2. Public Finance Defined
• Public finance is about the taxing and spending activities of the
• 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
• Scope of public finance unclear – government has role in many
activities, but focus will be on taxes and spending.
3. 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.
4. 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.
5. Government at a Glance
• Size of government – how to measure?
– Number of government employees
– Annual expenditures
• Purchases of goods and services, transfers, and
• Unified budget – In 2001, $1.6 trillion spent at
federal level, and another $1.3 trillion at state and
6. 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.
7. Government Expenditure
• Some numbers
• Annual expenditures have grown by a factor of 290
– 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.
9. 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
• Although large, the U.S. government is small in
relative terms. More reliance on private sector.
11. Government Expenditure
• In 1965
• National defense almost half
of federal expenditure
• Social security small &
• Debt payments roughly
• In 2001
• Defense was less than one-
• Social security now largest
spending item, Medicare large
13. 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.
14. Government Expenditure
• Federal government responsible for about 51% of
• State governments responsible for 21%.
• Local governments responsible for 28%.
– State & local governments primarily responsible for police
& fire protection, education, transportation, and some
15. 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
– Less reliance now on property tax, more on income tax.
16. Recap of Introduction
• Public finance, definition
• Views of government
• Government expenditure
• Government revenue
• 1. Elementary economic theory - K.K. Dewett
and 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)