Chapter 1-Introduction Public economics
1 Chapter 1 - Introduction Public Economics
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
2 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
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
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
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 1 6th amendment to constitution Can run budget deficits State and local government Can impose spending/taxing restrictions on itself Many states cannot run budget deficits
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
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
5 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
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
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
Government Expenditure Some numbers Annual expenditures have grown by a factor of 290from1929-2001 Inflation, population also changing. Real, per-capita expenditure still 10 times as large As percentage of GDP, government expenditure was 9.6%in1929,and29.3%in2001
7 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 Table 1. State, local, and federal government expenditures (selected years) Total expenditures 200/ Dollars 200/ Dollars Percent (billions) (billions) per Capita of GDP 1929 10 118 9.9% 1940 237 1,794 18.8 1950 61 428 2,812 20.7 1960 591 3,272 22.7 1970 1,080 5,268 27.6 1980 81 1.557 6.839 1990 1,778 2,249 30.6 2000 2.776 2,842 10.061 28.3 2001 2,951 2,951 10.335 29.3 Conversion to 2001 dollars done using the GDP deflator. SOURCE: Calculations based on Economic Report of the President, 2003(Washington, DC: US Government Printing office.2003).pp.276.280.317,373
Table 1.1
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
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 listed. • Although large, the U.S. government is small in relative terms. More reliance on private sector
Table 1.2 Table 1.2 Government expenditures as a percentage of gross domestic prod (selected countries australia 31.0% 38.3% 374 Sweden france 494 United Kingdon 38.8 erman 44.5 SOURCE: U.S. Census Bureau, Statistical Abstract of the United States, 2002, p. 838. Figures are for 200
Table 1.2