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Public Finance

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

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Public Finance

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  1. Public Finance • Public financeis the field of economics that studies government activities and the alternative means of financing government expenditures.

  2. 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.

  3. Production Possibility Curve

  4. 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

  5. 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

  6. Government Expenditures, 1930 - 2008 Year GDP Federal Government State and Local Government Total Government Percentage of GDP Total 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 Table 1.1 (abbreviated) – Billions of dollars

  7. Government Expenditures in the U.S.

  8. 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

  9. Distribution of Federal Expenditures

  10. Structure of Federal Government Expenditure

  11. Structure of Federal Government Expenditure

  12. State and Local Government Expenditures

  13. State and Local Government Expenditures

  14. State and Local Government Comparison

  15. State and Local Government Comparison

  16. Financing Government Expenditures • Federal Government—Taxes

  17. Financing Government Expenditures

  18. Financing Government Expenditures • State and local governments—Taxes, Federal Grants

  19. Financing Government Expenditures

  20. State and Local Government Comparison

  21. State and Local Government Comparison

  22. Annual Budget Differential (billions)

  23. Annual Budget Differential (% GDP)

  24. Federal Debt (billions)

  25. Federal Debt (% GDP)

  26. 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

  27. 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?

  28. 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

  29. Population Aging

  30. Old-Age Dependency Ratios

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