Econ 350
Public Expenditure Economics
•Introduction to Public Economics
•Public Expenditure In Canada
•Political Economy
Lorne Priemaza, M.A.
Lorne.priemaza@ualberta.ca
Quotes, tables, graphs and definitions from
Rosen et al’s “Public Finance in Canada”
Course Overview
Econ 350 is divided into 4 sections:
1) 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:
1) History
2) Theoretical Framework and Analysis
3) 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 Canada
Chapter 2: Fundamentals of
Welfare Economics
Chapter 3: The Economic Roles
of Government
Chapter 1: Introduction to Public
Finance In Canada
Canadian Government
Government Size
Expenditures
Revenues
Theory -Why are we here?
• This course will take a microeconomic
view of:
1) Why the government affects
allocation of resources and
distribution of income
2) How the government affects
allocation of resources and
distribution of income
-Often there are many options, each with
pro’s and con’s
The Big Question
• Public Economics examines the tension
between two philosophies and their
implications:
Good of the
individual
VS
Good of society
Low taxes
High taxes
No healthcare
Healthcare
No social servicesSocial services
High tuition
Low tuition
Canadian Government
Federal Government
-Capital=Ottawa
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
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 can’t 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 => import & excise
taxes
-Founding fathers favored a strong federal
government
-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 1930’s: federal
government used “conditional grants”
to fund provincial employment, highways,
some education, old age pensions,
disease prevention, and social assistance
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 government’s
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
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)
Summary of Canadian Taxation
1867 Constitution Act laid out tax
powers
This act has been amended to give
federal government more power
Provinces don’t 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
History - Canadian Expenditure
History - Canadian Revenue
Note: Provincial expenditures>revenues
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) A department with 20 people?
B) A department with 2 people and a
supercomputer?
C) A department with 10 full time staff and 40
seasonal staff?
Theory - Government Size
Three methods of judging government size are:
1) Government purchases
-(of goods and services)
2) Government transfers
-(to people, business, and other governments)
-(ie: welfare)
3) Interest payments
But even these methods have problems…
Government Size Measurement Problems
1) 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
measured?
-The government doesn’t spread capital purchases
over the lifetime of the capital (as the private
sector does)
Government Size Measurement Problems
We can’t precisely measure the size of the
government, but we still gain information by
asking:
1) Is government relatively small or relatively big
2) 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 1930’s to 44.5% today)
 Transportation and communication
expenditure had decreased (is this an issue?)
 Debt charges used to be high, rose into the
90’s, and recently have fallen
 Expenditures such as social welfare and
interest payments are often determined in
advance (ie: Pensions)
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
spends…generally)
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