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ESCUELA NACIONAL DE ADMINISTRACIﾓN
Y HACIENDA PﾚBLICA.
COORDINACIﾓN DE IDIOMAS.


PUBLIC FINANCE

Introduction

Public Finance, field of economics concerned with how governments raise money, how that money is spent, and the effects of these activities on the economy and on society. Public finance studies how governments at all levels, national, state, and local, provide the public withdesired services and how they secure the financial resources to pay for these services.

In many industrialized countries, spending and taxation by the government form a large portion of the nation's total economic activity. For example, total government spending in the United States equals about 40 percent of the nation's gross domestic product, that is, the value of all the goods and servicesproduced within the United States in one year.

Why Public Finance is needed ?

Governments provide public goods, government-financed items and services such as roads, military forces, lighthouses, and street lights. Private citizens would not voluntarily pay for these services, and therefore businesses have no incentive to produce them.

Public finance also enables governments to corrector offset undesirable side effects of a market economy. These side effects are called spillovers or externalities.

Public finance provides government programs that moderate the incomes of the wealthy and the poor. These programs include social security, welfare, and other social programs. For example, some elderly people or people with disabilities require financial assistance because theycannot work. Governments redistribute income by collecting taxes from their wealthier citizens to provide resources for their needy ones. The taxes fund programs that help support people with low incomes.




Public Spending

Each year national, state, and local governments create a budget to determine how much money they will spend during the upcoming year. The budget determines whichpublic goods to produce, which spillovers to correct, and how much assistance to provide to financially disadvantaged people. The chief administrator of the government, such as the president, prime minister, governor, or mayor, proposes the budget. However, the legislature, such as the congress, parliament, state legislature, or city council, ultimately must pass the budget. The legislature oftenchanges the size and composition of the budget, but it must not make changes that the chief administrator will reject and veto.

Government spending takes two forms: exhaustive spending and transfer spending. Exhaustive spending refers to purchases made by a government for the production of public goods. For example, to construct a new harbor the government buys and uses resources from the economy,such as labor and raw materials. In transfer spending the government transfers income to people to help them support themselves. Transfers can be one of two kinds: cash or in-kind. Cash transfers are cash payments, such as social security checks and welfare payments. In-kind transfers involve no cash payments but instead transfer goods or services to recipients. Examples of in-kind transfersinclude food stamp coupons and Medicare. Recipients of food stamp coupons exchange the coupons for groceries.

Public Revenue

Governments must have funds, or revenue, to pay for their activities. Governments generate some revenue by charging fees for the services they provide, such as entrance fees at national parks or tolls for using a highway. However, most government revenue comes from taxes,such as income taxes, capital taxes, and sales and excise taxes.

An important source of tax revenue in most industrialized countries is the income or payroll tax, also known as the personal income tax. Income taxes are imposed on labor or activities that generate income, such as wages or salaries. In the United States, income taxes account for about half of the total revenue of local, state,...