Difference Between Public Finance And Private Finance

Public finance is the study of income and expenditure of the government and also of the policies and principles relating thereto. On the other band private finance is the study of income, debt and expenditure of an individual or other non-government bodies. In some respects, both Public Finance And Private Finance are similar but in most of the cases, these two differ from each other. We shall now make an attempt to point the difference between public finance and private finance in the following lines.

Difference Between Public Finance And Private Finance

Public finance and private finance differ in many respects. Following are the principal points of differences between private finance and public finance which can be noted :

(1) Income Expenditure Adjustment. Every individual tries to adjust his expenditure according to his income, He first determines his income and then tries to spend it according to his needs. His expenditure may, in exceptional circumstances, exceed his income but this cannot be continued for long. He always tries to cut his coat according to his cloth. But for the state, it is expenditure that determines its income. It first estimates its expenditure and then tries to adjust its income.

(1) Nature of Borrowing. The government has larger sources of revenue than a private individual. A government at the time of financial crisis can raise internal loans from its citizens. It can approach external sources for help such as foreign governments or markets. But an individual cannot borrow funds from himself internally. He can borrow funds only externally.

 (3) Printing of new currency. A private individual cannot raise his income by printing new currency irrespective of the nature of urgency. A government on the other hand, enjoys the right to print more currency when it is hard pressed. In fact, during war etc. it meets its obligations by printing new notes.

(4) Principle of Equi-marginal utility. Normally, both the state and the private individuals try to obtain maximum satisfaction out of their expenditure by following the equi-marginal utility principle. An individual attach more importance to this law and adjust his expenditure on various items in such a way as to get maximum satisfaction.  Although the state broadly accepts this principle but it does not always follow it strictly. Very often, it spends money keeping in mind the non-economic factors, like welfare of certain community etc.

 (5) Nature of Budget. The state prepares its budget (an estimate of its income and expenditure in advance) annually but an individual generally does not prepare budget regularly. Moreover, an individual prepares surplus budget because he would like to save something for future. But surplus budget is not good for or is not considered to be a virtue of the state. A surplus budget of the state implies two things-

(i) the government has levied taxes on the people than necessary, and

(ii) the government is not spending as much on the welfare of the public as it should. So a deficit budget is always preferred by the state Keynes supported a deficit budget to meet the situation created by depression. A deficit budget implies more expenditure of public projects, more purchasing power, more demand and more economic activities.

 (6) Secrecy of Budget. The budget of a private individual is top Secret and nobody is much concerned about an individual budget. But there is no question of secrecy with the public budget. In a democratic country, the budget, is presented before the Parliament, given wide publicity and widely discussed and subjected to criticism.

Hence it is said that public finance is public and private finance is private.

 (7) Elasticity of Finance. Public finance is more elastic than private finance. An individual cannot make drastic changes in his income but it is not so with the public finance. The government can make adjustment or changes in its income by imposing more taxes.

(8) Differences in objectives. There is a fundamental difference in the objectives of private finance and public finance. An individual is always guided by the profit motive and tries to increase his income and wealth for personal benefits whereas the objective of public finance is social benefit.

(9) Coercion to get Revenue. The government can use coercive force to get revenue. No tax payer can refuse to pay taxes for which he is liable. But an individual does not have any such force.

(10) Present and Future Income. For an individual present is more valuable than future whereas for the government, future is equally important because it lasts forever. The state is the trustee for the future. Very often, the state spends more for future than for the present. For example, investments in education, health services, long run project, etc. are all for future generation’s benefit but its burden is imposed on the present generation.

 (11) Solvency. A state is a long term institution and cannot be declared insolvent. In solvency of a state means insolvency of all citizens and that is not possible. Whereas the individual can be declared insolvent if his liabilities exceed his assets. Moreover, the assets and liabilities of a state cannot be determined.

 (12) Audit. Government expenditure and income are subject to audit by constitutional authorities but private finance is not subject to audit. Individuals themselves audit their own accounts without performing any formalities. There is no procedural necessity as it is in the case of public finance.

Thus, public finance and private finance differ in many respects.

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