What is the difference between public finance and private finance


Public finance studies the income-getting and income-spending activities of the public bodies or the state. Private finance deals with the way a private person gets and spends his income. There are certain differences between the principles underlying public finances and those of private finances. These are explained below.

1.         Adjustment of Income and Expenditure: An individual usually adjusts his expenditure to his income. But the public authority generally adjusts its income to its expenditure. In other words, we can say that an individual cuts his coat according to his cloth. While the public authority first decides the size of the coat and then tries to produce cloth according to the size of its coat. The public authority prepares on estimate of the total expenditure to be incurred during a fiscal year and then devices ways and means to raise the required amount. The individual on the other hand tries to live within his own means. His expenditure is generally determined by his income.

2.         Unit of Time: The public authority balances its budget during a given period which is generally a year. For an individual there is no period of time in the course of which the budget must be balanced. The individual generally continues earning and spending without keeping any record of his budget by a particular date. The public authority however has to keep full records of its income and expenditure and the accounts are to be in balance during the financial year.

3.         An individual cannot borrow from himself: If at any time an individual is in need of money, he cannot borrow from himself. He can raise the loan from other individuals or can utilize his past savings, but he cannot borrow internally. The public authority, on the other hand, can borrow internally from its own people and externally from other nations.

4.         Issue of Currency: Government has full control over the issue of currency in the country. No other person except the state can print notes. If an individual does so, he will be put behind the bars.

5.         Provision for the Future: The government has to make a solid provision for the future. It spends large amounts of the money on those projects which the future generation is only to benefit. The individuals on the other hand are not generally liberal and far-sighted. They discount the future at a higher rate and so usually make inadequate provisional for the future.

6.         Big and deliberate changes in public finance: It is easier for the government to make big and deliberate changes in its income, and expenditure but for an individual it is very difficult affair. A few individuals may succeed in increasing their incomes but all the persons cannot do so. The public authority can also make deliberate decrease in its income without feeling any difficulty. But for individuals, reduction in income is very painful as they are used to certain standard of living.

7.         Surplus Budgeting: For an individual, excess of income over expenditure or surplus budgeting is considered to be a virtue but for the public authority it is not as such, it is expected from the government that it should raise only as much revenue as it needs during a calendar year. After all what is the fun of showing persistently surplus budgets? It is not better to give relief to the tax-payer than to show surplus budgets.

8.         Mystery shrouds Individual Finance: Individuals finance is usually shrouded in mystery. Every body likes that his financial position should remain a closely guarded secret but this is not the case with public authorities. The government publishes its budget and gives due publicity to it.

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