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Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

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Public finance Public finance Dr. Alshiha Dr. Alshiha Introduction Introduction Public Finance Public Finance Dr. Adnan Alshiha Dr. Adnan Alshiha
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Page 1: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

Public financePublic finance Dr. AlshihaDr. Alshiha

IntroductionIntroduction

Public FinancePublic Finance

Dr. Adnan AlshihaDr. Adnan Alshiha

Page 2: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

What Is Public Finance?What Is Public Finance?

Public FinancePublic Finance, field of economics , field of economics concerned with how governments concerned with how governments raise money, how that money is raise money, how that money is spent, and the effects of these spent, and the effects of these activities on the economy and on activities on the economy and on society society

Page 3: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

What Is Public Finance?What Is Public Finance?

Public financePublic finance studies how studies how governments at all levels—national, governments at all levels—national, state, and local—provide the public state, and local—provide the public with desired services and how they with desired services and how they secure the financial resources to pay secure the financial resources to pay for these services. for these services.

Page 4: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

What Is Public Finance?What Is Public Finance?

In many industrialized countries, In many industrialized countries, spending and taxation by the spending and taxation by the government form a large portion of government form a large portion of the nation's total economic activity. the nation's total economic activity.

For example, total government For example, total government spending in the United States equals spending in the United States equals about 40 percent of the nation's about 40 percent of the nation's gross domestic productgross domestic product

Page 5: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

Why Public Finance Is Why Public Finance Is Needed?Needed?

Governments provide Governments provide public goodspublic goods——government-financed items and government-financed items and services such as roads, military services such as roads, military forces, lighthouses, and street lights. forces, lighthouses, and street lights.

Private citizens would not voluntarily Private citizens would not voluntarily pay for these services, and therefore pay for these services, and therefore businesses have no incentive to businesses have no incentive to produce them.produce them.

Page 6: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

Why Public Finance Is Why Public Finance Is Needed?Needed?

Public finance also enables governments Public finance also enables governments to correct or offset undesirable side to correct or offset undesirable side effects of a market economy. effects of a market economy.

These side effects are called These side effects are called spilloversspillovers or or externalities.externalities.

Example: households and industries Example: households and industries may generate pollution and release it may generate pollution and release it into the environment without into the environment without considering the adverse effect pollution considering the adverse effect pollution has on others. has on others.

Page 7: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

Why Public Finance Is Why Public Finance Is Needed?Needed?

Pollution is a spillover because it affects Pollution 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 can To correct a spillover, governments can encourage or restrict certain activities. encourage or restrict certain activities.

For example, governments can sponsor For example, governments can sponsor recycling programs to encourage less recycling programs to encourage less pollution, pass laws that restrict pollution, pollution, pass laws that restrict pollution, or impose charges or taxes on activities or impose charges or taxes on activities that cause pollution.that cause pollution.

Page 8: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

Why Public Finance Is Why Public Finance Is Needed?Needed?

Public finance provides government Public finance provides government programs that moderate the incomes of programs 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 or For example, some elderly people or people with disabilities require financial people with disabilities require financial assistance because they cannot work. assistance because they cannot work.

Page 9: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

Why Public Finance Is Why Public Finance Is Needed?Needed?

Governments redistribute income by Governments redistribute income by collecting taxes from their wealthier collecting taxes from their wealthier citizens to provide resources for their citizens to provide resources for their needy ones. needy ones.

The taxes fund programs that help The taxes fund programs that help support people with low incomes.support people with low incomes.

Page 10: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

Public SpendingPublic Spending

Each year national, Provincial, and Each year national, Provincial, and local governments create a budget to local governments create a budget to determine how much money they will determine how much money they will spend during the upcoming year. spend during the upcoming year.

The budget determines which public The budget determines which public goods to produce, which spillovers to goods to produce, which spillovers to correct, and how much assistance to correct, and how much assistance to provide to financially disadvantaged provide to financially disadvantaged people. people.

Page 11: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

Public SpendingPublic Spending

The chief administrator of the governmentThe chief administrator of the government—such as the prime minister, governor, or —such as the prime minister, governor, or mayor—proposes the budget. mayor—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 and The legislature often changes the size and composition of the budget, but it must not composition of the budget, but it must not make changes that the chief administrator make changes that the chief administrator will reject and veto.will reject and veto.

Page 12: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

Government SpendingGovernment Spending

Government spending takes two Government spending takes two forms: forms:

Exhaustive spendingExhaustive spending Transfer spending.Transfer spending.

Page 13: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

Government SpendingGovernment Spending

Exhaustive spending:Exhaustive spending: refers to refers to purchases made by a government for purchases made by a government for the production of public goods. the production of public goods.

For example, to construct a new For example, to construct a new harbor the government buys and harbor the government buys and uses resources from the economy, uses resources from the economy, such as labor and raw materials. such as labor and raw materials.

Page 14: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

Government SpendingGovernment Spending Transfer spendingTransfer spending when government when government

transfers income to people to help them transfers income to people to help them support themselves. support themselves.

Transfers can be one of two kinds: Transfers can be one of two kinds: cashcash or or in-kind.in-kind. Cash transfersCash transfers are cash payments, such as are cash payments, such as

social security checks and welfare payments. social security checks and welfare payments. In-kind transfersIn-kind transfers involve no cash payments involve no cash payments

but instead transfer goods or services to but instead transfer goods or services to recipients. Examples of in-kind transfers recipients. Examples of in-kind transfers include food stamp coupons and Medicare. include food stamp coupons and Medicare.

