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Econ 350 Public Expenditure Economics


Title: Econ 281 Chapter 1 Author: Lorne Priemaza Last modified by: Lorne Priemaza Created Date: 8/29/2002 4:53:39 PM Document presentation format – PowerPoint PPT presentation

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Title: Econ 350 Public Expenditure Economics

Econ 350Public Expenditure Economics
  • Introduction to Public Economics
  • Public Expenditure In Canada
  • Political Economy

Lorne Priemaza, M.A.
Quotes, tables, graphs and definitions from
Rosen et als Public Finance in Canada
Course Overview
  • Econ 350 is divided into 4 sections
  • Introduction
  • -What is Public Economics, Welfare Economics, and
    why is the government involved?
  • 2) Public Economic Framework
  • -How do we analyze aspects of Public Economics
    (Public Goods, Externalities, Income
    Redistribution, Cost-Benefit Analysis)?

Course Overview
  • Econ 350 is divided into 4 sections
  • 3) Public Expenditures In Canada
  • -How do our Public Economics tools apply to
    Canadian programs (Social Welfare, EI, Pensions,
    Healthcare, Education)?
  • (-Note Part 4 in textbook)
  • 4) Political Economy
  • -How do governments make decisions and what is
    Fiscal Federalism?
  • (-Note Part 3 in textbook)

Course Content
  • Most topics will consist of 4 sections
  • History
  • Theoretical Framework and Analysis
  • Mathematical Framework and Analysis
  • -Note that since Econ 450 covers more in-depth
    math, this coverage will vary widely by topic
  • 4) Analysis and Discussion
  • Note As the text was last updated in 2008, it
    lacks a comprehensive analysis of the
    2008-present financial crisis

Part 1 Introduction
  • Chapter 1 Introduction to Public Finance in
  • Chapter 2 Fundamentals of Welfare Economics
  • Chapter 3 The Economic Roles of Government

Chapter 1 Introduction to Public Finance In
  • Canadian Government
  • Government Size
  • Expenditures
  • Revenues

Theory -Why are we here?
  • This course will take a microeconomic view of
  • Why the government affects allocation of
    resources and distribution of income
  • How the government affects allocation of
    resources and distribution of income
  • -Often there are many options, each with pros
    and cons

The Big Question
  • Public Economics examines the tension between two
    philosophies and their implications

Good of the individual
Good of society
  • Low taxes
  • No healthcare
  • No social services
  • High tuition
  • High taxes
  • Healthcare
  • Social services
  • Low tuition

Canadian Government
  • Federal Government -CapitalOttawa
  • Provincial Government
  • -10 provinces, 3 territories
  • -Alberta Capital Edmonton
  • Local Government
  • -Cities, towns, hamlets, counties, etc.
  • ie Edmonton, Leduc, Milk River, Lac St. Anne

History - Canadian Taxation
  • British North American Act/Constitution Act
  • 1) Federal government can raise money through
    tax (except property taxes on provincial
  • 2) Provinces cant charge custom duties, excise
    duties and other indirect taxes
  • 3) Provinces can use direct taxes (income taxes,
    estate taxes, inheritance taxes, property taxes)

A History of Canadian Taxation
  • Original taxes
  • -Before confederation, provinces went into debt
    to build infrastructure (roads, ports, etc)
  • -After confederation, federal government assumed
    this debt
  • -Federal government responsible for defense,
    navigation, shipping, trade regulation, criminal
    justice, and banking

A History of Canadian Taxation
  • Original taxes
  • -99 of tax revenue gt import excise taxes
  • -Founding fathers favored a strong federal
  • -Provinces were given subsidies to cover justice,
    education, welfare, and internal transport

A History of Canadian Taxation
  • Tax Changes
  • -World War I (1917) introduced corporate and
    personal income tax
  • -1919 excise and custom duties were 78 of taxes
  • -1920 saw first federal sales tax
  • -1912 to the 1930s federal government used
    conditional grants to fund provincial
    employment, highways, some education, old age
    pensions, disease prevention, and social

A History of Canadian Taxation
  • Tax Amendments
  • -1940 amended the constitution to allow federal
    employment insurance
  • -1951 amended the constitution to allow
    federal/provincial old age pensions
  • -this lead to an increase in payroll taxes

