Public Finance PDF

INTRODUCTION This book considers the nature of public nance and its symbiotic relationship with economy and society. It considers: its philosophical underpinnings the nature of the services it nances its relative scale how it is spent how it is raised it...

INTRODUCTION This book considers the nature of public nance and its symbiotic relationship with economy and society. It considers: its philosophical underpinnings the nature of the services it nances its relative scale how it is spent how it is raised its possible bene cial and adverse effects its sustainability the appropriate governmental level of decision-making the means by which it can be disbursed an optimal strategy for public nance. Examination of each of these aspects of public nance is set within an analytical framework based on equity, ef ciency, economy and effectiveness. The intended outcome of this examination is to provide an understanding of the multidisciplinary nature of public nance. It is not the preserve of any one discipline, despite the fact that the great majority of academic texts providing detailed examinations of the rationale for public nance have been written by economists. One such economist de nes public nance as ‘the eld of economics that analyses government taxation and spending policies’ (Rosen 1999, page 536). Essentially the same de nition is adopted by other economists (for example Hyman 1999, page 5) though, in practice, most simply do not de ne ‘public nance’. However, ‘[public nance] is something of a misnomer, because the fundamental issues are not nancial (that is, relating to money). Rather the key problems relate to the use of real resources. For this reason, some authors prefer the label “public sector economics” or simply “public economics”’ (Rosen page 4). In treating public nance as a branch of economics and presenting it as such in textbooks, the subject is immediately made inaccessible to the vast majority of undergraduate and postgraduate students. One such text bravely acknowledges a criticism by one of its reviewers, namely ‘death by diagrams’ (Cullis and Jones 1998, preface). Moreover, economists themselves are often unclear about what parts of their discipline fall within the subcategory of public nance, as would be made clear by an examination of the contents pages of the books in the reading list at the end of this chapter. Traditionally, however, economists have limited their study of public nance to microeconomics, in particular using economic theory to examine how governments can and should affect the use of a country’s productive resources (labour, capital, land and entrepreneurship) to promote the welfare of its citizens. Other treatments of public nance take the form of highly technical considerations of individual taxes, government borrowing and debt, the nancing of local and regional governments and so on. Not surprisingly, therefore, public nance is often regarded as a highly technical, esoteric subject, comprehensible to only an enlightened minority of economists, practitioners and scal federalists. This is unfortunate because a clear understanding of the nature of public nance is an essential underpinning for an understanding of many of the key public policy debates in both developed and developing countries. Even economics students often have a poor understanding of those debates because their view of public nance has been so heavily in uenced by the abstract approach adopted by economists. Therefore, the aim of this book is to provide a multidisciplinary, broad-based appreciation of the nature and scope of public nance. In its broadest terms, public nance is an essential (but often neglected) foundation for the study and practice of social policy, public management, economics and other applied social sciences. Too often, those who study or work in the public sector have an insuf cient understanding of the extremely broad nature of public nance. There never seems to be enough money for public services. Service practitioners and service clients often believe that more money being made available from national and/or local taxes would necessarily lead to enhanced service provision and improved social welfare. When more money is not made available, disgruntled practitioners and clients often regard the cause as ideological or due to ‘the dead hand of nance’. This blinkered understanding arises because of the failure to comprehend the strategic underpinnings of public nance. Whilst knowledgeable of ne detail, practitioners often neglect the strategic foundations of public nance, being ‘unable to see the wood for the trees’. The imperative of having to make the system of public nance work leaves little time for re ection on the nature and scope of public nance. Such re ection is crucial for the development of a sustainable strategy for public nance. In considering the strategic underpinnings of public nance, this book is written for the non-specialist layperson. Its objective is to provide a clear and unambiguous understanding of the ongoing public fi fi fi fi fi fi fi fi fi fi fi fl fi fl fi fi fi fi fi fi fi fi fi fi fi fl fi fi fi fi fi fi fi fi fi fi fi fi fi fi  policy debates relating to public nance and, in particular, to the bullet points listed above. That understanding culminates in the last chapter which provides a strategy for public nance. WHAT IS ‘PUBLIC FINANCE’? One may initially think that the meaning of ‘public nance’ is perfectly clear, being money raised and spent by the state: raised from taxes and spent on services in promoting the public interest, particularly in terms of bene ting the poor. This ‘tax and spend’ model of public nance is, in fact, a severely distorted perception. It is distorted for three reasons: taxation is not the only source of public nance public nance is not spent only on public services or welfare payments ‘the public interest’ is conceptually vague and meaningless in practical terms. A comprehensive de nition of public nance would have to encompass the following characteristics: it is money raised from a wide variety of sources by the state and its agencies including taxes, sales, fees, charges, borrowing, lotteries, donations and bequests, payments in kind and so on disbursed within the public sector, and often in the private and voluntary sectors to individuals, families, companies and service organisations both at home and abroad spent in the form of welfare payments, subsidies, grants, wages and salaries, rents, insurance