We’ve covered important topics like taxation as well as the impact of the CBN’s decision to float the Naira here on the PiggyVest Blog. But have you ever wanted to know the role of a  government in the economy? To understand this, we must start with a simple question: what is public finance?

Public finance is a branch of economics that examines how governments manage public funds across federal, state and local levels. It deals with all parts of a country’s finances and explores how revenue, expenditure and debt can impact the growth and development of a nation.

This article will explore public finance in detail — including its scope, objectives, functions and components. We’ll also highlight the types of public finance and finish by discussing the definition and importance of public finance management. Let’s begin!

What is the scope of public finance?

Public finance is one of the most basic subfields of economics and primarily studies how a country, like Nigeria, manages its finances. It also emphasises a government’s role and influence in boosting the national economy through infrastructure improvements, reduced unemployment, and the application and monitoring of financial and fiscal policies.

The four key areas of consideration in public finance are:

1. Public revenue. This area focuses on the funds collected by the government to fund public services and maintain infrastructure. Revenue comes from sources like taxation and grants, and is crucial for the government to carry out its functions effectively.
2. Public expenditure. This area refers to government spending on various sectors, including education, healthcare and social welfare programs. It focuses on how a government spends to achieve its objectives and serve the public.
3. Public debts. Public debt is the accumulation of financial obligations that a government owes to various creditors, including individuals, institutions and foreign governments. Governments usually use debt to finance budget deficits, invest in long-term projects or stabilise the economy during economic downturns.
4. Financial administration. This area deals with the efficient management and oversight of public funds — including budgeting, accounting and auditing — to ensure government transparency and accountability. Financial administration is vital in maintaining trust in government institutions and preventing mismanagement.

These areas of consideration are according to the renowned Professor Hugh Dalton, whose work in Economics extended beyond public finance and included the positive relationship between a person’s income and their standard of living (don’t worry, we won’t bore you with all that information in this article).

Public finance is a pretty important topic that every citizen should know. However, there are several tools and subtopics under public finance, so you can quickly lose track of what matters and what doesn’t.

The areas we’ve shared above are an excellent way to know what falls under public finance and ensure a complete understanding of the concept.

What are the components of public finance?

Public finance consists of individual elements — just like budgeting and financial intelligence. We’re sure these elements aren’t new to you, but we’ll explain them in the context of the role of governments.

Here are the components of public finance:

• Budget. A budget is a comprehensive financial estimation (or plan) that outlines a government’s expected revenue and proposed expenditures for a specific period (typically a fiscal year). It primarily guides a government’s spending priorities.
• Deficit/surplus. Deficits happen when a government spends more money than it takes in, so it has to borrow. On the flip side, a surplus occurs when a government makes more money than it spends — giving it a chance to pay off debt or invest in other things.
• Expenditure. Expenditure refers to all categories of government spending. It includes day-to-day operational expenses and capital expenditures (investments in infrastructure and long-term initiatives).
• National debt. This component refers to the accumulated funds a nation’s government owes to various foreign and domestic creditors. It exists due to past deficits and measures a government’s outstanding financial obligations.
• Revenue. This component includes all income sources, from taxes and fees to tariffs and grants. It’s a critical part of public finance and provides the funds required to run the nation in the first place.

It’s the responsibility of a nation’s government to balance these five components to ensure country-wide sustainability and economic growth. 

What are the objectives of public finance?

Now that we know the definition of public finance and what the concept covers, let’s dive into its goals. 

The following are the objectives of public finance:

• Management of public needs. The first objective of public finance is to meet the various needs and requirements of the public. These needs include healthcare, education and social welfare programs that enhance the well-being of citizens.
• Economic growth. Through public finance, governments allocate funds for investments in infrastructure, research and development. These projects stimulate economic activity, create jobs and enhance the nation’s prosperity.
• Inequality reduction. Governments can use public finance to reduce income gaps by applying progressive taxation (a system where taxes increase as income increases) and social welfare programs. These can help redistribute resources to benefit disadvantaged or marginalised groups.
• Price stability. Public finance also focuses on the economy and how policies can help control inflation and stabilise the prices of goods and services. This stability benefits consumers and businesses and can help boost a nation’s international reputation.
• Job creation. Governments can use public finance to stimulate job creation, especially through public works projects and training programs (like Nigeria’s N-Power). Job creation can further improve the economy by enhancing national productivity.
• Stabilisation of currency value in international markets. Governments use policies (like floating the naira) to maintain a currency’s stability and competitiveness in the global market. This is essential for trade, investment and the overall health of the national economy.

These objectives are what public finance (or at least a proper implementation of it) should work towards. You might come across some other goals in the wild, but they are usually related to the objectives shared above.

Types of public finance

We already explained that public finance is an economic subfield focusing on government finances. We also highlighted that this subfield focuses on four critical areas of consideration. But what are its types?

Below are the types of public finance:

• Public revenue. This is the lifeblood of government finances and covers public expenses. It includes all income generated by the government from various sources.
• Public expenditure. Public expenditure refers to the government’s spending on a wide range of activities and programs as well as investments in critical areas of the economy (like education). 
• Public debt. Public debt shares many similarities with personal debt and refers to all borrowed funds from various sources. The government uses these funds to fund budget deficits, finance long-term projects or stabilise the economy during economic downturns.
• Financial administration. Financial administration involves the management and oversight of public finances. It ensures that governments transparently and accountably use public funds.

As you can see, the areas of consideration in public finance are the same as its types. However, they serve different purposes in understanding and studying public finance as a discipline.

To simplify, while the scope of public finance focuses on the broad themes of the concept, the types of public finance represent the specific elements that make up those themes.

In other words, the scope tells us the significant areas of interest, while the types help us break down and understand the specific elements within those areas. Think of it like looking at a high-quality image on the internet before zooming in to examine it in detail.

What are the functions of public finance?

We’ve already explored a lot in this article, so it’s time to bring things home. What specific actions must a government take to manage its resources? In other words, what are the functions of public finance?

The following outlines the essential functions of public finance:

• Effectively managing public revenue and expenditure through the proper utilisation of resources.
• Establishing price stability and mitigating inflation in the economy.
• Supplying essential infrastructure to the public.
• Maintaining transparency in public policies and records of financial transactions.
• Assessing the current position relative to public budgets and adjusting policies accordingly to manage the economy.
• Monitoring the effectiveness of various facets of financial policy functions.
• Formulating economic policies that foster the nation’s growth and progress.

There are several other public finance functions, but this list is a fair summary.

What is public finance management?

Public finance management refers to the processes, practices and policies governments use to effectively and efficiently manage the financial resources of a country (public funds). It focuses on the components of public finance, the interplay between each element and the government’s place in the financial cycle of public resources.

This financial cycle begins with budget preparation and includes revenue generation, expenditure, accounting and financial reporting.

Importance of public finance management

What’s the end goal of public finance and public finance management? Why should you (or the government) know this information in the first place? What exactly is the importance of public finance management?

Public finance management is important for the following reasons:

• It fosters investment by implementing diverse policies and incentive packages (like free trade zones and trade agreements).
• It plays a crucial role in efficiently allocating natural and human resources.
• Effective administration of public finances contributes to the advancement of the nation.
• Public finance helps in upholding price stability while mitigating inflation and unemployment.
• It helps governments frame policies and make decisions that foster innovation — bolstering overall economic development.

Now you know!

Conclusion

A government’s role in the economy is pretty significant. A knowledge of public finance (as well as public finance management) can help governments efficiently manage public funds to boost the economy and enhance social welfare.