Seminar 1 Fundamental Principles of Public Finance and The Logic of the Budget Process Professor Lydia Portee Kaplan 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.Accountability 2.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?