premiums, interest and amortisation payments on public debt, international transfers, humanitarian aid, payments for construction projects, equipment and other inputs from private sector companies. Thus, public nance ‘comprises any revenues or expenditures passing through state budgets, derived from whatever source and however spent’. The essential point is that nance has to be accounted for within governmental budgets for it to qualify as public nance. Therefore, any revenues or expenditures not passing through governmental budgets cannot be de ned as public nance. The sources and uses of revenues are therefore not the de ning features of public nance. Recent moves towards more ‘entrepreneurial government’, namely paying more attention to raising (rather than simply spending) money from a plurality of sources, can be accommodated within this de nition of public nance. It matters not how the money is raised, whether from taxes, charges, licence fees, lotteries or the other sources noted above. What matters is that, irrespective of their source, those revenues are recorded in local, regional, central or federal government accounts. Likewise, it does not matter how or on what those revenues are spent, expenditures are treated as public nance if and only if they pass through state budgets. This de nition resolves imponderables regarding the treatment of revenues and expenditures that could arguably be treated as public nance, for example so-called tax expenditures (see Chapter 4) and that part of nance within ‘public–private partnerships’ (also known as ‘private nance initiatives’) not provided by governments or state agencies. Such de nitional questions are now resolved because, having de ned public nance, any revenues or expenditures not included therein therefore become de ned as private nance by default. Thus private nance ‘comprises any revenues or expenditures not passing through state budgets, irrespective of their source and howsoever spent’. The difference between public and private nance can be illustrated using several examples. Expenditures on over-the-counter medicines are classi ed as public nance in respect of that part of spending supported by publicly funded exemptions and concessions, the remaining part of expenditure not so supported being classi ed as private nance because it does not enter public accounts. Similarly, spending on private sector leisure services supported by publicly funded vouchers is categorised as public nance but any top-up payments funded by the users of private sector leisure services themselves are categorised as private nance (see Chapter 9). If, however, those vouchers had been exchanged for use of municipal leisure services, both forms of nance would enter the public accounts and so be treated as public nance. Spending on domestic energy such as electricity and gas is classi ed as public nance if that energy is provided by state-owned industries but as private nance if those industries are not state-owned. Central, federal, regional or local government subsidies for domestic energy consumption are categorised as public nance irrespective of whether they are paid to state- owned organisations, private sector companies or mutual organisations. Thus, on the basis of these de nitions, there is a clear, mutually exclusive, distinction between public and private nance. It would be a mistake, however, to believe that that distinction is based solely upon accounting rules. Two prior decisions have to be made before an item of revenue or expenditure is recorded in the fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi  public accounts: citizens have rights to receive particular services deemed essential for their livelihoods, for example access to education and/or health services the state should make nancial provision in order for those rights to be secured. Where no such rights exist (whether explicit or implicit), then no public nance is required. Where such rights do exist, the amount of public nance required to secure them will then depend upon operational decisions about service provision. There are two main options for service delivery: Direct provision by the state The state enables services to be provided by the private and/or voluntary sectors. Public nance will generally be greater when direct state provision occurs compared with when the state enables them to be provided by the non-state sector. In the latter case the state pays (either citizens or service providers) the minimal amount of subsidy required to enable those deemed to be in need of services to receive them. Only the subsidy enters the state budget, not the total amount spent on the service(s). This was made clear by the leisure vouchers example above. Thus whether or not an item of revenue or expenditure enters the public accounts ultimately depends upon public policy decisions about citizens’ rights to services and how access to those services should be enabled. These public policy decisions re ect the dominant political philosophy within any one country. It is necessary, therefore, to examine the philosophical underpinnings of public nance. PHILOSOPHICAL UNDERPINNINGS OF PUBLIC FINANCE There is a long-lived tradition of philosophical discourse regarding the need for government, beginning with the ancient Greek philosophers (Socrates, Plato and Aristotle) three or four centuries BC. Today, political philosophy remains a vibrant subject for debate in considering the relationship between the citizen and the state. This relationship crucially impinges on the nature and scope of public nance. Any text purporting to deal with public nance must pay attention to its philosophical underpinnings but, in fact, most do not. Very few of the texts listed in the ‘Further Reading’ section below address philosophical underpinnings, the most notable exception being Barr 1998. Three broad categories of political philosophy are outlined in Table 1.1. Philosophers may be dismayed by their reductionist nature, as they are gross simpli cations of complex philosophical propositions. Each category contains different strands of arguments that have developed over the centuries. These strands overlap at the margins, such that there are no clear categorical boundaries between them. However, detailed analysis of these different political philosophies is not necessary for the purposes of this book, bearing in mind that they are only intended to illustrate how differing political philosophies impinge upon public nance. The intention of