Public Finance | Fundamentals | Public Goods
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Public Finance (or Public Sector Economics, as it is increasingly called) covers the areas of taxing, spending and budgeting activities of government and their influence on the allocation of resources and the distribution of income. The relatively new field of Public Choice has, in recent years, shaped the field in a significant way. Public Choice analyzes the behavior of elected officials and bureaucrats in the public sector and examines the implications of government failure.
A standard contemporary textbook on Public Finance, in addition to discussing theoretical foundations and methods of empirical analysis, covers the following areas:
  • The role of government and desired levels of government activity in the economy.
  • The nature of public goods (e.g., parks and bridges).
  • Government expenditures (including debt) and revenue-raising activities (fees and charges, in addition to the three major taxes - sales, income and property).
Government refers to all levels of government -- federal, state and local -- though, increasingly, both service delivery and raising revenues are carried out at the state and local levels.
One of the primary purposes of long-term state and local borrowing is to allow governments to finance needed capital projects without causing burdensome changes in tax rates, fees or other charges. In theory, governments borrow for public purposes, i.e., to improve the quality of lives of the communities within their jurisdiction. Decisions such as the type of debt to be issued and who will repay the debt depend on political and economic factors.
Total Debt Outstanding by State and Local Governments (in billions of dollars):  







Long Term

1,427.5 1,088.4 838.7 549.0 322.5

Short Term

24.3 27.0 19.3 19.6 13.1





568.6 335.6
Source: 2003 Statistical Abstract of the United States


Governments usually finance expenditures of public sector capital or infrastructure by sale of bonds or through other forms of government borrowing. Bond financing, however, can be politically sensitive. Governments may often be able to make decisions about borrowing without being accountable to taxpayers - increasingly witnessed in public financing of prisons. Some public sector economists are of the opinion that in the absence of constitutional restraint, there is no guarantee that government borrowing will be used effectively. Abuse of government borrowing could also be controlled if well-informed taxpayers play a role in government decisions about public finance.
In 1978, voters in California amended the state's constitution to limit the real estate tax to one percent of full values of the property tax base. Proposition 13 limited property tax increases and slowed down the issuance of general obligation bonds significantly. On the other hand, the use of lease-revenue bonds, which do not require voter approval, increased dramatically in the state during the 1980s.
In March 2004, California voters approved the largest municipal debt issue in the history of the U.S. bond market in an effort to get the state out of its fiscal crisis. The $12 billion economic recovery bond offering is different from the state's general obligation bonds in that these bonds are backed by a quarter-cent portion of the state's sales tax, in addition to the full faith and credit of the government. The state plans to lower local government's share of sales taxes by a quarter-cent and compensate that with property tax revenues so that taxpayers do not have to pay higher sales taxes. But more than three dozen local governments have challenged the sales tax reduction. California general obligation bonds currently have the lowest credit rating for state general obligation bonds in the nation.

Updated: June 2004

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