Similarities
The following are the similarities between public and private finance.
i) Objective. Both public and private finance aim at the satisfaction of human wants. The objective of public finance is to
satisfy social wants and that of private finance to satisfy individual wants.
ii) Principles. Both government and individuals follows similar principles. The government follows the principle of maximum
social benefit while spending its income. Similarly, an individual follows the principle of maximum satisfaction when
spending out of his given income.
iii) Income, Expenditure and Borrowing. Both government and individual have similar but limited sources of income. Both earn
their incomes. Both can spend in anticipation of receiving incomes. If their incomes are insufficient to meet their expenditures, both borrow. Both have also to repay the borrowed money.
iv) Policies. Both government and private companies (and even individuals) follow sound or unsound (rational or irrational) financial policies. If the government follows sound financial policies, it maximize social welfare. Similarly, an individual maximizes his welfare. The opposite happens in the case of unsound financial policies.
v) Administration. Both government and private companies require efficient administration for their success. If the government administration is corrupt and inefficient, it will lead to misuse and wastage of finances. Similar is the case with a private company.
Differences
The following are the main points of differences or dissimilari¬ties between public and private finance.
i) Adjustment between Income and Expenditure. An individual determines his expenditure on the basis of his income. He prepares his family budget on his expected income during the month. On the other hand, the government first estimates about its expenditure and then finds out means to raise the necessary income. As pointed out by Bastable, ‘’The individual says, ‘I can spend so much’, the Finance Minister says, ‘I have to raise so much”. But this difference between private and public finance is not always rigid. The opposite may happen under certain circumstances. For example, an individual adjusts his income to expenditure when he marries and then has children. He works harder in order to increase his income. Similarly, the government adjusts its expenditure to income during recession. It cuts down its expenditure on various programmes and projects when its income falls.
ii) Elasticity. There is greater elasticity in public finance than in private finance. The government has more resources of income whereas the resources of an individual are limited. The government “has the whole wealth of the community on which to draw, in addition to the possibility of raising external loans.” It has many resources such as taxes, fees, assessments, internal and external borrowings, and printing notes. On the other, the income of an individual is limited to his current income, past savings and borrowings.
iii) Motives. There are also differences in motives between private and public finance. An individual or a firm has the profit motive whereas the government has the welfare motive. An individual always tries to save and a firm to earn profit. But there are no such considerations on the part of the government, except the public welfare. However, there are some public enterprises which are run on profits that are utilized for public welfare.
iv) Expenditure. There are differences in the nature of expenditure between the two. An individual’s expenditure is governed by his habits, customs, fashions, etc. On the other hand, the government expenditure depends on its economic and social policies, like removing unemployment and poverty, reducing income inequalities, providing infrastructure facilities, etc.
v) Compulsion. There is compulsion in public finance. People have to pay taxes. If they do not pay, they are punished by fine and imprisonment. But an individual or firm cannot force anybody to pay him money. He can file a suit in the court. But even then he may not receive his money back. The same is the case with loans. The government can force the people to lend it during war or emergency. But an individual cannot compel any person to lend him money.
vi) Law of Equi-rmarginal Utility. An individual spends his limited income on various goods and services in such a manner that the MUs of these expenditures- are equal. The government also tries to maximize social welfare based on the law of equi-marginal utility. But often the government cannot follow this principle because a large volume of government expenditure is of a fixed nature which cannot be changed to equalize marginal utilities. Further, the government expenditure may be influenced by non-economic considerations such as political pulls and pressures that do not maximize social welfare.
vii) Present Vs Future. An individual is more concerned with his present needs and tries to satisfy them. Life being uncertain and short, he has his immediate I gain or profit in view. On the other hand, government is a permanent organization only the ruling party changes. It is concerned not only with the welfare of present generation but also with future generations. If, therefore, undertakes and spend on those activities which also benefit future generations.
viii) Budgeting. The duration and nature of private and public budgets also differ. An individual may have a weekly or monthly budget. On the other hand a public budget is for one fiscal year. An individual tries to have a surplus budget in order to save same money for the future. He can have a deficit budget occasionally by borrowing from somebody. But a government can have a surplus, deficit or balanced budget. Further, the government budget is passed by the parliament. But the budget of an individual or firm is a private affair without any controlling authority.
ix) Secrecy Vs Openness There is secrecy in private finance; No individual wants to reveal his income and saving, so does a firm about its accounts. On the contrary, the government budget is an open public document, which is, commented, debated and publicized at various forums.
x) Bankrupt. An individual or firm can be bankrupt. But a government cannot go bankrupt because it can borrow from international agencies and also print notes. It can only face a financial crisis, deflationary (recessionary) and inflationary (boom) pressures by an appropriate combination of expenditure, borrowing and taxation policies.
Judiesiz answered the question on July 6, 2018 at 23:56