Page 15: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

Public Revenue Public Revenue Governments must have funds, or Governments must have funds, or

revenue, to pay for their activities. revenue, to pay for their activities. Governments generate some revenue Governments generate some revenue

by charging fees for the services they by charging fees for the services they provide, such as entrance fees at provide, such as entrance fees at national parks or tolls for using a national parks or tolls for using a highway. highway.

However, most government revenue However, most government revenue comes from taxes, such as income comes from taxes, such as income taxes, taxes, capital taxes,capital taxes, and and salessales and and excise taxes.excise taxes.

Page 16: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

Public Revenue Public Revenue

An important source of tax revenue in An important source of tax revenue in most industrialized countries is the income most industrialized countries is the income or payroll tax, also known as the or payroll tax, also known as the personal personal income tax.income tax.

Income taxes are imposed on labor or Income taxes are imposed on labor or activities that generate income, such as activities that generate income, such as wages or salaries. wages or salaries.

In the United States, income taxes account In the United States, income taxes account for about half of the total revenue of local, for about half of the total revenue of local, state, and federal governments combined. state, and federal governments combined.

Page 17: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

Public Revenue Public Revenue Another important source of government Another important source of government

revenue is the capital tax. revenue is the capital tax. Capital includes items or facilities that Capital includes items or facilities that

generate profits, such as factories, generate profits, such as factories, business machinery, and real estate. business machinery, and real estate.

Some types of capital taxes are known as Some types of capital taxes are known as “profits” taxes. “profits” taxes.

One kind of capital tax used by the federal One kind of capital tax used by the federal government in the United States is the government in the United States is the corporate income tax.corporate income tax.

A A property taxproperty tax is a capital tax used by state is a capital tax used by state and local governments. Property taxes are and local governments. Property taxes are levied on items such as houses or boats.levied on items such as houses or boats.

Page 18: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

Public Revenue Public Revenue

Sales and excise taxes are also a major Sales and excise taxes are also a major source of government tax revenue. source of government tax revenue.

Many state and local governments levy a Many state and local governments levy a sales tax on the purchase of certain items. sales tax on the purchase of certain items.

Consumers usually pay a percentage of Consumers usually pay a percentage of the sales price as the tax. the sales price as the tax.

Excise taxes are used by all levels of Excise taxes are used by all levels of government. government.

An excise tax is levied on a specific An excise tax is levied on a specific product, such as alcohol, cigarettes, or product, such as alcohol, cigarettes, or gasoline. gasoline.

Page 19: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

In Canada and many European, South In Canada and many European, South American, and Asian countries, a American, and Asian countries, a value-value-added tax (VAT)added tax (VAT) provides significant provides significant revenue. revenue.

The VAT is levied on the value added to a The VAT is levied on the value added to a product during production as its product during production as its components are assembled into final goods. components are assembled into final goods.

For example, a clothing manufacturer might For example, a clothing manufacturer might spend $500 on fabric, thread, zippers, and spend $500 on fabric, thread, zippers, and other goods required to make dresses. The other goods required to make dresses. The manufacturer then adds $1000 to cover the manufacturer then adds $1000 to cover the costs of labor and the use of machines and costs of labor and the use of machines and equipment and sells the dresses for a total equipment and sells the dresses for a total of $1500. The value-added tax is paid on of $1500. The value-added tax is paid on this $1000.this $1000.

Page 20: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

How Public Finance How Public Finance Affects the Economy?Affects the Economy?

Government spending and taxation directly Government spending and taxation directly affect the overall performance of the affect the overall performance of the economy. economy.

For example, if the government increases For example, if the government increases spending to build a new highway, spending to build a new highway, construction of the highway will create jobs. construction of the highway will create jobs. Jobs create income that people spend on Jobs create income that people spend on purchases, and the economy tends to grow. purchases, and the economy tends to grow.

The opposite happens when the government The opposite happens when the government increases taxes. Households and businesses increases taxes. Households and businesses have less of their income to spend, they have less of their income to spend, they purchase fewer goods, and the economy purchase fewer goods, and the economy tends to shrink. tends to shrink.

Page 21: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

Fiscal PolicyFiscal Policy

A government's fiscal policy is the A government's fiscal policy is the way the government spends and way the government spends and taxes to influence the performance taxes to influence the performance of the economy.of the economy.

Page 22: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

Government Deficits Government Deficits

When the government spends more When the government spends more than it receives, it runs a than it receives, it runs a deficit.deficit.

Governments finance deficits by Governments finance deficits by borrowing money. borrowing money.

Deficit spending—that is, spending Deficit spending—that is, spending funds obtained by borrowing instead funds obtained by borrowing instead of taxation—can be helpful for the of taxation—can be helpful for the economy. economy.

Page 23: Public finance Dr. Alshiha Introduction Public Finance Dr. Adnan Alshiha.

ExampleExample when unemployment is high, the when unemployment is high, the

government can undertake projects that government can undertake projects that use workers who would otherwise be idle. use workers who would otherwise be idle.

The economy will then expand because The economy will then expand because more money is being pumped into it. more money is being pumped into it.

However, deficit spending also can harm However, deficit spending also can harm the economy. the economy.

When unemployment is low, a deficit may When unemployment is low, a deficit may result in rising prices, or inflation. The result in rising prices, or inflation. The additional government spending creates additional government spending creates more competition for scarce workers and more competition for scarce workers and resources and this inflates wages and resources and this inflates wages and pricesprices


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