Importance of Public Finance.

The expenditure and revenue policies of the government have far-reaching
consequences in an economy. These policies affect different fields of the economy
including production, distribution, consumption, price level, foreign trade, saving,
investment, etc. Following are some of the importance of public finance in an
economy:

        1.      Productive use of scarce resources: The government can channel the use of
resources from unproductive sectors to productive sectors using its revenue
and expenditure.
For E.g. the government can discourage unproductive activities by taxing them
heavily and encourage productive activities by providing tax exemptions and
subsidies.
2. Capital formation and economic growth: The expenditure and revenue
policies of the government can accelerate the rate of economic growth by
lifting up the rate of capital formation.
3. Reduction of poverty and inequality: The government can reduce the gap
between the rich and the poor by implementing an appropriate fiscal policy.
For E.g. it can tax the rich at progressively higher rates and use the revenue thus
collected for the welfare of the poor and the underprivileged.
4. Economic stability: Public finance is an indispensable tool to maintain
economic stability by controlling both inflation and deflation in the economy.
It the economy is suffering from a very high rate of inflation, the government
can control it by reducing its expenditure and increasing its tax revenue from
direct taxes.
5. Provision of public goods and infrastructure: Public goods and infrastructures
like law and order, health, education, roads, electricity, safe drinking water,
irrigation, etc. are possible only through big government spending