no fixed period of time 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.
(vi) The individual finance is kept a secret, whereas the 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.
(vii) A State can raise an internal loan; an individual cannot. Nobody can borrow from himself. But a State can borrow from its own citizens.
(viii) The State can issue paper currency in order to meet its expenditure. But no such course is open to a private individual.
(ix) No Equi-marginalising of utilities. An individual tries to maximize satisfaction from his income by distributing his expenditure in such a manner as to have equi-marginal utility in every case. But state expenditure is done by the Finance Department in an objective manner. There is no such equi-marginalising of utilities.
(x) The private individual lacks the coercive authority which a government has. A government has simply to pass a law and compel the citizens to pay a tax or subscribe to a compulsory loan (i.e. compulsory deposit), but an individual cannot do anything of the kind.