government activity in the modern mixed economy

(1)

GOVERNMENT ACTIVITY IN THE MODERN MIXED ECONOMY

C h a p t e r 1

Public Finance, 10^th Edition David N. Hyman

Adapted by Chairat Aemkulwat for Public Economics 2952331

Chairat Aemkulwat, Public Economics 2952331

11/08/2015

Outline: Chapter 1 GOVERNMENT ACTIVITY IN THE MODERN MIXED ECONOMY

1. Individuals, Society, and Government 2. The Mixed Economy, Markets, and Politics 3. Circular Flow in the Mixed Economy

4. Government Expenditures in Thailand and the United States

5. Financing Government Expenditure in Thailand and the United States 6. Aging Populations: Implications for Public Finance

(2)

Allocation of Resources

Resources are allocated between government and private use:

• For government use:

- Roads - Schooling - Fire Protection

• For private use:

- Food - Clothing

• Units of private goods and services are forgone by individuals so that government can provide goods and services.

Chairat Aemkulwat, Public Economics 2952331 3

1. Individuals, Society, and Government

1. Individuals, Society, and Government Chapter 1 GOVERNMENT ACTIVITY

IN THE MODERN MIXED ECONOMY

Production Possibility Curve

1. Individuals, Society, and Government

Chapter 1 GOVERNMENT ACTIVITY

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 OG₁to OG₂requires a sacrifice of X₁X₂units of private goods per year.

(3)

ANS.

The increased allocation of resources to government provision of health services implies that fewer resources can be used for other goods and services.

PPF: The student should plot health care services on one of the axes and “all other goods and services” on the other axis.

As production of health care services increases, given fixed resources and technology,

production of other goods and services must decline.

5

Chairat Aemkulwat, Public Economics 2952331 Chapter 1 GOVERNMENT ACTIVITY 1. Individuals, Society, and Government IN THE MODERN MIXED ECONOMY

5. Suppose federal, state, and local governments in the United States were to engage in a massive campaign to deal with AIDS, drug abuse, and other health related problems. The increase in government medical spending would require a massive tax

increase. Assuming that resources and technology are fixed, use a production-possibility curve to show the cost of increased

government health services.

Ans.

Shift PPF to the northeast

Given a point on the old production possibility curve, the outward shift allows movement in the northeast direction to a point on the new production possibility curve corresponding to an increase in production of both private and government goods and services.

7

7. As productive resources and technological know-how

increase, a nation’s production-possibility curve shifts outward.

Use a production-possibility curve to show how resource growth and improvements in technology can allow a nation to increase its production of government goods and services while also increasing its output of private goods and services.

(4)

The Mixed Economy

Characteristics of a mixed economy:

1. Government supplies many goods and services 2. Government regulates private economic activity 3. Government expenditures equal 1/5 to ¼ of GDP 4. Government participates in markets as a buyer of

goods and services

2. The Mixed Economy, Markets, and Politics

Chairat Aemkulwat, Public Economics 2952331 Chapter 1 GOVERNMENT ACTIVITY 7

IN THE MODERN MIXED ECONOMY

Government Expenditures in the U.S.

• Government purchases divert productive resources from private use:

- National defense

• Steel, labor

• Government transfer payments redistribute purchasing power among citizens:

- Social benefits

• Social Security, Medicare

8

3. Circular Flow in the Mixed Economy

(5)

3. Circular Flow in the Mixed Economy

Chapter 1 GOVERNMENT ACTIVITY IN THE MODERN MIXED ECONOMY

The upper and lower loops represent transactions between households and business firms in markets.

Households use the income they earn from the sale of productive services to purchase the outputs of business firms.

The inner loop represents transactions between households and

government and between business firms and government.

Governments purchase productive services from households and outputs of business firms.

These purchases are financed with taxes, fees, and charges levied on persons and firms, and the inputs acquired are used to provide government services and transfers.

Ans.

Social Security pensions are government

transfers.

Except for a small

amount of purchases for personnel and other resources to administer the transfer, no

government purchases are required.

1

1. Suppose governments increase spending for Social Security pensions. Explain why the increased

government spending for pensions will not appreciably increase government purchases of productive

resources or the products of business firms.

(6)

Government Expenditures in the Thailand

2553, 1,937.9

2553, 365.7 2503, 6.8

2553, 2,303.6

2503, 12.7%

2553, 22.8%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

0.0 500.0 1,000.0 1,500.0 2,000.0 2,500.0

2503 2508 2513 2518 2523 2528 2533 2538 2543 2548 2553 รัฐบาลกลาง

รัฐบาลท้องถิ่น ภาครัฐบาล ภาครัฐบาล/GDP

Central Government Local Government General Government GG/GDP

Source: www.fpo.go.th

4. Government Expenditures in Thailand and the United States

Government Expenditures in the U.S.

