Chapter 1

Individuals and
Government
FNAN4115/BUSS 4015 – Public Finance
Dr. Bernard Watler

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 Chapter Objectives

 Define Public Finance.

 Examine the legal framework for public finance in Belize.
 Examine the economic basis for government.
 Use a production-possibility curve to explain the trade-off between private goods and
services and government goods and services.
 Describe how the provision of government goods and services through political institutions
differs from market provision of goods and services and how government affects the
circular flow of income and expenditure in a mixed economy.
 Explain the difference between government purchases and transfer payments and discuss
the growth of government expenditures in the United States and other nations since 1929.
 Discuss the various categories of federal, state, and local government expenditures in the
United States and the way those expenditures are financed. In the case of Belize we look
at national expenditures and how they are financed (Consolidated Revenue Fund).
 Determine some of the issues that must be addressed to evaluate the costs and benefits of
government activities.

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 Public Finance Defined
 Public Finance is the field of
economics that studies government
activities and the alternative means of
financing government expenditures.
 Public finance is about the taxing and
spending activities of the government.

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 Public Finance Defined
 Also known as “public sector economics”
or “public economics.”
 Focus is on microeconomic functions of
government; the way government affects
the allocation of resources and the
distribution of income.
 Polices that affect overall unemployment
or price levels are left for
macroeconomics.

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 Public Finance Defined
 Scope of public finance unclear –
government has role in many activities,
but focus will be on taxes and spending.

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 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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 Government at a Glance
• Size of government – how to measure?
– Number of government employees??
– Annual expenditures??2022-23 est
• 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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 The Legal Framework
 The Appropriation Act gives the
Government of Belize the authority to
collect revenue and incur expenditure
within the framework of the approved
budget.

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 The Legal Framework
 Legal framework
 Central government
 No real constraints on spending in Bze’s
Constitution
 Can run budget deficits (Exp is greater than
Rev)
 Local government
 City and Town Councils under the authority of
the Ministry of Local Government.
 Village Councils are under the authority of the
Ministry of Rural Development.
 Can run budget deficits.

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 ECONOMIC BASIS FOR
GOVERNMENT
 In a national economy, the market
mechanism cannot perform all those
functions required to attain an efficient
and equitable allocation of resources.
Thus a government or public sector
may be needed for the following
reasons:
 (1) To promote competition

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 ECONOMIC BASIS FOR
GOVERNMENT
 (2) To ensure the provision of goods not
adequately provided by the private sector.
 (3) To tackle externalities
 (4) To enforce contracts
 (5) To redistribute income and wealth
 (6) To promote macroeconomic objectives
e.g. full employment, low inflation,
economic growth etc.

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 Government
 Governments are organizations formed
to exercise authority over the actions of
persons who live together in a society
and to provide and finance essential
services.

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 Political Institutions
 Political Institutions are rules and
generally accepted procedures that
evolve for determining what government
does and how government outlays are
financed.

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 Examples of Political
Institutions

 Majority rule
Under majority rule, one alternative (such as a political candidate or a
referendum to increase spending for education) is chosen over others if it
receives more than half the votes cast in an election.

 Representative government

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 The Allocation between
Private and Government
Resources
 Private
 Food
 Housing
 Cars
 Clothing
 Government
 National Defense
 Public Schools
 Police

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 Figure 1.1 A Production-Possibility Frontier

C
Government Goods and
Services per Year B
G2

G1 A

0 X2 X1 M
Private Goods and Services per Year
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 The production-possibility curve shows
alternative combinations of government
goods and services and private goods and
services that can be produced in an
economy. The curve assumes that
productive resources and technology are
given. An increase in government goods
from 0G1 to 0G2 requires a sacrifice of
X1X2 (X1 – X2) units of private goods
per year.

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 Distribution of Government
Goods and Services

 Nonmarket rationing:
 Prices and willingness to pay those prices
are not applicable to goods such as
national defense.

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 The Market Economy and
Politics

 Pure Market Economy

 Virtually all goods and services are supplied by
for-profit private firms.
 Supply and demand determine price.
 Individuals would be able to purchase goods and
services freely, according to their tastes and
economic capacity (their income and wealth),
given the market-determined prices.

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 Mixed Economy
 A mixed economy is one in which
government supplies a considerable
amount of goods and services and
regulates private economic activity.
 In such an economy, government
expenditures typically amount to
between one-quarter and one-half of
GDP.

