Public finance involves the taxing and spending activities of government. It focuses on the microeconomic functions of government and examines taxes and spending. Government ideology can view the community or individual as most important. In the US, the federal government has more spending flexibility than states. Government spending has increased significantly as a percentage of GDP from 1929 to 2001. Major items of federal spending have shifted from defense to entitlements like Social Security and Medicare. Revenues mainly come from individual income taxes, payroll taxes, and corporate taxes at the federal level and property, sales, and income taxes at the state and local levels.

1. PUBLIC FINANCE-INTRO
BSC AGRI 2
PAE
UNIT 4
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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.
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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.
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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.
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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.
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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.
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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.
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8. Table 1.1

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.
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10. Table 1.2

11. 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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12. Figure 1.1

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.
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14. 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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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
federal government.
– Less reliance now on property tax, more on income tax.
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16. Recap of Introduction
• Public finance, definition
• Views of government
• Government expenditure
• Government revenue
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17. Source
• 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)