A History of Canadian Taxation
  • Tax Fights
  • -Provinces (especially Quebec) have opposed the
    federal governments expansion of taxation and
    provision powers
  • -Tax revenues have moved from excise and import
    to income, payroll, and sales tax
  • -all new taxes originate in the House of Commons
    and cannot be introduced by the senate

A History of Canadian Taxation
  • Provincial Taxes
  • -Constitution Act limits provinces to direct
  • -To pay for increased welfare (especially after
    Great Depression), health, and education,
    provinces introduced income taxes and sales
  • -Provinces determine what taxes local governments
    can impose (usually property)

Summary of Canadian Taxation
  • 1867 Constitution Act laid out tax powers
  • This act has been amended to give federal
    government more power
  • Provinces dont like this fact, and they fight
  • Governments have supplied more and more services
    over time, required more and more taxes
  • Tax revenue has moved from import and excise
    taxes to income, payroll and sales taxes

History - Canadian Expenditure
History - Canadian Revenue
  • Note Provincial expendituresgtrevenues due to
    federal subsidies

Summary of Canadian Taxation
  • Government programs have increased over time
  • Therefore
  • Taxes have grown and changed over time
  • Therefore
  • Government size has grown

Theory - Government Size
  • Employment - poor measure of government size.
  • Which is bigger
  • A department with 20 people?
  • A department with 2 people and a supercomputer?
  • A department with 10 full time staff and 40
    seasonal staff?

Theory - Government Size
  • Three methods of judging government size are
  • Government purchases -(of goods and services)
  • Government transfers-(to people, business, and
    other governments)-(ie welfare)
  • Interest payments
  • But even these methods have problems

Government Size Measurement Problems
  • Accounting issues
  • -Assess loan guarantees when made, when
    defaulted, or a mixture?
  • -Assess pension plans as they are paid out or as
    they are paid into?
  • -How to assess the liability of contaminated land
    or aboriginal claims
  • -Miscellaneous uncertainty (is a child tax credit
    a tax/revenue reduction or an expenditure)?

Government Size Measurement Problems
  • 2) Hidden Government Costs
  • -If a new regulation has a huge cost to society,
    how is that measured?
  • -How are the impacts of a change to tax law
  • -The government doesnt spread capital purchases
    over the lifetime of the capital (as the private
    sector does)

Government Size Measurement Problems
  • We cant precisely measure the size of the
    government, but we still gain information by
  • Is government relatively small or relatively big
  • Has government size been increasing or decreasing
    over time
  • Regardless of the measure, government size has
    increased since confederation. For example,
    Government expenditure in 2006 was 38 of GDP.

Government size summary
History - Government Expenditure
  • Government expenditure on health and social
    welfare has INCREASED (17.7 of government exp.
    in 1930s to 44.5 today)
  • Transportation and communication expenditure had
    decreased (is this an issue?)
  • Debt charges used to be high, rose into the 90s,
    and recently have fallen
  • Expenditures such as social welfare and interest
    payments are often determined in advance (ie

Government Expenditure Composition
Government Expenditure Composition
  • Relative Federal government expenditure was high
    in 1926, grew by 1960, and shrank since then
  • Relative Provincial government expenditure
    started small and has grown ever since
  • Relative Local government expenditure started big
    and has been shrinking
  • Provinces spend more than they make, requiring
    Federal transfers
  • (as Federal government makes more than it

Government Expenditure Composition
Federal Transfers 2006-07
History - Government Revenue
  • As mentioned previously government revenue has
    changed drastically over the years
  • Personal Income Tax now accounts for 32 of
    government revenue
  • Payroll taxes have increased to 8.4
  • Corporate income tax has fallen slightly lately
    (15.7 in 1964 to 10.4 in 2006)
  • Local government revenue has decreased since 1926

Government Revenue
Chapter 1 Conclusion
  • -The 1867 Constitution Act gave government
    taxation powers
  • -Revenue and expenditure by all levels of
    government has changed drastically over the years
  • -Canada has 3 levels of government (federal,
    provincial and local) which share/fight over
    revenue and expenditure powers
  • -Government size is hard to determine, but has
    increased over time