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 Figure 1.2 Circular Flow in the Mixed Economy
Goods & Services Goods & Services
Output
Market
Dollars Dollars

Income Support
& Subsidies Subsidies
Taxes, fees, charges Taxes, fees, charges
Households Government Services
Government Government Services
Firms

Dollars Input Dollars

Market
Resources Resources
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Copyright © 2002 by Thomson Learning, Inc.
 Government Expenditures in
the United States

 Government purchases of
 labor
 land
 capital

 Government Transfer Payments

 Welfare e.g. BOOST, Food Pantry etc
 Social Security

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 Growth in Government
Expenditures (billions $)
Table 1.1 (abbreviated)
Year GDP Federal State Total Percentage
Government and Local Government of GDP
Government Total

1930 91.3 2.5 7.5 10.0 10.95

1945 223.0 84.7 8.5 93.2 41.79

1960 527.4 85.8 34.1 119.9 22.73

1975 1635.2 345.4 152.1 497.5 30.42

2005 12487.1 2548.4 1328.8 3877.2 31.05

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 International Comparisons
Country Government Current Expenditures
as a Percentage of GDP 2006

Denmark 55.5
France 50.3
Germany 46.2
Canada 39.5
United Kingdom 44.8
Japan 37.4
United States 31.05

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 Figure 1.3 Total Government Expenditure as a
Percentage of GDP 1929-1999

45
40
Percentage of GDP

35
30
25
20
15
10
5
0
39
45
55
70
80
82

88
90
92
94
96
98
31

84
86

99
29

19
19
19
19
19

19
19
19
19
19

19
19
19

19
19
19
19

Year
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 Structure of Federal
Government Expenditures

 Purchases of Goods and Services

 Transfer Payments
 Grants in Aid to State and Local
Governments
 Net Interest Paid

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 Federal Expenditure by
Category, 1999

Table 1.2

Category Percentage of Total Federal

Expenditures
 
Transfer Payments 42.97

Purchases 27.04

Interest 14.97

Grants to State and Local 12.84

Other 2.18
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 Figure 1.4 The Distribution of Federal Expenditure, 1966-
1999
Percentage of Total Federal Expenditure

70
Government Purchases
60

50
Transfer Payments
40

30
Grants to State and
20 Local Governments

10
Net Interest
0
59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99
Year
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 Federal Government Expenditure by
Function
All other
Veteran’s Benefits 5%
3%
Transportation Social Security
3% 23%
Education
4%

Health
9%

Net Interest National Defense

11% 16%

Medicare
12% Income Security
14%
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 The Structure of State and
Local Government Expenditure
in the United States
 Education
 Civilian Safety
 Transportation
 Executive, Legislative, and Judicial
 Income Security
 Health and Hospitals
 Recreational and Cultural Activities
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 State and Local Government Expenditure
Recreational and
Cultural Activities
2% Other
7%
Health and
Hospitals
3%

Income Security
5%
Education
42.71%
Executive
Legislative and
Judicial
11%

Transportation
13%

Civilian Safety
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 Financing Government
Expenditures in the US

 Taxes:
 Income (Corporate and Personal)
 Payroll
 Excise
 Customs

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 Federal Revenues
Customs Duties Other
1% 1%
Excise Taxes
4%
Corporate Profits Taxes
12% Income Taxes
47%

Payroll Taxes
35%

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 State and Local Government Revenues

Other
8%

Sales Taxes
27%

Property Taxes
21%

Corporate Profit Taxes

3%
Payroll Taxes Federal Grants
1% 20%
Nontaxes
3%

Income Taxes
17%

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 State Budget Crunch of 2002
 37 states were forced to reduce their budgets.
 Revenues were typically 10% less than
anticipated.
 States with the most severe deficits:
 AK, AZ, CA, NY, NC, OK, OR, VA, and WA
 Causes
 Cuts in taxes on business and individuals in the
1990s
 No sales tax collections on services
 Growth in costs of Medicaid

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36
 Implications of a
Graying America

 Social Security
 Medicare
 Medicaid

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 Implications of a
Graying America
 Social Security
 In 2008 baby-boomers start to retire and collect
 The ratio of workers to retiree falls
 Medicare
 Health care inflation is substantially higher than
overall inflation
 Medicaid
 Increased use of long-term care for baby-boomers

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38
 How Much Government is
Enough?
 The question of how much government
is enough is an important one in any
society. It is the tradeoff between public
and private goods. When government
gets bigger, it comes at the expense of
less private consumption.

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 The Belizean Government
Budget at a Glance 2017/18
 TOTAL REVENUES & GRANTS - $1,186,770,285

 TOTAL REVENUE - $1,140,088,774

 RECURRENT REVENUE - $1,032,902,996

 CAPITAL REVENUES - $5,983, 695

 GRANTS - $46, 681, 511

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 The Belizean Government
Budget at a Glance 20??
 TOTAL EXPENDITURES - $1,180,103,128
 RECURRENT EXPEND -$1,030,405,076
 Primary Expenditure - $
 Debt Service (Interest & other charges)- $109,054, 615
 TOTAL CAPITAL EXPEND - $149,698,052
 RECURRENT SURPLUS/DEFICIT - $47,
598, 152 ($825, 604, 389 - $778, 006, 237)

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 The Belizean Government
Budget at a Glance 20??
 PRIMARY SURPLUS/DEFICIT =
Recurrent Revenue – (Primary
Expenditure + Debt Service) = $825,
604, 389 – $778, 006, 236 = $47, 598,
152.

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 Problems and Solutions

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 Problems and Solutions

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 Problems and Solutions

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 Problems and Solutions

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 Problems and Solutions

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 Problems and Solutions

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