the categorical summary provided by Table 1.1 is to make clear to readers that public nance is about much more than just money. In fact, it is about political philosophy. It re ects the constitutional and cultural relationship between individual citizens and their governments at national, regional and local levels. It re ects the rights and responsibilities of individual citizens, not just for their own livelihoods but also for those of their families, neighbourhoods and local, regional and national communities. It is sometimes problematic to attempt to classify individual writers in terms of one or other of these political philosophies, precise interpretation of their arguments being open to dispute. Bearing this caveat in mind, Libertarian viewpoints were developed in the eighteenth and nineteenth centuries by Hume, Smith, Bentham and Mill and hence are regarded as classical liberal theory. The most extreme form of Collectivist thinking was developed by Marx in the twentieth century, communist theory being subsequently further developed by neo-marxists. Neo-Liberal views were expounded in the twentieth century and so are regarded as modern liberal theory. However, the range of views within the Neo-Liberal category of political philosophy is potentially very wide, re ecting different interpretations of ‘primacy of the individual’, ‘limited positive rights’, ‘enabling state’, ‘mixed economy’, ‘modi ed markets’ and other such terms in Table 1.1. Put simply, the Libertarian and Collectivist political philosophies are much more absolutist and hence much clearer in terms of their beliefs than is the variable spectrum of Neo-Liberal philosophy. The broad strategic implications of these philosophical foundations of public nance are now discussed separately for each political philosophy. The more precise implications for spending, taxation and other sources of public nance are considered in more detail in following chapters. fi fi fi fi fl fi fi fi fi fi fl fl fl fi fi fi fi  Libertarian1 Neo-liberal Collectivist Classical liberal theory Modern liberal theory Civic theory De ning features Autonomy of the individual Primacy of the individual Mutual dependence Unregulated markets Modi ed markets Reject markets Negative rights only2 Negative plus limited positive rights Full positive rights3 Laissez-faire state Enabling state Provider state Capitalism4 Mixed economy5 Socialism6 Beliefs The state is corruptible The state is a necessary evil Benevolent state Taxation is con scation Taxation for ef ciency Taxes for social aims Moral hazard/dependency culture Promote human capital Build social capital No moral case for equality Equality of opportunity Equality of outcome Private property rights are inviolable Property rights re ect policy aims Property is theft General implications No such thing as society Weak conception of society Society emphasised Private enterprise guarantees rights Modi ed market rights State confers rights Individuals are consumers not citizens Individuals primarily consumers Citizens rstly Depend on charity and active citizen State supplements charity/voluntary action State replaces charity Implications for the public sector Minimal state Heavily constrained state Expansive state Enforces only negative rights7 Some limited positive rights8 Full positive rights9 Private sector provision of public services Private or public sector provision Public sector provision Minimal welfare state (‘safety net’ only) Conditional welfare state Unconditional welfare Private insurance Public plus private insurance Public insurance Implications for public nance Minimal public nance Restrained public nance Unrestrained public nance Private spending replaces public spending Seek additionality of public spending Public replaces private spending Minimise ‘burden of taxation’ Tax ‘bads’ not ‘goods’ for ef ciency Redistributive taxes for equity Regressive taxes Proportional taxes Progressive taxes Borrowing and public debt very limited Borrowing/debt for ef ciency purposes Borrowing/debt for welfare. s: 1. The term ‘Libertarian’ is used to denote classical liberal theory in order to distinguish it from modern liberal theory, here referred to as ‘Neoliberal’ in order to avoid confusion 2. Freedom from coercion, interference, discrimination 3. Social and economic rights 4. An economic system based on the private ownership of the means of production, distribution and exchange 5. An economic system in which the public and private sectors coexist side by side 6. An economic system in which the means of production, distribution and exchange are owned collectively by the community, usually through the state 7. Via system of justice: police, courts, prison and so on 8. To education, health care, culture and so on 9. Social justice PUBLIC FINANCE UNDER LIBERTARIANISM Libertarians believe strongly in ‘individual responsibility’, the state only intervening to protect citizens from coercion, interference and discrimination. The state therefore should only provide services protecting those ‘negative rights’, namely the system of justice and the associated law, order and protective services such as the police, courts, prisons, probation and rehabilitation services. There is therefore only minimal need for public nance. For Libertarians there is no such thing as social justice: a person’s life chances are simply the result of market outcomes. Those outcomes may be fortunate for some and unfortunate for others but they are not unfair. They merely re ect one’s innate abilities to earn one’s livelihood through individual air, initiative and hard work. Charitable giving and charitable work (rather than state action) should be relied upon to help those who are unfortunate in lacking innate abilities for self-support. There is therefore no moral case for equality, no such thing as society, no need for the modern welfare state, no need for public nance (other than for law and order and, perhaps, to relieve destitution). Instead the private sector can and should be relied upon to provide individuals and their households with the services they are willing and able to pay for. Private nance is therefore the dominant form of nance, dispensing almost completely with the need for public nance. Even if well intentioned, government intervention is counterproductive. It sti es individual initiative, destroys the culture of charitable giving and charitable work, creating instead a ‘dependency culture’. Individuals, families and communities become unnecessarily