12

(7)

Structure of Government Expenditure in Thailand

EXPENSE 2012 Share

Compensation of employees 998,248 42.8%

Use of goods and services 715,658 30.7%

Subsidies 163,985 7.0%

Interest 139,724 6.0%

Social benefits 125,754 5.4%

Other expense 113,990 4.9%

Consumption of fixed capital 70,704 3.0%

Grants 1,792 0.1%

EXPENSE 2,329,855 100.0%

Source: http://dw.mof.go.th/foc/gfs/

Structure of Federal Government Expenditure

(8)

• The Public Finance Data is compiled by the Public Finance Analysis Section of the Fiscal Policy Office, based on the standard described on the International Monetary Fund's Dissemination Standards Bulletin Board (DSBB).

• There are three main categories:

1) Central Government Data

2) General Government and Nonfinancial Public Corporations (Quarterly)

3) General Government and Nonfinancial Public Corporations (Annually).

Structure of Government Expenditure in Thailand

OUTLAYS BY FUNCTIONS OF GOVERNMENT 2012 Share

General public services 594,505.5 21.4%

Economic affairs 524,998.3 18.9%

Education 461,228.6 16.6%

Social protection 457,181.8 16.5%

Health 241,229.5 8.7%

Defense 167,405.8 6.0%

Housing and community amenities 166,662.8 6.0%

Public order and safety 133,269.0 4.8%

Recreation, culture and religion 25,408.6 0.9%

Environmental protection 2,453.9 0.1%

TOTAL OUTLAYS 2,774,343.9 100.0%

16

(9)

Structure of Government Expenditure in Thailand

General public services , 21.4%

Economic affairs , 18.9%

Education , 16.6%

Social protection , 16.5%

Health , 8.7%

Defense , 6.0%

Housing and community amenities , 6.0%

Public order and safety, 4.8%

Recreation, culture and religion, 0.9%

Environmental protection , 0.1%

Structure of Federal Government Expenditure

(10)

Structure of Federal Government Expenditure

Structure of Government Expenditure in Thailand

20

(11)

State and Local Government Expenditures

(12)

Ans.

The debt accumulated by past budgets amounts to many times more than the amount of federal spending.

It will take many years to retire the outstanding debt.

The interest on the outstanding debt will have to be paid for many years until the debt is retired. Running a budget surplus would accelerate the rate of debt repayment

3

3. Explain why interest payments by the federal government would still be a large share of federal expenditures even if the federal government does not run a deficit again for several years.

treasury reserves

ANS.

This answer is more in the form of an opinion, but should be based on Figure 1.1.

The key observation in the student’s answer is that all the spending cuts/additions suggested should still proportionately add to 100% with justifications for increases and decreases in spending.

6

Chapter 1 GOVERNMENT ACTIVITY 24

7. Opinions differ about the appropriate level of total government spending. State if you think that the total size of government (federal, state, or local) should increase or decrease. Use Figure 1.1 to show the direction of change that you prefer. If you think that the total size of government should increase, what programs would you like to see increased? If you would prefer a decrease, what programs should be cut?

(13)

Thailand: Financing Government Expenditures

REVENUE 2012 Share

Taxes 1,877,178.4 80.6%

Social contributions 84,231.3 3.6%

Grants 1,899.5 0.1%

Other revenue 365,180.6 15.7%

Miscellaneous and unidentified revenue 55,317.4 2.4%

REVENUE 2,328,489.8 100.0%

• Central Government—Taxes and Non-Tax Revenues

5. Financing Government Expenditure in Thailand and the United States

Taxes , 80.6%

Social contributions, 3.6%

Grants , 0.1%

Other revenue, 15.7%

Miscellaneous and unidentified revenue, 2.4%

Thailand: Financing Government Expenditures

• Central Government—Taxes and Non-Tax Revenues

(14)

Thailand: Taxes by Central Government

• Central Government—Taxes

2012 Share

Individual Income Tax 184,343.1 9.8%

Corporation Income Tax 659,273.0 35.1%

Value Added Tax 457,917.0 24.4%

Excise Tax 396,907.4 21.1%

Specific Business Tax 40,318.7 2.1%

Customs and other import duties 115,388.3 6.1%

Taxes on exports 320.6 0.0%

Profits of fiscal monopolies 5,663.7 0.3%

Other Sales Tax 3,659.6 0.2%

Other Taxes 13,387.0 0.7%

Taxes 1877178.39 100.0%

Chairat Aemkulwat, Public Econmics 2952331 27

Thailand: Taxes by Central Government

Individual Income Tax,

9.8%

Corporation Income Tax, 35.1%

Value Added Tax, 24.4%

Excise Tax, 21.1%

Specific Business Tax, 2.1%

Customs and other import duties , 6.1%

Taxes on exports , 0.0% Profits of fiscal monopolies , 0.3%

Other Sales Tax, 0.2%

Other Taxes, 0.7%

28

(15)

