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PUBLIC FINANCE-INTRO
BSC AGRI 2PAE
UNIT 4
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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.
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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.
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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
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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
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Source
• 1. Elementary economic theory - K.K. Dewettand J.D. Verma
• 2. International Economics - B. Mishra
• 3. Fundamentals of Agricultural Economics -A.N. Sadhu and A. Singh
• 4. Economics - Paul A. Samelson and W.D. Nordhans (Pearson Publications)