dependent upon the state support for their livelihoods. They lose the ability to provide for themselves an adequate standard of living. Dependency is exacerbated by ‘moral hazard’ whereby people change their behaviour as a consequence of being insured, being less cautious in their attitudes and responses to risk. For example, in being protected by a publicly nanced social insurance scheme, individuals fi fi fl fi fi fi fi fl fi fi fi fi fi fi fl fi fi fi fi fi fi fl  may fail to provide for themselves and their families (for example against sickness and old age) because they believe they can rely on the state in times of need. Even worse, they may fail to act responsibly in terms of living healthy lifestyles because they know the state will care for them if the worst happens. Thus smokers may believe they have a right to free publicly funded health care even though they have contributed to their own smoking-related illnesses, the prospect of free care encouraging them to be reckless with their health. Perversely, therefore, people may believe they have a right to public nance simply because they have paid taxes. The very payment of taxes therefore creates the need for more taxation. Likewise, governments cannot be trusted to act responsibly. The state is corruptible, public patronage being used to serve the interests of those who work in government or who can bene t the government. Benevolent patronising governments are bad enough but corrupt ones are even worse. Governments grow for their own sake as well as for (or even instead of) those they are meant to serve (see Chapter 2). Put simply, the best role for the state is ‘laissez-faire’. The best thing the state can do is get out of the way of private enterprise and leave ‘markets’ to do what they are best at, namely generating private nance in the form of pro ts and incomes. Government intervention creates the need (and the incentive) for further intervention in a vicious circle. Public nance goes out of control as the state has increasingly to con scate (that is, tax) people’s incomes and wealth in order to nance ever higher levels of public expenditure (see Chapters 6 and 7). In contrast, individual responsibility creates less need for state action, encourages further private sector provision and so progressively reduces the need for government intervention and public nance in a virtuous circle of self-help and self-improvement through private nance. PUBLIC FINANCE UNDER NEO-LIBERALISM Like Libertarians, Neo-Liberals emphasise individual responsibility. However, they believe that market outcomes may be unjust because not everyone has the same opportunity to earn one’s livelihood through air, initiative and hard work. Therefore the state should ensure that everyone has the same opportunity to secure an adequate standard of living. Thus some ‘limited positive rights’ should be ensured by the state creating ‘equality of opportunity’. These positive rights include an education suf cient to make people employable, a health service to keep them t for work, a jobs market free from social, racial, gender or age discrimination, and a social security system to help those who cannot reasonably be expected to support themselves because of disability or old age. Thus there is need for fairly substantial amounts of public nance. Nevertheless, there are strict limits to government intervention in economy and society. One’s rights to state assistance are matched with responsibilities for self-suf ciency. The state’s role is to enable people and families to look after themselves, rather than being the rst port of call in times of need. Thus positive rights are strictly limited by making eligibility for state support conditional upon acting responsibly, for example by undertaking training and subsequently seeking employment. The state enables people to invest in themselves, building their ‘human capital’ to secure equality of opportunity. Equality of outcome will not, however, be achieved. This is because, even though there is no discrimination, people’s innate abilities, air and work effort will vary and this should be rewarded through differential (but nonetheless fair) outcomes. Hence, although Neo-Liberals have a conception of society, it is not allembracing: there is still an emphasis on the primacy of the individual. The emphasis is on what the individual can do for the state, not what the state can do for the individual. Whilst governments are generally well intentioned and competent, there is an acceptance of the need to avoid an expansive and selfserving state sector. Thus the need for intervention should always be questioned on pragmatic grounds, namely whether public intervention makes markets work better or worse. Put simply, the role of the state should be restricted to an ‘enabling state’, enabling people to provide for themselves and their families through paid employment in the private sector rather than become dependent on welfare handouts. The state should concentrate on creating equality of opportunity but not of outcome, removing discrimination and arbitrary disadvantage. Thus, there are limits to government intervention. Hence, public nance should complement private nance, not replace it. PUBLIC FINANCE UNDER COLLECTIVISM Collectivist philosophy does not accept the concept of the autonomous individual. Each individual is part of a ‘community’ and cannot function without it. Mutual dependence requires collective rather than individualised provision to meet fi fl fi fi fi fi fi fi fi fi fi fi fi fi fl fi fi fi  ‘social needs’. People have full (rather than limited) positive rights as citizens, not just negative rights as consumers. Only the benevolent and omniscient state can provide for such extensive social and economic rights. Thus markets have to be directly controlled (that is, collectivised, not just modi ed) by the state. In the extreme case, state control is intended to ensure ‘equality of outcome’ (not just of opportunity). However, not even the most interventionist states have sought complete equality of outcome, if only because it is most likely impractical. In practice, therefore, the objective is much greater equality of outcome than could be achieved by either unrestrained or modi ed markets. Under collectivism, private property rights are replaced by ‘social ownership’ and the building of social (rather than private) capital. Private pro t must not be at the expense of social welfare. Hence, the state is expansive, becoming all-encompassing