Introduction Public Finance Dr. Adnan Alshiha

1. Public financePublic finance
Dr. AlshihaDr. Alshiha
IntroductionIntroduction
Public FinancePublic Finance
Dr. Adnan AlshihaDr. Adnan Alshiha

2. What Is Public Finance?What Is Public Finance?
 Public FinancePublic Finance , field of economics, field of economics
concerned with how governments raiseconcerned with how governments raise
money, how that money is spent, and themoney, how that money is spent, and the
effects of these activities on the economyeffects of these activities on the economy
and on societyand on society

3. What Is Public Finance?What Is Public Finance?
 Public financePublic finance studies howstudies how
governments at all levels—national, state,governments at all levels—national, state,
and local—provide the public with desiredand local—provide the public with desired
services and how they secure the financialservices and how they secure the financial
resources to pay for these services.resources to pay for these services.

4. What Is Public Finance?What Is Public Finance?
 In many industrialized countries, spendingIn many industrialized countries, spending
and taxation by the government form aand taxation by the government form a
large portion of the nation's total economiclarge portion of the nation's total economic
activity.activity.
 For example, total government spendingFor example, total government spending
in the United States equals about 40in the United States equals about 40
percent of the nation's gross domesticpercent of the nation's gross domestic
productproduct

5. Why Public Finance IsWhy Public Finance Is
Needed?Needed?
 Governments provideGovernments provide public goodspublic goods——
government-financed items and servicesgovernment-financed items and services
such as roads, military forces, lighthouses,such as roads, military forces, lighthouses,
and street lights.and street lights.
 Private citizens would not voluntarily payPrivate citizens would not voluntarily pay
for these services, and thereforefor these services, and therefore
businesses have no incentive to producebusinesses have no incentive to produce
them.them.

6. Why Public Finance IsWhy Public Finance Is
Needed?Needed?
 Public finance also enables governmentsPublic finance also enables governments
to correct or offset undesirable side effectsto correct or offset undesirable side effects
of a market economy.of a market economy.
 These side effects are calledThese side effects are called spilloversspillovers oror
externalities.externalities.
 Example: households and industries mayExample: households and industries may
generate pollution and release it into thegenerate pollution and release it into the
environment without considering theenvironment without considering the
adverse effect pollution has on others.adverse effect pollution has on others.

7. Why Public Finance IsWhy Public Finance Is
Needed?Needed?
 Pollution is a spillover because it affectsPollution is a spillover because it affects
people who are not responsible for it.people who are not responsible for it.
 To correct a spillover, governments canTo correct a spillover, governments can
encourage or restrict certain activities.encourage or restrict certain activities.
 For example, governments can sponsorFor example, governments can sponsor
recycling programs to encourage lessrecycling programs to encourage less
pollution, pass laws that restrict pollution,pollution, pass laws that restrict pollution,
or impose charges or taxes on activitiesor impose charges or taxes on activities
that cause pollution.that cause pollution.

8. Why Public Finance IsWhy Public Finance Is
Needed?Needed?
 Public finance provides governmentPublic finance provides government
programs that moderate the incomes ofprograms that moderate the incomes of
the wealthy and the poor.the wealthy and the poor.
 These programs include social security,These programs include social security,
welfare, and other social programs.welfare, and other social programs.
 For example, some elderly people orFor example, some elderly people or
people with disabilities require financialpeople with disabilities require financial
assistance because they cannot work.assistance because they cannot work.

9. Why Public Finance IsWhy Public Finance Is
Needed?Needed?
 Governments redistribute income byGovernments redistribute income by
collecting taxes from their wealthiercollecting taxes from their wealthier
citizens to provide resources for theircitizens to provide resources for their
needy ones.needy ones.
 The taxes fund programs that help supportThe taxes fund programs that help support
people with low incomes.people with low incomes.

