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Chapter 1 - Introduction
Public Economics
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Public Finance Defined
? Public finance is about the taxing and spending activities
of the government.
? Also known as,public sector economics” or,public
economics.”
? Focus is on microeconomic functions of government –
polices that affect overall unemployment or price levels are
left for macroeconomics.
? Scope of public finance unclear – government has role in
many activities,but focus will be on taxes and spending.
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Public Finance and Ideology
? How should a government function in economic sphere?
? Organic view – community stressed above individual,
Goals of society set by the state.
? Mechanistic view – government is a contrivance created
by individuals to better achieve their individual goals,
Individual,not group,is at center stage.
– This is the viewpoint taken in the textbook.
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Government at a Glance
? Legal framework
– Federal government
? No real constraints on spending in Constitution
? Taxes must come originate in House of Representatives.
– Equal tax rates across states.
– Income tax came from 16th amendment to Constitution.
? Can run budget deficits
– State and local government
? Can impose spending / taxing restrictions on itself.
? Many states cannot run budget deficits.
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Government at a Glance
? Size of government – how to measure?
– Number of government employees
– Annual expenditures
? Purchases of goods and services,transfers,
and interest payments
? Unified budget – In 2001,$1.6 trillion spent
at federal level,and another $1.3 trillion at
state and local levels.
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Government at a Glance
? These numbers ignore activities that do
not have explicit outlays,but substantial
effects on resource allocation.
– Regulations,for example.
– Conceivably,could construct a,regulatory
budget” to account for these costs,but
difficult to compute.
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Government Expenditure
? Some numbers
? Annual expenditures have grown by a factor of
290 from 1929-2001.
– Inflation,population also changing,Real,per-capita
expenditure still 10 times as large.
– As percentage of GDP,government expenditure was
9.6% in 1929,and 29.3% in 2001.
Table 1.1
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Government Expenditure
? United States versus other developed countries.
? U.S,public sector is quite small compared to
Sweden or France,and smaller than all the
countries listed.
? Although large,the U.S,government is small in
relative terms,More reliance on private sector.
Table 1.2
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Government Expenditure
? In 1965
? National defense almost
half of federal
expenditure
? Social security small &
Medicare non-existent
? Debt payments roughly
constant.
? In 2001
? Defense was less than
one-fifth
? Social security now
largest spending item,
Medicare large &
growing
Figure 1.1
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Government Expenditure
? Much of the government budget consists of
entitlement programs – programs with costs
determined by number of people who qualify.
– Social Security,Medicare,welfare
? Three-quarters of the federal budget is relatively
uncontrollable,because of these entitlements.
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Government Expenditure
? Federal government responsible for about 51%
of direct expenditure.
? State governments responsible for 21%.
? Local governments responsible for 28%.
– State & local governments primarily responsible for
police & fire protection,education,transportation,and
some welfare programs.
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Government Revenues
? Federal taxes mainly consist of individual
income taxes,payroll taxes,and corporate
taxes.
– Personal income tax 46% of collections.
? State & local taxes mainly consist of property
taxes,sales taxes,individual income taxes,and
grants from federal government.
– Less reliance now on property tax,more on income
tax.
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Recap of Introduction
? Public finance,definition
? Views of government
? Government expenditure
? Government revenue