through highly progressive taxes used to nance the comprehensive public provision of goods and services in delivering the ‘unconditional welfare state’. Only by such means can ‘social justice’ be achieved. A person’s livelihood must be guaranteed by the state because free markets cannot be relied on to deliver socially acceptable standards of living for all social groups. The state cannot simply stand back to leave markets to allocate resources by chance, as is the case under the laissez-faire state of Libertarianism. Nor should it rely on equality of opportunity to secure socially acceptable outcomes because those outcomes cannot be guaranteed by the enabling state of Neo-Liberalism. Instead, the state must be the ‘provider state’, itself providing a fully comprehensive range of public services in accordance with its assessment of the need for service of each and every citizen. The resulting social bene ts more than compensate for any concerns about dependency cultures, moral hazard, incompetent state or corrupt state. These concerns are generally misplaced and are blown out of all proportion by Libertarians and Neo-Liberals. Thus, under the Collectivist political philosophy, public nance is unrestrained, fully funding public services in accordance with need. State planning is seen as more effective than either unrestrained or modi ed markets in delivering the economic growth underpinning social welfare. Thus, social (rather than simply economic) welfare is the modus operandi of public nance and it can best be delivered by skewing taxes and public services in favour of disadvantaged low-income groups in order to obviate all such institutionalised and class-based disadvantage. Hence, public nance completely replaces private nance. OVERVIEW OF THE THREE POLITICAL PHILOSOPHIES The three categories of political philosophy outlined above clearly have fundamentally different implications for the degree to which governments should intervene in the economy and society. They hold radically different views of the nature of citizenship, rights, responsibilities and equity and, in particular, the constitutional relationship between the state and the individual citizen. Just how far is it legitimate for the state to seek to control or in uence the everyday lives and behaviours of its citizens and to raise the necessary nances from them? Notwithstanding such fundamentally different political philosophies, one common theme is that they all recognise the bene ts of economic growth. Growth of national output is seen as essential for improved individual and/or social welfare in the longer term. Obviously, the three philosophies differ fundamentally in terms of the most effective way of achieving economic growth, that is, whether by unrestrained, modi ed or collectivised markets. Nevertheless, state intervention (or lack of it) is concerned with economic ef ciency as well as equity. The Libertarian, Neo-Liberal and Collectivist political philosophies clearly relate to differing views of the legitimacy and effectiveness of public nance. Libertarians argue that private interests should take precedence over public interests and that the state has no right to redistribute incomes and wealth in pursuit of irrelevant and unsustainable notions of social justice. Collectivists argue the opposite case, rejecting market outcomes and taking the view that individuals belong to a civic community whose interests are safeguarded by the collective provision of services. Whilst these two diametrically opposed extreme political philosophies have been very in uential in past centuries, Neo-Liberalism has arguably been the more in uential political philosophy in terms of more recent social, political and economic reforms in most countries. THE NEO-LIBERAL RESURGENCE The long-term changes in the relative scale of public nance analysed in Chapter 3 can only be understood by appreciating the changing balance between the three political philosophies in in uencing public policy-making. At the risk of oversimplifying and overgeneralising a complex fl fi fi fi fi fi fl fi fi fi fl fi fi fi fi fi fi fl fi fi  and constantly shifting balance of political philosophy in the westernised world, the twentieth century saw shifts: from the pre-1940s Libertarian end of Neo-Liberalism towards the Collectivist end during the following several decades returning to the Libertarian end of Neo- Liberalism during the 1980s and 90s. The Great Depression of the 1930s led to substantial levels of unemployment in Western economies. It apparently demonstrated the failure of free markets to promote the public interest, contrary to the writings of Adam Smith (a famous eighteenth-century Scottish economist and philosopher). Thus developed countries adopted more interventionist stances, in general accepting arguments by Keynes, Galbraith and other contemporary economists that governments could and should use public nance (that is, government expenditures, borrowing and taxation) to modify market behaviour in order to promote full employment and so promote the public interest. Most developed Philosophical and Analytical Frameworks for Public Finance 11 countries adopted a Keynesian approach towards the management of the economy, seeking to maintain the totality of demand for goods and services so as to create and sustain full employment. They did this by varying their levels of public nance as follows: by borrowing so as to spend their way out of prolonged recession or temporary cyclical economic downturn by raising more public nance than was spent so as to minimise any in ationary consequences of full employment. They also used public nance to fund comprehensive schemes of social insurance covering loss of earnings due to unemployment, sickness and retirement, the state acting as a cradle-to-grave ‘safety net’. Keynesian economic policies seemed to work from the late 1940s through to the early 1970s. However, it became increasingly dif cult for governments to use public nance to maintain full employment. Public nance began to account for an ever-increasing proportion of national income in most developed countries as public expenditures, public borrowing, public debt and taxation rose inexorably. The growth of the relative scale of public nance in the second half of the twentieth century (see Chapter 3) re ected the then general presumption that ‘the state knows best’ what is in the interests of its citizens. This assumption of state benevolence, superior knowledge and far- sightedness