Download Government`s Budget

Chapter 1:
Introduction
Econ 330: Public Finance
Dr. Reyadh Faras
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Public Finance and Ideology
 Public finance economists analyze not only the
effects of actual government taxing and spending
activities but also what they ought to be.
 Views of how government should function in the
economic sphere are influenced by ideological
views concerning the relationship between the
individual and the state.
 Political philosophers have distinguished two
major approaches:
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Public Finance and Ideology
A. Organic View of Government
 Society is viewed as a natural organism, each individual is a
part of the organism, and the government is the heart.
 The individual has significance only as part of the
community, and what is good for it is defined with respect to
the good of the community. They stress that the community is
above the individual.
 Goals of society are set by the state, which leads society
towards their achievement.
 Problem: who chooses between the conflicting goals of
society?
 Proponents argue that certain goals are natural.
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B. Mechanistic View of Government
 Government is not organism, it is an invention by
individuals to better achieve their individual goals.
 The individual rather than the group is at center
stage.
 Problem: what is good for society? and how the
government should act to promote it?
 Generally: government protect society individuals
from violence, thus it must have a monopoly on
coercive power. Otherwise anarchy develops.
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 In addition, government has the responsibility for
creating and maintaining certain public works and
certain public institutions, which individuals are
not willing to be responsible for.
 Liberals: with a very limited government and are
against any further economic role for it.
 Socialists: with substantial government
intervention for the good of individuals.
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Government at a Glance
The Legal Framework
 Constitution empowers Congress to pay the debts
and provide for the common defense and general
welfare.
 Constitution does not limit the size of federal
expenditure to the size of the economy.
 Federal government is not required to finance all
its expenditures by taxation. If expenditures
exceeds revenues, it is empowered to borrow
money.
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The Size of Government
 Common measure of the size of the government is
the number of workers in the public sector.
However, such measure can be misleading.
 A more sensible measure is based on the size of
government expenditures, of which are three
types:
1. Purchases of goods and services.
2. Transfers of income to people, businesses, or
other governments.
3. Interest payments.
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 Generally: when expenditures go up, people
conclude that government size has increased.
 However, some government activities have
substantial effects on resource allocation even
though they involve minimal explicit outlays.
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Federal Expenditures by Type
Dr. Reyadh Faras
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Federal Revenues by Source
Dr. Reyadh Faras
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Contribution of Policy Changes
to Growth in Deficit Since 2001
Dr. Reyadh Faras
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‫مصادر الزيادة في عجز الموازنة الفيدرالية (‪)2012‬‬
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‫د‪ .‬رياض الفرس‬
Trade and federal budget deficits as % of GDP
Dr. Reyadh Faras
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Federal Debt Held by
the Public as Share of GDP
Dr. Reyadh Faras
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Debt to GDP Ratios, Various Countries, 2008
Dr. Reyadh Faras
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Built-In Stability
Government Expenses, G
and Tax Revenues, T
T
Surplus
G
Deficit
GDP1 GDP2
GDP3
Real Domestic Output, GDP