The importance of public finance was not so recognized in the 19th century as the Government in those days confined itself to the maintenance of law and order situation in the courtyard to the defense of the country from external aggression. The Government in those days did not intervene in economic But in the 20th century, every Government ensures ‘Social Welfare‘ to its citizens and therefore, the scope of governmental activities has been increasing day by day. Modern Governments do not only confine themselves to law and order situation but they also actively intervene in economic matters to justify themselves as, ‘Welfare States’. The Governments require money to spend it on the welfare of citizens.Hence, the importance of public finance has increased greatly in recent years.
The importance of public finance can be justified on the following grounds-
(1) Protection to Infant Industries. The Government of an underdeveloped country protects its infant Industries against foreign competition through various public finance activities like imposition of heavy tariff duties on imports, putting restrictions on imports, giving subsidies to keep the cost low etc. The objective of such operations is to enable these industries to stand on their legs against foreign competition.
(2) Planned Economic Development. Public finance renders valuable help in the planned economic development of the country. The planning authorities fix the priorities of expenditure for the plan period. The Government raises the necessary funds to implement the plans through direct and indirect taxation. The government takes necessary action to achieve the plan objectives, through fiscal measures.
(3) Regulating Consumption Habits. Public finance regulates the consumption habits of the people. It imposes taxes on items of consumption, the use of which is to be discouraged such as wine, cigarettes, tobacco and bidi, and allows concessions and rebates in taxes if it likes to encourage the consumption of any commodity. In practice, it can be seen that through tax-policy, Government is able to encourage or discourage the demand on various commodities.
(4) Reducing Inequalities. Public finance also plays a vital role in reducing social inequalities, through its fiscal policies. The Government can levy Heavy taxes on the richer sections of the society because they have capacity to pay, and spend the income so received on providing various facilities to poorer sections of the society such as providing free medical facilities, educational facilities, cheap housing, Cheap rations through fair price shops etc. Thus. on the one hand it reduces the purchasing power of the richer sections and on the other hand, increases the purchasing power of the poor sections of the society.
(5) Maintaining Balance or Trade: The Government always restricts the imports only to the essential items: hence imports of non- essential items are taxed heavily. On the other hand, the Government encourages the exports of its surplus production. It reduces the burden on export items and also supports them with subsidies and grants. These operations restricting imports and encouraging exports of the Government maintain the balance of trade.
(6) Industrial Development. Public finance helps industrial development of the country as follows- .
(i) Governments grant Subsidies and grants to various industries these days to enable them to increase the production of different essential items. These subsidies and grants have special place in the Government expenditure of underdeveloped and backward countries. On the other hand, Governments want to discourage the production of non-essential or harmful commodities, they may impose heavy taxes on such items.
(ii) Public finance induces the investment during the time of depression through its taxation policy by allowing tax-rebates for investments in desired direction. Through tax-policies, the Government can also discourage the investment in certain industries producing non-essential or harmful items of consumption. During boom or inflation, the Government regulates the flow of investment to anti-social operations.
(iii) The role of public finance in under-developed countries is to bring economic stability to keep the level of consumption and investment quite up to the level of production. It requires continuous trimming of the investment process to keep the productive process in the same speed. Through the help of public policies, the public, expenditure and individual demands can be tempered and turned according to the need of the economy.
(iv) To strengthen the economic development in developing countries, it is essential to give highest priority to capital formation because industrial development cannot be imagined without capital. For this purpose, there must be policies in the store of the government to encourage people to save more by cutting their wasteful expenditure. The capital formation, its speed and quantum will ultimately affect the economic development of the country.
(v) Industrial development of a country will bring in more employment opportunities to people especially in under-developed countries. The government may also provide more jobs through the deficit budget which is an indispensable measure to increase the volume of employment during depression.
Thus, it is evident that the government of a country can push up the industrial and economic development of the country, provide more employment opportunities, encourage investments and savings in the desired direction and increase social benefits through public expenditure. On the reverse, it can have an influential check over infrastructure economic and social activities, mitigate the inflationary and deflationary trends in the economy regulates the consumption and production of unwanted items, and can regulate the flow of imports to protect its own industries and so on. It therefore, affects the overall economic and social system of the country. Public financial management systems are now well defined.