Thailand: Taxes by Central Government

29

Financing Government Expenditures

• Federal Government—Taxes

(16)

Financing Government Expenditures

31

REVENUE 2012 Share

Taxes 165,241.3 33.1%

Grants 320,477.2 64.2%

Other revenue 13,452.7 2.7%

Miscellaneous and unidentified revenue 2,813.1 0.6%

REVENUE 499,171.2 100.0%

• local governments —Taxes and Grants

Thailand: Financing Government Expenditures

32

(17)

• local governments —Taxes and Grants

Thailand: Financing Government Expenditures

Taxes , 33.1%

Grants, 64.2%

Other revenue , 2.7%

Miscellaneous and unidentified revenue, 0.6%

33

Chapter 1 GOVERNMENT ACTIVITY IN THE MODERN MIXED ECONOMY Act of the plan and the

process of

decentralization to local Administrative Organization, B.E. 2542 (1999).

พระราชบัญญัติกําหนด แผนและขั้นตอนการ กระจายอํานาจให้แก่

องค์กรปกครองส่วน ท้องถิ่น พ.ศ.2542

2012 Share

Local Maintenance Tax and Building and Land Tax 22,080.9 13.4%

Fee for right registrations and juristic act on the properties 26,399.9 16.0%

Value Added Tax 49,648.5 30.0%

Other Sales taxes 4,082.7 2.5%

Excise Tax 35,293.1 21.4%

Specific Business Tax 557.2 0.3%

Motor vehicles taxes 23,209.5 14.0%

Other Taxes 3,969.5 2.4%

• local governments —Taxes

Thailand: Local Taxes

(18)

Local Maintanence Tax and Building and Land Tax, 13%

Fee for right registrations and juristic act on the properties, 16%

Value Added Tax, 30%

Other Sales taxes , 2%

Excise Tax, 21%

Specific Business Tax, 0% Motor vehicles taxes, 14%

Other Taxes, 2%

Thailand: Local Taxes

• local governments —Taxes

35

Financing Government Expenditures

• State and local governments—Taxes, Federal Grants

36

(19)

Financing Government Expenditures

37

Financing Government Expenditures: Local Government

(20)

Functions of Government

• Provide items we cannot easily make available for ourselves or purchase from others in markets

- Law enforcement and courts

• Redistribute income and economic opportunity - Income support for elderly, unemployed, poor

• Stabilize economic fluctuations - Inflation

• Regulate production and consumption

- For improved health, elimination of excessive monopolistic control over prices

39

How much government is enough?

How much should governments do, and how much should be left to private enterprise and initiative through market sale of goods and

services?

40

(21)

Ans.

A slowdown in the economy during the recession in 2007 to 2009 sharply reduced tax collections for many state governments. During the booming 1990s, many state governments also cut tax rates. As income tax collections and sales tax collections have fallen budget deficits have increased.

Also contributing to the deficits were sharp increases in state government spending for medical assistance to the poor.

Because state governments are required by law to balance their budgets, they must either raise taxes, cut spending, or find other ways of generating revenue when a deficit is forecast.

2

2. As of 2009, many state governments were experiencing fiscal problems, and tax revenues were falling short of planned

expenditures. What factors can influence state revenue

collections and expenditures? Explain why state governments must cut spending or increase taxes when revenues fall short of expenditures. Give examples of the types of taxes used by state governments.

Aging Populations & Public Finance

• Percentage of U.S. residents age 65 or older: 1950 – 8.3%; 2000 – 12.3%; 2050 – 21.1%

• Thailand 2010 – 9.2% SOURCE:CIA World Factbooks

• Significant effects on Social Security and government-funded health care expenditures

• Tax rates to finance programs must increase or benefits to recipients must decline to avoid causing large federal budget deficit

6. Aging Populations: Implications for Public Finance

(22)

Population Aging

43

Old-Age Dependency Ratios

44

(23)

Ans.

Even though many programs are federally funded, such as, Medicare, programs such as Medicaid are partially state funded.

Consequently, the aging population will increase state expenditures as Medicaid and other healthcare programs become more expensive due to increased demand.

The aging population will also impact state government revenue as the population leaves the workforce and contribute less and less in the form of personal income tax, sales tax and property tax.

4

4. The proportion of the population over 65 has been increasing and is expected to increase further. How does an aging population affect a state government’s expenditures? Which state programs are

expected to cost more as the population ages? How does an aging population affect a state government’s tax revenues? Which types of state taxes are likely to see revenue declines as the population ages?

• Individuals, Society, and Government

• The Mixed Economy, Markets, and Politics

• Circular Flow in the Mixed Economy

• Government Expenditures in Thailand and the United States

• Financing Government Expenditure in Thailand and the United States

• Aging Populations: Implications for Public Finance

‘Recap: Chapter 1 GOVERNMENT ACTIVITY IN THE

MODERN MIXED ECONOMY