Public finance is often considered one of the toughest topics to master. That’s because it deals with money: money that you, as an individual, contribute to or control. Therefore, it covers a wide range of issues, such as budgeting for the nation, national security, healthcare and education. It also covers social programs such as healthcare, unemployment, and welfare. And it even has a little bit to do with the stock market, as well as your 401(k) s, investments and so forth.
Basically, public finance involves the study of governmental actions, which can include direct spending, deficits and taxes. The objectives of public finance are first to identify when, how and by what extent the state should intervene in the economy, and know the possible outcomes of various interventions. By undertaking this task, public financial experts are attempting to achieve macroeconomic stability, increase economic efficiency and credibility, promote fiscal consolidation and growth, and decrease the risk of financial and credit crisis. These are some broad objectives of public finance.
However, public finance has many sub-topics. Two of these sub-topics are macroeconomics and microeconomics. For starters, the study of macroeconomics looks at how people, countries, firms, and institutions think and act overall. The focus is on broad issues such as inflation, unemployment, trade, financial and credit crisis and overall economic performance. Microeconomics, on the other hand, is focused on the economic performance of specific firms, regions or districts.
Microeconomics also looks closely at the behavior of firms, regions or districts within a country. This includes the supply, demand, incentives and so on. One of the major areas of microeconomics is market failure. Market failure occurs when there is inadequate demand in any market area, leading to a too high price for a given item or service. In the United States, market failure can include the slow economic growth, inflation, decline in house price, over production, slow job growth and so on.
Public finance scholars pay special attention to the determination of taxes. Governments usually decide to levy taxes either by direct tax administration or indirect tax administration. Direct tax administration involves the collection of tariffs and similar indirect taxes by governmental bodies such as state, federal or local governments. Examples of indirect taxes are estate taxes, sales taxes, personal income taxes, etc. Thus public policy seeks to ensure that the tax burden is spread across a wide range of individuals and households in order to minimize the burden on vulnerable groups such as lower-income groups or unemployed people.
Another important area of public finance is macroeconomics, which studies national income, output and consumption in terms of the country’s entire economy. Unlike microeconomics which studies the movement of particular items in particular sectors of the economy, national income and output are not closely tied to the performance of any particular item. This makes for easier analysis and overall comparison across the sectors and industries within the country. The field of public economics also addresses the economic growth of the nation as a whole. Economic growth is primarily driven by economic growth in the public sector, so it is important to study how these economies are affected by macroeconomic policies.
Public finance scholars also study the relationship between fiscal policy and financial management. In general, financial management refers to the ability of a company to meet its obligations. A company’s ability to meet its obligations is dependent upon the capacity of the company’s financial managers to convince lenders to extend loans. In other words, if lenders believe a company is worthy of a loan, they will provide loans. But if a company’s financial managers are unable to convince lenders of their robustness, the company’s capacity to meet its debt obligations will be adversely affected.
A further aspect of public finance is the impact that government policies have on the budgeting process. When a government adopts a new spending policy, the budgetary resources are reallocated to accommodate the new policy. However, some think that this allocation of resources can result in an artificial creation of demand for goods and services, leading to rising inflation. To avoid such a scenario, governments should only adopt policies which directly affect the productivity of their societies. For instance, if a government increases the tax rate, businesses will have no choice but to increase prices in order to cover the cost of increased tax burdens in order to survive.