Public Finance and Private Finance: Similarities and Dissimilarities

Let us learn about the similarities and dissimilarities between public finance and private finance.

Similarities between Public Finance and Private Finance:

The following are the points of similarities between public finance and private finance:

(a) Same Welfare Objective:

Both kinds of finances have broadly the same objective. Private finance is concerned with the maximization of individual welfare while public finance is concerned with the maximization of a community’s welfare from given resources.

(b) Rationality:

All kinds of finances are based on rationality. A rational individual tries to maximize his personal gain by allocating his given income.

Likewise, the government also behaves rationally in the sense that it seeks to maximize society’s welfare from the expenditures made in different activities. Any irrational behaviour— either on the part of the individual or the government—may spell disaster to indivi­duals, and to the society as a whole.

(c) 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 resources which are scarce.

(d) Loans are Repayable:

Both private and public loans are required to be repaid. An individual borrows money from various sources to meet personal requirements. But that too cannot be unlimited. He has to repay his loans. Like individuals, 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 be regarded as an extension of private finance. This, however, is not true.

Dissimilarities between Public Finance and Private Finance:

There are some basic differences between private and public finance. Some of the important differences are:

(a) Objectives are Indeed Different:

The objectives are different by the very nature of public and private finance. The government has to set an objective standard of utility from given public expenditure while an individual fixes a subjective standard of utility from his given personal expenditure.

Private individuals or firms are mainly concerned with private consumption or profits, while the government aims at promoting the society’s welfare. Again, an individual or a firm is mainly concerned with present profits and prospects, not with that of the distant future. But the government has to serve society generation after generation.

In other words, government is not guided by the profit motive; it is mainly concerned with the general interest of the society. An individual is myopic in the long run, and that is why he attaches more importance to the present period than to the future. On the other hand, since government regards itself as a trustee for the future, it makes provisions not only for present period but also for posterity.

(b) Public Expenditure Determines Public Revenue:

An individual adjusts his expenditure to income while the state adjusts income to expenditure.

An individual usually prepares his family budget in accordance with the income that he expects to receive. Income is, thus, the crucial determinant of individual budget. On the other hand, the government usually prepares its budget of expenditures and then searches wherefrom it can raise the required funds to meet the expenditures.

Thus, expenditure is the crucial determinant of public budget. In view of this difference, it is said that in private finance the coat is cut according to the cloth available, while in public finance the opposite happens—the size of the coat is determined first and then the authorities set out to gather the necessary cloth (through taxation, borrowing and deficit financing).

However, there may arise some situations in which an individual may also adjust his expenditure to income—like the government. In case of unforeseen emergencies, an individual may have to spend more than what he receives from current income.

Under the circumstances, he will have to work harder and sacrifice leisure or to borrow money from different sources to supplement his present income. Likewise, when government expenditure exceeds government revenue, government borrows money. Or it may cut expenditure when its expected revenue falls short of the target.

(c) 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 a surplus budget it is desirable to have a deficit budget of a government so as to increase the country’s productive power. In other words, a surplus budget may not stimulate economic activities. On the contrary, a deficit budget is often made to finance economic development.

(d) Methods of Raising Resources are Different:

One of the important areas of differences between public and private finance lies in the method of raising income.

First, resources of the state are large compared to individuals. Secondly, a government has the power to raise revenues from nationals as taxes are defined as the compulsory contributions to the govern­ment. An individual cannot force others to pay him money. In order to raise money, a government can print money.

An individual does not have this right. Further, the government can raise money both from its own citizens and from external sources like the IMF, the World Bank, foreign countries, etc. No such prerogative is enjoyed by individuals. Government may force people to buy its own bonds to enable it to raise resources, particularly during emergencies like war.

(e) Public Finance is Transparent:

Private finance relating to sources of revenue and spending is a secret affair. An individual tries to maintain secrecy of his accounts. Usually, an individual does not disclose his financial standing. Nor such disclosure has any significance to other people.

No such secrecy is maintained in the case of public finance. Government places its budget (i.e., estimated accounts of income, expenditure, methods of financing deficit) in the parliament. All these information are available in the news media so that transparency in public budget is maintained.

Thus, dissimilarities between public and private finance are more important than similarities. That is why we have separate theories and tools, principles and practices relating to public finance. Public finance is not merely the study of revenue-expenditure process of the government; it also studies how revenue-expenditure process affects macro- economic variables of an economy like consumption, interest rate, etc.

Thus, public finance is a part of the economic system as a whole. The domain of private finance is microeconomics while that of public finance is macroeconomics—although governmental and private activities are more complemen­tary in nature.