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Public Finance
• Public finance is the field of economics that studies government activities and the alternative means of financing government expenditures.
Allocation of Resources
Resources are allocated between government and private use:
• For government use:- Roads- Schooling- Fire Protection
• For private use:- Food- Clothing
• Units of private goods and services are forgone by individuals so that government can provide goods and services.
Production Possibility Curve
The Mixed Economy
Characteristics of a mixed economy:
• Government supplies many goods and services
• Government regulates private economic activity
• Government expenditures equal ¼ to ½ of GDP
• Government participates in markets as a buyer of goods and services
Government Expenditures in the U.S.
• Government purchases divert productive resources from private use:- National defense
• Steel, labor
• Government transfer payments redistribute purchasing power among citizens:- Social benefits
• Social Security, Medicare
Government Expenditures, 1930 - 2008
Table 1.1 (abbreviated) – Billions of dollars
Year GDP Federal Government
State and Local
Government
Total Government
Percentage of GDPTotal
1930 91.2 2.8 7.9 10.7 11.73
1950 293.8 41.8 19.3 61.1 20.80
1970 1038.5 204.8 107.8 312.6 30.10
1990 5803.1 1301.5 668.1 1969.6 33.94
2008 14264.6 3247.2 1747.2 4994.4 35.01
Government Expenditures in the U.S.
International Comparisons
Country Government Current Expenditures as a Percentage of GDP 2008
France 52.5
Sweden 51.2
United Kingdom 45.4
43.4
Canada 39.6
United States 38.6
Japan 36.4
Germany
Distribution of Federal Expenditures
Structure of Federal Government Expenditure
Structure of Federal Government Expenditure
State and Local Government Expenditures
State and Local Government Expenditures
State and Local Government Comparison
Category State Local
Education 232 593
Health 40 39
Public Safety 12 77
Transportation 90 62
Public Welfare 50 7
Housing 10 40
Interest on General Debt 44 55
Total 863 1232
State and Local Government Comparison
Financing Government Expenditures
• Federal Government—Taxes
Financing Government Expenditures
Financing Government Expenditures
• State and local governments—Taxes, Federal Grants
Financing Government Expenditures
State and Local Government Comparison
Category State Local
Sales Taxes 358 90
Federal Grants 423 58
Income Taxes 278 26
Corporate Profits Taxes 50 7
Property Taxes 13 397
Education 85 25
Utilities 16 122
Total 1067 876
State and Local Government Comparison
Annual Budget Differential (billions)
Annual Budget Differential (% GDP)
Federal Debt (billions)
Federal Debt (% GDP)
Functions of Government
• Provide items we cannot easily make available for ourselves or purchase from others in markets
- Law enforcement and courts
• Redistribute income and economic opportunity- Income support for elderly, unemployed, poor
• Stabilize economic fluctuations- Recession/Inflation
• Regulate production and consumption- For improved health, elimination of excessive
monopolistic control over prices
How much government is enough?
How much should governments do, and how much should be left to private enterprise and initiative through market sale of goods and services?
Aging Populations & Public Finance
• Percentage of U.S. residents age 65 or older: 1950 – 8.3%; 2000 – 12.3%; 2050 – 21.1%
• Significant effects on Social Security and government-funded health care expenditures
• Tax rates to finance programs must increase or benefits to recipients must decline to avoid causing large federal budget deficit
Population Aging
Old-Age Dependency Ratios