Econ 350 Public Expenditure Economics

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Econ 350Public Expenditure Economics

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

Lorne Priemaza, M.A. Lorne.priemaza_at_ualberta.ca
Quotes, tables, graphs and definitions from
Rosen et als Public Finance in Canada
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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)?

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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)

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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

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Part 1 Introduction

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

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Chapter 1 Introduction to Public Finance In
Canada

• Canadian Government
• Government Size
• Expenditures
• Revenues

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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

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The Big Question

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

Good of the individual
VS
Good of society

• Low taxes
• No healthcare
• No social services
• High tuition

• High taxes
• Healthcare
• Social services
• Low tuition

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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
  County

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History - Canadian Taxation

• British North American Act/Constitution Act
  (1867)
• 1) Federal government can raise money through
  tax (except property taxes on provincial
  property)
• 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)

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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

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A History of Canadian Taxation

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

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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
  assistance

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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

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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

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A History of Canadian Taxation

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

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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
  back
• 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

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History - Canadian Expenditure
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History - Canadian Revenue

• Note Provincial expendituresgtrevenues due to
  federal subsidies

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Summary of Canadian Taxation

• Government programs have increased over time
• Therefore
• Taxes have grown and changed over time
• Therefore
• Government size has grown

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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?

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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

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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)?

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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
  measured?
• -The government doesnt spread capital purchases
  over the lifetime of the capital (as the private
  sector does)

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Government Size Measurement Problems

• We cant precisely measure the size of the
  government, but we still gain information by
  asking
• 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.

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Government size summary
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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
  Pensions)

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Government Expenditure Composition
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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
  spendsgenerally)

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Government Expenditure Composition
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Federal Transfers 2006-07
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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

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Government Revenue
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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