provided the constitutional and sociopolitical rationale for the growth of the ‘all- powerful state’. Citizens are obliged to pay compulsory taxes and to consume services over which they have typically had little say as individual users (as distinct from voters). Compulsion of the individual by the state was the foundation of the growth of the welfare state in almost all developed economies, most notably after 1945 (see Chapter 4). The perceived solution was for the state to promote and redistribute prosperity through compulsory levies on its citizens and industries and through the direct provision of services. Whilst Collectivists regarded such developments as socially bene cial, others regarded them as potentially disastrous. George Orwell’s novels foresaw a nightmare of all-pervasive state control of the minutiae of our everyday lives, the ‘Big Brother’ state deciding how the citizen should be raised, their jobs, their sex lives, even their thoughts. Although the most extreme predictions of his novel 1984 (written in 1948) had not transpired by the year of the title, it was still generally regarded by Libertarians and more right-wing NeoLiberals as a thoroughly undesirable portent. The near universal acceptance of the success of high levels of state intervention began to break down in many developed countries from the mid1970s onwards. The rapid economic growth rates of the 1945–70 period could not be sustained. Sharp uctuations in economic activity coincided with bouts of in ation, rising rates of unemployment, rapid deindustrialisation and loss of manufacturing jobs, de cits in international trade, rising public sector borrowing and debt, increasingly high proportions of incomes and expenditures taken by taxation, and increasing dependence on the welfare state. This apparently demonstrated the ‘impotent state’, namely the failure of governments to control markets in seeking to promote the public interest. The general acceptance of the all-powerful state and its ability to solve economic and social problems began to break down. Solutions to socioeconomic problems became less obvious, as societies became increasingly multicultural, family, household and labour market restructuring occurred, and with increasing emphasis on numeracy, literacy and other human capital skills appropriate for growing service sectors. This led to a resurgence of Neo-Liberal arguments that states were growing fi fi fi fi fi fl fi fl fl fi fi fi fl fi  out of control, increasingly seeking to control the lives of their citizens and sti ing economic prosperity by both excessive regulation of the market economy and high taxes making work and enterprise less worthwhile. NeoLiberals blamed the 1930s Great Depression on governments, not on markets. They argued that governments had restricted international trade by imposing taxes and quotas on imports of other countries’ exports. This led to the fall in world trade and prosperity Friedman and other neo-classical economists argued that Keynesian economic policies were bound to fail because governments simply cannot control the level of economic activity (and hence employment) by varying the levels of public nance. They argue that growth of the public sector is at the expense of the private sector, public expenditure replacing private expenditure through con scatory taxes. Moreover, they argue that, in sti ing work and enterprise, high taxes do not simply lead to a substitution of public nance for private nance, they actually reduce the total level of (public and private) nance. Thus Neo-Liberals such as Hayek and Friedman argue that cradle- to-grave welfare states are counterproductive in making economies less productive by crowding out the private sector: public nance crowds out private nance (see Chapter 6). Hence, according to the Neo-Liberal argument, public nance creates greater equality in the distribution of incomes by ‘levelling down’ in making the mass of people poorer on average than they would have otherwise been without that state intervention. Neo-Liberals argue that the prosperity of free markets ‘trickle down’ to the poorest groups in society by creating jobs, a ‘levelling-up’ process that bene ts the poor without requiring government intervention. Hence, by reducing their intervention in the market economy, governments would actually be working in the public interest. An increasing distrust of politicians and bureaucrats developed alongside the profound restructuring of economy and society. Not only were governments increasingly seen not to have all the answers, they were also increasingly seen as being composed of elites who often pursued their own self-interests rather than the welfare of those they were supposed to serve. Mancur Olson explained the rise and decline of nations by means of social rigidities at national level caused by self-serving powerful elites (‘distributional coalitions’) which he argued reduce wealth creation by preventing rapid and ef cient adaptation to changing conditions, thus leading to ‘institutional sclerosis’. J. K. Galbraith argued that the distribution of power, rights and economic resources reinforce producer power within the planning system, allowing control of nominally competitive markets and ensuring the survival of existing rms. Niskanen and others developed the theory of ‘self-serving bureaucracies’, whereby public sector bureaucrats pursue their own self-interest rather than the public interest once some minimum level of performance acceptable to governments has been achieved. Hence, the view that (national, regional and local) governments promote the public interest is naive. The Neo-Liberal arguments became widely accepted within the developed world during the 1980s and 90s. Whilst the Libertarian and Collectivist schools have been very in uential at a philosophical level, it is the NeoLiberal school that has been most in uential for public policy. The resurgence of Neo-Liberalism was arguably an inevitable result of globalisation. GLOBALISATION, POLITICAL PHILOSOPHY AND PUBLIC FINANCE Globalisation is an ongoing process, not a one-off event. It refers to a cumulative process of increasing internationalisation of trade and nancial and investment markets. This has arisen as a result of: deregulation (for example removal of import tariffs and quotas and other trade restraints) improved communications, most notably transport of goods by air and development of e-commerce (that is, the purchase of goods and services over the