Finance is an offshoot of economics, which deals with the arrangement, management and deployment of money in an optimum way. It has two main branches – private finance and public finance. Private Finance is all about the management of finances at an individual level.
On the other hand, public finance is a field of finance in which one studies the role of government and the impact of the various activities undertaken by the government, in an economy.
One of the main difference between private finance and public finance lies in the power of an eminent domain. This means that when we talk about private finance the sources of income for an individual are confined, however, in case of public finance, the government can use its power and impose taxes, mint coins and print currency notes.
Come let’s discuss the difference between private finance and public finance.
Content: Private Vs Public Finance
|Basis for Comparison||Private Finance||Public Finance|
|Meaning||Private finance is the study of income and expenditure, borrowings, etc. of individuals, households and business firms.||Public finance is concerned with the revenue/incomes and expenditure, borrowings, etc. of the economy or government.|
|Adjustments||Individuals adjust their spending as per their income.||Government adjust the income, according to the size of expenditure on different segments.|
|Objective||To maximize profit.||To promote social welfare.|
|Nature of Budget||An individual attempts to maintain a surplus budget.||The government prefers a deficit budget.|
|Financial Transaction||Transactions are kept secret.||Transactions are open and known to all.|
|Time Horizon||No fixed period||One year|
Definition of Private Finance
When the optimization of finances is undertaken at a micro-level, it is called Private Finance.
So, private finance is the management and analysis of the financial activities of an individual, household, business enterprise, etc. which may cover savings, investments, insurance, banking, personal loans, tax management, credibility, fixed deposits, retirement planning, real estate planning and so forth.
It involves the division or application of income on various items, based on their priority with the help of a budget, savings, protection and expenses, and after taking into account multiple factors such as risk involved, needs, future prospects, etc.
It aims at meeting personal financial goals, which can be anything such as saving for the future, buying a property, travelling abroad, retirement planning, etc.
Definition of Public Finance
Public Finance refers to that part of finance which is related to the financial activities of the public authorities at different levels, i.e. centre, state and local, and the alternative ways to finance the expenditure of the government. It is also called as public sector economics, as the development of nation solely depends on it.
It includes – public revenue, public expenditure, public debt, financial administration, budget, accounts, auditing and financial control. The analysis of public finance aims at understanding the consequences of government spending on different activities, regulations, taxes and borrowing on the wages, investment and disbursement of income.
It has three main functions:
- Optimum allocation of resources
- Distribution of Income
- Economic Stabilization
Public finance deals with – How the government collects or raises funds? How are the funds utilized? How they incur expenses? How is the process of collection and application of funds administered? What facilities, subsidies, welfare payments and utilities are provided to the masses?
Key Differences Between Private and Public Finance
The difference between private and public finance can be discussed in the points below:
- Public Finance refers to that branch of finance which studies government financial dealings, including government spending, borrowing, deficits and taxation. On the flip side, by Private Finance, we mean the study and analysis of the income, expenditure, and debt of private individuals, firms and household.
- In public finance, the government ascertains the total expenditure to be made on different sectors first and then identifies the sources from which the revenue can be generated to meet those expenses. On the contrary, in the case of private finance, any individual, household, or business enterprise decides the quantum of expenditure to be made, on the basis of his/her income.
- The main objective of private finance is to manage the finances in such a way which helps in earning maximum profit. As against, the primary objective of public finance is the welfare of the general public.
- In private finance, the individual seeks to maintain a surplus budget by spending only a certain portion of his income. On the contrary, in public finance, the government usually frames a deficit budget, during the phase of economic development, war or depression.
- In private finance, the individual’s income and his/her expenditure is his /her own affair, and so it can be kept secret. Conversely, in public finance, the government uses public money, for providing public utility services, that is why it cannot be kept secret.
- Public finance is related to the yearly budget of the government, which is fixed, but private finance is related to daily, weekly or monthly budget of an individual or household.
- Public finance is relatively more elastic than private finance because an individual cannot make sudden and huge changes in his income, but the same is possible in case of public finance.
In private finance, the individual or household can postpone or avoid certain expenses if they are unnecessary or avoidable. However, in the case of public finance, the government cannot avoid or delay certain expenditures, especially expenditure on defence, agriculture, research or public administration.