Public finance is the branch of economics that related to public expenditure, public income and public debt. Fiscal policy is the policy decisions of the Government regarding public finance. Together these two elements determine a country’s progress.
The growth of any country is conventionally measured in the growth of its Gross Domestic Product (GDP), it is the total value of all the goods produced and services provided in an economy in a year. A related dynamic is the operation of demand and supply in the economy. The public finance and fiscal policy help in adjusting consumption patterns in the economy, and thereby facilitating a healthy growth of the country.
For an economy to operate without large troubles it is necessary that demand from the consumers and supply from the producers be equal to each other, as much as possible. This equilibrium is often unbalanced, creating situations of excess demand (demand exceeds supply) or excess supply (supply exceeds demand). Such situations are harmful to the economy in the long run. The Government uses its tools of public finance and fiscal policy to bring back the equilibrium in demand and supply.
For example, when there is excess demand the government increases tax rates to arrest the excess money in the hands of the public, so as to reduce the demand. When there is excess supply, the government does the opposite, it reduces tax rates to increase the money in the hands of the public in order to increase demand to reach the supply level. Thus, the government through its tools of public finance and fiscal policy intervene in the economy to ease situations before it turns detrimental to the country’s progress.
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