Internet). Globalisation has been associated with a move away from Collectivist states (that is, communism and socialism) and towards a greater degree of capitalism within more Neo-Liberal mixed economies. These terms are expanded on below: Socialism, an economic system in which the means of production, distribution and exchange are owned collectively by the community, usually through the state and in which income is distributed according to work. Hence, unlike totalitarianism (that is, a dictatorial one-party state regulating every facet of life), socialism is consistent with democratic systems of government. Nevertheless, the wishes of the minority are overridden by those of the majority through central government planning. Market-driven outcomes are simply unacceptable. In effect, there is not such fi fi fi fi fi fi fi fi fi fl fi fi fl fl fi fl  thing as ‘the free market’ or ‘free enterprise’. Equity and community are of overriding importance. Pro tability is simply not an issue. Communism, a classless society in which private property has been abolished and in which income is distributed according to need (as assessed by the state) rather than according to work (under socialism) or according to work and ownership of property rights (under capitalism). In Marxist theory, socialism is a transitional stage in the development of a society from capitalism to communism. Capitalism, an economic system based on the private ownership of the means of production, distribution and exchange. Also known as ‘free enterprise’ and ‘free markets’, it requires unfettered free-market economies, free of government restrictions. Government intervention is minimal, restricted only to that which is essential in order to facilitate economic activity through enforcement of laws of contract. No welfare state exists, services such as education and health being purchased and provided privately and personal and household incomes being solely dependent upon one’s earnings and other market-derived incomes. In effect, there is no such thing as ‘society’ in terms of welfare planning to achieve equitable outcomes. The distributions of income, wealth and life chances between individuals and their households are determined solely by market outcomes. Equity is simply not an issue. A mixed economy, an economic system in which the public and private sectors coexist side by side. The balance between the public and private sectors within economy and society varies along a continuum approaching capitalism at one end and socialism at the other. Towards the middle of this continuum, equity and community rank equal in importance with pro tability and individualised consumerism. Markets and society complement each other in a symbiotic relationship whereby, within democratically determined limits, pro ts can be used to pursue social aims and state provision of social services such as education and health care can be used to underpin and facilitate ef cient markets. There are such things as society and markets, just as there is individual liberty within communities. Broadly speaking, the Libertarian philosophy requires a pure capitalist economy. The Collectivist philosophy in its purest form requires a wholly centrally planned economy (either communism or socialism). The Neo-Liberal philosophy requires a mixed economy in which the public and private sectors coexist and which is therefore characterised by a variable mix of free enterprise and state planning. The closest approximations to a centrally planned economy are the former Soviet Union (that is, the Union of Soviet Socialist Republics), namely Russia and its former satellite states (dissolved in 1991), (the People’s Republic of) China, Cuba and (the People’s Republic of) North Korea. China joined the World Trade Organization in 2001, re ecting its growing desire to trade within the global economy. The closest approximation to a pure capitalist economy was the former British Crown Colony of Hong Kong (returned to Chinese control in 1997). Most other countries fall within the mixed economy category, the USA being closer to the capitalism end of the spectrum, Scandinavian countries closer to the socialist end of the spectrum, Western European countries being at intermediate points on that spectrum. In general, however, the greater degree of capitalism has been associated more with a shift in mixed economies towards the capitalist end of the spectrum than with the collapse of communism or socialism. Nevertheless, both events have occurred as nation states have increasingly ‘rolled back the frontiers of the state’. They have done this by selling state industries and other assets, by liberalising markets through the abolition of statutory monopolies, by contracting out the provision of public services to private sector and voluntary sector organisations, and by forming public–private partnerships and other types of private nance initiative. Referred to generically as ‘privatisation’, withdrawal of the state as a direct provider of services and its transformation into the enabling state has occurred in almost all developed and developing countries. That withdrawal has been most profound in social and economic terms in the ‘transition economies’ of Central and Eastern Europe, in transition from centrally planned to free-market economies. Thus, whilst the philosophical debate rages on, there seems to be an international trend towards the more free-market end of Neo-Liberalism, as countries try to help markets work better whilst not going so far as to withdraw completely from ensuring positive rights. Instead, those positive rights have become more limited (most notably in Scandinavian countries) and been made more conditional (most notably in the Anglo-American culture). ECLECTICISM AND fi fi fi fl fi fi  PRAGMATISM IN PUBLIC FINANCE The bulk of the population in any one country may take a more eclectic than ideological view of public nance. Many people would accept that the minimal state of pure Libertarianism is impractical in modern society. Indeed, many would argue that economic development (that is, the transformation from an agricultural, through industrial, to postindustrial service economy) depends critically on state intervention. Thus governments often provide ‘physical capital’ (that is, the infrastructure of roads, railways, water supply, sanitation and so on) in the early stages of industrial development and human capital (that is, through education, training, health care and so on) in the later 16 Strategic