public finance

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public finance

the branch of economics concerned with the income and expenditure of public authorities and its effect upon the economy in general. When the CLASSICAL ECONOMISTS wrote upon the subject of public finance, they concentrated upon the income side, TAXATION. Since the Keynesian era of the 1930s, much more emphasis has been given to the expenditure side and the effect that FISCAL POLICY has on the economy.

The PUBLIC SECTOR is so large a part of most economies that it influences virtually every aspect of economic life, either through its own expenditure on goods and service provided by the private sector, its wage payments to public-sector employees, or its social security payments (pensions, sickness and unemployment benefits). Similarly, the financing of these expenditures by means of various taxes (income tax, value-added tax, corporation tax, etc.) affects the size and pattern of spending by individuals and businesses.

Governments plan their revenue and expenditure each fiscal year by preparing a budget (see BUDGET ( GOVERNMENT)). They may plan to match their expenditure with their revenue, aiming for a BALANCED BUDGET; or they may plan to spend less than they raise in taxation, running a BUDGET SURPLUS and using this surplus to repay former public debts (see NATIONAL DEBT); or they may plan to spend more than they raise in taxation, running a BUDGET DEFICIT that has to be financed by borrowing (see PUBLIC-SECTOR BORROWING REQUIREMENT).

As well as serving as the instrument of government planning of its own economic and social commitments, the budget plays an integral role in the application of fiscal policy, specifically the operation of DEMAND MANAGEMENT policies to reduce unemployment and inflation. See KEYNESIAN ECONOMICS, PROGRESSIVE TAXATION.

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