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07-SEPTEMBER-2008 03:17:44 - Public finance Redirected from Public expenditure July 2008 Public finance This article is part of the series: Finance and Taxation Taxation Income tax · Payroll tax CGT · Stamp duty · LVT Sales tax · VAT · Flat tax Tax, tariff and trade Tax haven Tax incidence Tax rate · Proportional tax Progressive tax · Regressive tax Tax advantage Taxation by country Australia British Virgin Islands Canada China Colombia France Germany Hong Kong India Indonesia Ireland Netherlands New Zealand Peru Russia Singapore Switzerland Tanzania United Kingdom United States European Union v d e Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank · Money supply Gold standard Fiscal policy Spending · Deficit · Debt Policy-mix Trade policy Tariff · Trade agreement Finance Financial market Financial market participants Corporate · Personal Public · Regulation Banking Fractional-reserve Full-reserve · Free banking Islamic view talk project Public finance is a field of economics concerned with paying for collective or governmental activities, and with the administration and design of those activities. The field is often divided into questions of what the government or collective organizations should do or are doing, and questions of how to pay for those activities. The broader term public economics and the narrower term government finance are also often used. Contents 1 Overview 2 Government expenditures 2.1 Government operations 2.2 Income distribution 3 Financing government expenditures 3.1 Taxes 3.2 Debt 3.3 Seigniorage 3.4 Public Finance in Socialist Economies 4 See also 5 Notes 6 References 7 External links Overview The proper role of government provides a starting point for the analysis of public finance. Private markets, if certain conditions are met, will allocate goods and services among individuals efficiently in the sense that no waste occurs and that individual tastes are matching with the economy's productive abilities. If private markets were able to provide efficient outcomes and if the distribution of income was socially acceptable, then there would be little or no scope for government. In many cases, however, conditions for private market efficiency are violated. For example, if many people can enjoy the same good at the same time non-rival, non-excludable consumption, then private markets may supply too little of that good. National defense is one example of non-rival consumption, or of a public good. Market failure occurs when private markets do not allocate goods or services efficiently. The existence of market failure provides an efficiency-based rationale for collective or governmental provision of goods and services. Externalities, public goods, informational advantages, strong economies of scale, and network effects can cause market failures. Public provision via a government or a voluntary association, however, is subject to other inefficiencies, termed government failure. Under broad assumptions, government decisions about the efficient scope and level of activities can be efficiently separated from decisions about the design of taxation systems Diamond-Mirlees separation. In this view, public sector programs should be designed to maximize social benefits minus costs cost-benefit analysis, and then revenues needed to pay for those expenditures should be raised through a taxation system that creates the fewest efficiency losses caused by distortion of economic activity as possible. In practice, government budgeting is substantially more complicated and often results in inefficient practices. Government can pay for spending by borrowing borrowing, although borrowing is a method of distributing tax burdens through time rather than a replacement for taxes. A deficit is the difference between government spending and revenues. The accumulation of deficits over time is the total public debt. Deficit finance allows governments to smooth tax burdens over time, and gives governments an important fiscal policy tool. Deficits can also narrow the options of successor governments. Public finance is closely connected to issues of income distribution and social equity. Governments can reallocate income through transfer payments or by designing tax systems that treat high-income and low-income households differently. The Public Choice approach to public finance seeks to explain how self-interested voters, politicians, and bureaucrats actually operate, rather than how they should operate. Government expenditures Main article: Government spending Economists classify government expenditures into three main types. Government purchases of goods and services for current use are classed as government consumption. Government purchases of goods and services intended to create future benefits--- such as infrastructure investment or research spending--- are classed as government investment. Government expenditures that are not purchases of goods and services, and instead just represent transfers of money--- such as social security payments--- are called transfer payments.1 Government operations Main article: Government operations Government operations are those activities involved in the running of a state or a functional equivalent of a state for example, tribes, secessionist movements or revolutionary movements for the purpose of producing value for the citizens. Government operations have the power to make, and the authority to enforce rules and laws within a civil, corporate, religious, academic, or other organization or group.2 In its broadest sense, to govern means to rule over or supervise, whether over a state, a set group of people, or a collection of people.3 Income distribution Main article: Income distribution Income distribution - Some forms of government expenditure are specifically intended to transfer income from some groups to others. For example, governments sometimes transfer income to people that have suffered a loss due to natural disaster. Likewise, public pension programs transfer wealth from the young to the old. Other forms of government expenditure which represent purchases of goods and services also have the effect of changing the income distribution. For example, engaging in a war may transfer wealth to certain sectors of society. Public