10. Public SpendingPublic Spending
 Each year national, Provincial, and localEach year national, Provincial, and local
governments create a budget to determinegovernments create a budget to determine
how much money they will spend duringhow much money they will spend during
the upcoming year.the upcoming year.
 The budget determines which publicThe budget determines which public
goods to produce, which spillovers togoods to produce, which spillovers to
correct, and how much assistance tocorrect, and how much assistance to
provide to financially disadvantagedprovide to financially disadvantaged
people.people.

11. Public SpendingPublic Spending
 The chief administrator of the government—suchThe chief administrator of the government—such
as the prime minister, governor, or mayor—as the prime minister, governor, or mayor—
proposes the budget.proposes the budget.
 The legislature—such as the parliament,The legislature—such as the parliament,
Provincial council, or Municipality council—Provincial council, or Municipality council—
ultimately must pass the budget.ultimately must pass the budget.
 The legislature often changes the size andThe legislature often changes the size and
composition of the budget, but it must not makecomposition of the budget, but it must not make
changes that the chief administrator will rejectchanges that the chief administrator will reject
and veto.and veto.

12. Government SpendingGovernment Spending
 Government spending takes two forms:Government spending takes two forms:
 Exhaustive spendingExhaustive spending
 Transfer spending.Transfer spending.

13. Government SpendingGovernment Spending
 Exhaustive spending:Exhaustive spending: refers torefers to
purchases made by a government for thepurchases made by a government for the
production of public goods.production of public goods.
 For example, to construct a new harborFor example, to construct a new harbor
the government buys and uses resourcesthe government buys and uses resources
from the economy, such as labor and rawfrom the economy, such as labor and raw
materials.materials.

14. Government SpendingGovernment Spending
 Transfer spendingTransfer spending when governmentwhen government
transfers income to people to help them supporttransfers income to people to help them support
themselves.themselves.
 Transfers can be one of two kinds:Transfers can be one of two kinds:
 cashcash oror in-kind.in-kind.
 Cash transfersCash transfers are cash payments, such asare cash payments, such as
social security checks and welfare payments.social security checks and welfare payments.
 In-kind transfersIn-kind transfers involve no cash paymentsinvolve no cash payments
but instead transfer goods or services tobut instead transfer goods or services to
recipients. Examples of in-kind transfers includerecipients. Examples of in-kind transfers include
food stamp coupons and Medicare.food stamp coupons and Medicare.

15. Public RevenuePublic Revenue
 Governments must have funds, orGovernments must have funds, or
revenue, to pay for their activities.revenue, to pay for their activities.
 Governments generate some revenue byGovernments generate some revenue by
charging fees for the services theycharging fees for the services they
provide, such as entrance fees at nationalprovide, such as entrance fees at national
parks or tolls for using a highway.parks or tolls for using a highway.
 However, most government revenueHowever, most government revenue
comes from taxes, such as income taxes,comes from taxes, such as income taxes,
capital taxes,capital taxes, andand salessales andand excise taxes.excise taxes.

16. Public RevenuePublic Revenue
 An important source of tax revenue in mostAn important source of tax revenue in most
industrialized countries is the income or payrollindustrialized countries is the income or payroll
tax, also known as thetax, also known as the personal income tax.personal income tax.
 Income taxes are imposed on labor or activitiesIncome taxes are imposed on labor or activities
that generate income, such as wages orthat generate income, such as wages or
salaries.salaries.
 In the United States, income taxes account forIn the United States, income taxes account for
about half of the total revenue of local, state,about half of the total revenue of local, state,
and federal governments combined.and federal governments combined.

17. Public RevenuePublic Revenue
 Another important source of government revenueAnother important source of government revenue
is the capital tax.is the capital tax.
 Capital includes items or facilities that generateCapital includes items or facilities that generate
profits, such as factories, business machinery,profits, such as factories, business machinery,
and real estate.and real estate.
 Some types of capital taxes are known asSome types of capital taxes are known as
“profits” taxes.“profits” taxes.
 One kind of capital tax used by the federalOne kind of capital tax used by the federal
government in the United States is thegovernment in the United States is the corporatecorporate
income tax.income tax.
 AA property taxproperty tax is a capital tax used by state andis a capital tax used by state and
local governments. Property taxes are levied onlocal governments. Property taxes are levied on
items such as houses or boats.items such as houses or boats.

