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Definition and Scope:

Public finance, according to the traditional definition of the subject, is that branch of economics which deals with the income and expenditure of a government.

In the words of Adam Smith:

“The investment into the nature and principles of state expenditure and state revenue is called public finance“.

The earlier economists were perfectly justified in giving this definition of the science of public finance because the functions of the public authorities in those days were simply to raise revenue by imposing taxes for covering the cost of administration and defense.

The scope of the science of public finance now-a-days has widened too much. It is due to the fact that modern states have to perform multifarious functions to promote the welfare of its citizens. In addition to maintaining law and order within the country and provision of security from external aggression, it has to perform many economic and commercial functions.

Due to the increased activities of the state, there has taken place a vast increase in the expenditure of the public authorities. The sources of revenue have also increased. Taxes are levied not for raising the revenue alone but are used as an important instrument of economic policy.

Public finance now includes the study of financial administration and control as well. We, therefore, agree with Professor Bastable when he defines public finance as that:

“Branch of economics which deals with income and expenditure of public authorities or the state and their mutual relation as also with the financial administration and control the term public authorities includes all bodies which help in carrying on the administration of the state”.

The study of public finance is split up into four parts:

(1) Public Expenditure (2) Public Revenue, (3) Public Debt and (4) Budgeting.