education transfers wealth to families with children in these schools. Public road construction transfers wealth from people that do not use the roads to those people that do and to those that build the roads. Income Security Employment insurance Health Care Financing government expenditures Budgeted revenues of governments in 2006 Budgeted revenues of governments in 2006 Government financing can be achieved by taxes, government borrowing, asset sales, or seigniorage. How a government chooses to finance its activities can have important effects on the distribution of income and wealth income redistribution and on the efficiency of markets effect of taxes on market prices and efficiency. The issue of how taxes affect income distribution is closely related to tax incidence, which examines the distribution of tax burdens after market adjustments are taken into account. Public finance research also analyzes effects of the various types of taxes and types of borrowing as well as administrative concerns, such as tax enforcement. Taxes Main article: Tax A tax is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state for example, tribes, secessionist movements or revolutionary movements. Taxes could also be imposed by a subnational entity. Taxes consist of direct tax or indirect tax, and may be paid in money or as corvée labor. A tax may be defined as a pecuniary burden laid upon individuals or property to support the government . . . a payment exacted by legislative authority.4 A tax is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority and is any contribution imposed by government . . . whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name.5 Debt Main article: Government debt Governments, like any other legal entity, can take out loans, issue bonds and make financial investments. Government debt also known as public debt or national debt is money or cr owed by any level of government; either central government, federal government, municipal government or local government. Some local governments issue bonds based on their taxing authority, such as tax increment bonds or revenue bonds. As the government represents the people, government debt can be seen as an indirect debt of the taxpayers. Government debt can be categorized as internal debt, owed to lenders within the country, and external debt, owed to foreign lenders. Governments usually borrow by issuing securities such as government bonds and bills. Less crworthy countries sometimes borrow directly from commercial banks or international institutions such as the International Monetary Fund or the World Bank. Most government budgets are calculated on a cash basis, meaning that revenues are recognized when collected and outlays are recognized when paid. Some consider all government liabilities, including future pension payments and payments for goods and services the government has contracted for but not yet paid, as government debt. This approach is called accrual accounting, meaning that obligations are recognized when they are acquired, or accrued, rather than when they are paid. Seigniorage Main article: Seigniorage Seigniorage is the net revenue derived from the issuing of currency. It arises from the difference between the face value of a coin or bank note and the cost of producing, distributing and eventually retiring it from circulation. Seigniorage is an important source of revenue for some national banks, although it provides a very small proportion of revenue for advanced industrial countries. Public Finance in Socialist Economies Public finance in centrally planned economies has differed in fundamental ways from that in market economies. Some state-owned enterprises generated profits that helped finance government activities. The government entities that operate for profit are usually manufacturing and financial institutions, services such as nationalized healthcare do not operate for a profit to keep costs low for consumers. The Soviet Union relied heavily on turnover taxes on retail sales. Sales of natural resources, and especially petroleum products, were an important source of revenue for the Soviet Union. See also Corporate finance Fiscal incidence Personal finance Public economics Public choice Government budget Notes ^ Robert Barro and Vittorio Grilli 1994, European Macroeconomics, Ch. 15-16. Macmillan, ISBN 0333577647. ^ Columbia Encyclopedia, Government, Columbia University Press ^ See for example, The American Heritage Dictionary of the English Language, entry Govern ^ Black's Law Dictionary, p. 1307 5th ed. 1979. ^ Id. References Anthony B. Atkinson and Joseph E. Stiglitz 1980. Lectures in Public Economics, McGraw-Hill Economics Handbook Series James M. Buchanan and Richard A. Musgrave 1989. Public Finance and Public Choice: Two Contrasting Visions of the State. MIT Press Google book excerpts Richard A. Musgrave 1959. The Theory of Public Finance: A Study in Political Economy. R.A. Musgrave 1987. public finance, The New Palgrave: A Dictionary of Economics, v. 3, pp. 1055-60. Richard A. Musgrave and Peggy B. Musgrave 1973. Public Finance in Theory and Practice Joseph E. Stiglitz 2000. Economics of the Public Sector, 3rd ed. Norton. External links Moneyed Politicians IMF--Dissemination Standards Bulletin Board-- Subscribing ... see fiscal sector The IMF's Public Financial Management Blog v d e General areas of finance Financial markets · Investment management · Financial institutions · Personal finance · Public finance · Mathematical finance · Financial economics · Experimental finance · Computational finance Retrieved from http://en..org/wiki/Public_finance Categories: Macroeconomics | Public financeHidden category: Articles needing additional references from July 2008 Views Article Discussion this page History Personal tools Log in / create account Navigation Main page Contents Featured content Current events Random article Search Go Search Interaction Community portal Recent changes Contact Donate to Help Toolbox What links here Related changes Upload file Special pages Printable version Permanent link Cite this page Languages ÄŒesky Deutsch Français Hrvatski Italiano Magyar 日本語 Português Română Simple English SlovenÅ¡Ä?ina Türkçe ä¸æ–‡ This page was last modified on 27 August 2008, at 10:42
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