Seminar 1

Fundamental Principles of Public Finance and

The Logic of the Budget Process

Professor Lydia PorteeKaplan University

PP520 – Finance and the Administration of Public Funds

What’s the Difference Between Public and Private Sector?

• Similarities & Differences– Sources of funds– What funds get spent on– Decision making– Oversight and management control– Legal issues– Freedom of information– Measure of success

Why Do Governments Exist?

• Governments make rules for markets

• Governments enforce rules

• Governments provide public goods

WHY?

Market Failure

• Governments exist to provide valuable services that businesses or individuals are unwilling or unable to provide independently

The Elements of Nonappropriability

• Concepts– Exhaustion or Rivalry– Exclusion– Alternate use and joint use

• 2 big questions– Is the exclusion of the goods feasible?– Is consumption individual or joint?

4 Categories of Resources

PRIVATE GOODS•Food•Clothing•TV Sets

(alternate use, exclusion feasible)

TOLL GOODS•Turnpikes•Toll bridges•Motion pictures

(joint use, exclusion feasible)

COMMON-POOL RESOURCES•Aquifers•Fishing grounds•Petroleum reserves

(alternate use, exclusion not feasible)

PUBLIC GOODS•National defense•System of justice•Vector control

(joint use, exclusion not feasible)

Nonappropriability

• Nonexhaustion/nonrivalry (air

• Free Riders

Externalities

• Positive and Negative Unintended Consequences

• Good outcomes– Vaccines result in less exposure to those who

have not been innoculated)

• Bad outcomes– (alligators in the swamp after draining)

Failure of Competition

• Incomplete markets / imperfect information– Government testing of drugs, flood insurance– Adverse selection (HMOs rejecting cancer clients)– Moral hazard (flood insurance to those in flood zones)

• Economic stabilization– Preventing unemployment, inflation– Increasing standard of living

• Redistribution– Corrects perceived injustices

Privatization

• Arguments supporting– Smaller government– Operating efficiency and response to clients– Cash

• Arguments against– Loss of government capability– Possible monopolistic manipulation

Government Production & Government Provision

Government Provision with Government Production

Government Provision with

Private Production

Private Provision with Government Production

Private Provision with Private Production

Building Social Decisions from Private Preferences

• Public choice theory – individuals are the best judges of their own well being

• The welfare of the community depends upon the welfare of individuals in that community

• Pareto Principle – If at least one person is better off from a policy action and no person is worse off, then the community as a whole is better off and the action should be taken

The Size and Growth of Government Expenditures

19

Four Dimensions of Budgeting

1. Accountability2. Managerial: forecasting,

productivity, efficiency and effectiveness

3. Political instrument to allocate and redistribute resources

4. Economic instrument

20

Fiscal Policy and Budget

• Budgeting: plan to carry out policy objectives– Expenditures: who gets what for how much?– Revenues: who pays how much by which

means?• Fiscal Policy: the impact of federal government

expenditures and revenues on the economy.– Managing the economy

21

What is a Budget?

• A plan for how the government spends our money– Needs, priorities, estimates

• A plan for how the government will pay for its activities– Estimates and impacts

22

Enduring Issue

• Budgeting is a political process occurring in a political arena for political advantage– versus:

• Budgeting as a rational means to provide for the efficient, effective, and equitable distribution of the nation’s wealth to achieve publicly desired purposes.

Governmental Accounting and Financial Reporting

• Independent authorities or boards establish standards (rules) for accounting and financial reporting.– Financial Accounting Standards Board

(FASB) {set standards for private sector}– Government Accounting Standards Board

(GASB) {set standards for public sector}

Standards

1. Source documents

2. Journals

3. Ledgers

4. Procedures and controls

Comprehensive Annual Report (CAFR)

• A general-purpose report produced to supply information needed for public officials, citizens, auditors and investors.

• Publicly available document.

• Comprehensive and reliable single source of information.

Conclusion

• Why do governments exist?

• What are the objectives of governments?

• What are the results of our system of government?

• How are federal/state/local governments constrained?