Public Finance: Public finance is related to the financing of State activities, and can be narrowly

defined as a subject, which discusses financial operations of the fisc (or public treasury). Earlier
writers on the subject tended to define public finance in such a narrow manner, though this is no
longer the case now.

Subject Matter of Public Finance: Follow Book

Similarities between private & public finance: Modern economies are monetized. That is to
say, most of their economic activities have financial counterparts involving creation; use and
annihilation of financial claims. Both private and public sectors are engaged in activities that
involve purchases, sales and other transactions. Similarly, they are engaged in production,
exchange, saving, capital accumulation, investment, and so on. In order to finance these
operations, the government, amongst other things, creates money (which is also a financial
asset), raises loans, and makes payments, etc. Similarly, a private economic unit lends, borrows,
receives and makes payments, and so on. In these respects, therefore, both the public and private
finances are quite similar to each other. One may also point out that both sectors are engaged in
satisfying the wants of the society by sharing economic activities. Both have limited resources at
their disposal and try to ensure that the ‘most important’ wants are satisfied first. In that sense
their problems and decisions are similar. But the similarities between the two types of finances
almost end here. In contrast, the differences between the two are quite sharp.

Differences between private & public finance

1. Budget Constraints: Private economic units are bound by the necessity to live within their
means, adhering to limits on deficit spending. Such units can accumulate debt, but only to a
certain extent and for a limited period. In contrast, the State doesn't face the same stringent
restrictions, allowing it to plan for increased debt over time, leading to higher levels of public
debt in many countries.
2. Borrowing Flexibility: Not only can the State borrow both internally and externally, often
benefiting from lower interest rates due to its creditworthiness, but it can also create legal tender
currency. Private units lack this flexibility; they cannot raise internal loans and are subject to
higher interest rates.
3. Currency Creation and Obligations: The State's power extends to creating legal tender
currency, enabling it to influence market demand. Private units, on the other hand, are unable to
create money and must honor their obligations without the privilege of currency creation.
4. Decision-Making Principles: Private finance is guided by market principles, profitability, and
economic interests. In contrast, public finance is shaped by political and administrative decisions
that align with broader social objectives. The State operates beyond the scope of quid pro quo,
distinguishing its decision-making from that of private entities.
5. Long-Term Perspective: While private finance often considers short to medium-term gains,
the State's responsibility extends to the long-term well-being of the entire economy. This entails
the readiness to endure commercial losses for both immediate and long-term societal welfare.
Furthermore, the State invests in activities with no immediate economic returns, recognizing the
perpetual nature of society and its multifaceted needs.