18. Public RevenuePublic Revenue
 Sales and excise taxes are also a major sourceSales and excise taxes are also a major source
of government tax revenue.of government tax revenue.
 Many state and local governments levy a salesMany state and local governments levy a sales
tax on the purchase of certain items.tax on the purchase of certain items.
 Consumers usually pay a percentage of theConsumers usually pay a percentage of the
sales price as the tax.sales price as the tax.
 Excise taxes are used by all levels ofExcise taxes are used by all levels of
government.government.
 An excise tax is levied on a specific product,An excise tax is levied on a specific product,
such as alcohol, cigarettes, or gasoline.such as alcohol, cigarettes, or gasoline.

19.  In Canada and many European, SouthIn Canada and many European, South
American, and Asian countries, aAmerican, and Asian countries, a value-addedvalue-added
tax (VAT)tax (VAT) provides significant revenue.provides significant revenue.
 The VAT is levied on the value added to aThe VAT is levied on the value added to a
product during production as its components areproduct during production as its components are
assembled into final goods.assembled into final goods.
 For example, a clothing manufacturer mightFor example, a clothing manufacturer might
spend $500 on fabric, thread, zippers, and otherspend $500 on fabric, thread, zippers, and other
goods required to make dresses. Thegoods required to make dresses. The
manufacturer then adds $1000 to cover themanufacturer then adds $1000 to cover the
costs of labor and the use of machines andcosts of labor and the use of machines and
equipment and sells the dresses for a total ofequipment and sells the dresses for a total of
$1500. The value-added tax is paid on this$1500. The value-added tax is paid on this
$1000.$1000.

20. How Public FinanceHow Public Finance
Affects the Economy?Affects the Economy?
 Government spending and taxation directlyGovernment spending and taxation directly
affect the overall performance of the economy.affect the overall performance of the economy.
 For example, if the government increasesFor example, if the government increases
spending to build a new highway, construction ofspending to build a new highway, construction of
the highway will create jobs. Jobs create incomethe highway will create jobs. Jobs create income
that people spend on purchases, and thethat people spend on purchases, and the
economy tends to grow.economy tends to grow.
 The opposite happens when the governmentThe opposite happens when the government
increases taxes. Households and businessesincreases taxes. Households and businesses
have less of their income to spend, theyhave less of their income to spend, they
purchase fewer goods, and the economy tendspurchase fewer goods, and the economy tends
to shrink.to shrink.

21. Fiscal PolicyFiscal Policy
 A government's fiscal policy is the way theA government's fiscal policy is the way the
government spends and taxes to influencegovernment spends and taxes to influence
the performance of the economy.the performance of the economy.

22. Government DeficitsGovernment Deficits
 When the government spends more than itWhen the government spends more than it
receives, it runs areceives, it runs a deficit.deficit.
 Governments finance deficits by borrowingGovernments finance deficits by borrowing
money.money.
 Deficit spending—that is, spending fundsDeficit spending—that is, spending funds
obtained by borrowing instead of taxationobtained by borrowing instead of taxation
—can be helpful for the economy.—can be helpful for the economy.

23. ExampleExample
 when unemployment is high, the governmentwhen unemployment is high, the government
can undertake projects that use workers whocan undertake projects that use workers who
would otherwise be idle.would otherwise be idle.
 The economy will then expand because moreThe economy will then expand because more
money is being pumped into it.money is being pumped into it.
 However, deficit spending also can harm theHowever, deficit spending also can harm the
economy.economy.
 When unemployment is low, a deficit may resultWhen unemployment is low, a deficit may result
in rising prices, or inflation. The additionalin rising prices, or inflation. The additional
government spending creates more competitiongovernment spending creates more competition
for scarce workers and resources and thisfor scarce workers and resources and this
inflates wages and pricesinflates wages and prices