Public Finance stages of urbanised development. Many people believe that economic development simply could not take place if public nance was restricted to the minimalist state providing only for negative rights. Likewise, many people would accept that the all-encompassing state of the pure Collectivist political philosophy is impractical in a modern society. Indeed, many would argue that the wants and needs of citizens and consumers are so diverse and developing so rapidly that the state simply cannot comprehend them, let alone provide for them. The state does not have the knowledge or wherewithal to provide for increasingly cosmopolitan, multicultural and af uent societies. Many people believe that attempting to meet the needs and wants of such societies through public nance would be ineffective and extremely wasteful. For most people, the choice between alternative political philosophies is perhaps likely to be in uenced by the experience of their application to public policy. As a matter of practicality, it is no use believing in a political philosophy that either doesn’t work at all or can no longer work as socioeconomic conditions change. Similarly, one’s position on the spectrum of Neo-Liberalism (whether more towards the free-market or controlled market ends) may be dependent upon one’s experience of policy in practice. Idealism may have to be tempered by pragmatism. Indeed, people may not even be schooled in alternative political philosophies and may fail to distinguish between them in categorically exclusive terms. Moreover, the above analysis made clear that Neo-Liberalism is located along a spectrum of ideology between the extremes of Libertarianism to Collectivism. To the extent that governments are democratically elected and respond to the wishes of the electorate, the ideologies of political parties are necessarily tempered by the need to win votes. The casting of those votes may re ect citizens’ demands for services more than a particular political philosophy. It is possible for a citizen to believe in minimal state intervention and yet be unwilling to agree to a reduction in the public services used by his or her household. Ideology is tempered by self-interest. People’s behaviour is not always in accordance with their principles. Put simply, there are limits to how far ideology can be implemented in a democratic state. Governments face political opposition in pluralist political systems and must constantly respond to criticisms from opposition parties about too much or too little state intervention. Even a government broadly NeoLiberal in its economic and social programmes may still accept the need for a predominantly publicly nanced health service. Thus what voters want and how governments use public nance may be more eclectic than ideological. Moreover, the public nances may be heavily in uenced by the pragmatism of policy-making and policy implementation. Political parties inherit public expenditure programmes from previous governments when they take of ce and so the extent to which they can implement their ideologies immediately upon taking up of ce is severely limited. For example, a newly elected Libertarian government replacing a previous Collectivist government will nd it dif cult to fully implement its ideology of minimal state intervention and minimal public nance. It is not possible immediately to replace Collectivist principles by Libertarian principles (see Table 1.1). Privatisation of state assets through sale to the private sector may take many years to implement fully, especially if private property rights have to be re-established in legal terms before assets can be sold. Moreover, the market sector may lack the nancial, managerial and technological capacity to provide those services. Likewise, public services cannot simply be withdrawn overnight if there is no alternative private or voluntary sector provision for citizens to fall back on. Dependency cultures are dif cult to overcome in the short term. Charges for public services cannot be introduced overnight as a replacement of tax nance. Reform of public nance is therefore problematic. At the very least, it will have to continue re nancing the debt created by borrowing used to underpin expansionist fi fi fi fi fi fi fi fi fi fl fl fi fi fi fi fl fi fl fi fi  welfare states under a previous Collectivist government. Whilst replacement of a Collectivist by a Libertarian government would appear to be an unlikely extreme categorical shift, the radical restructuring of Central and Eastern European economies and societies during the 1990s after the collapse of the former Soviet Union is a case in point. Even a more modest shift along the ideological spectrum from a less to a more Neo-Liberal ideological outlook will be subject to many of the same constraining factors noted above. Thus some political scientists argue that political party ideology is less important than the inheritance of past expenditure programmes in explaining what governments actually do with public nance (as distinct from what they say they will do as party rhetoric). This is especially likely to be the case in democratic systems whose governments are subject to fairly regular changes in party control. A citizen may be predisposed to a particular political philosophy. Nevertheless, he or she may accept that there are practical limitations on the extent to which that philosophy can be re ected in the public nances. Most people would seem to agree that ideology cannot be pursued at all costs. They may adopt a ‘pick and mix’ approach to public nance in terms of its strategic role, total amount, sources, uses, the rights of its recipients, the incentives it creates and the conditions attached to its receipt. Most Libertarians accept (perhaps begrudgingly) the need for a welfare safety net to avoid destitution. Many Collectivists agree that citizens cannot simply choose to live off state handouts when they could reasonably be expected to support themselves and their families. Put simply, Collectivism is not a scrounger’s charter. For many voters, it may be that what matters is what works or, at least, what seems to work. Many people may accept that being humanitarian and paternalistic is counterproductive if it creates a strong dependency culture. Within limits, the state ‘has to be cruel to be kind’. Thus the pragmatism of government and the eclecticism of voters may severely constrain the extent to which particular political philosophies shape 18 Strategic Public Finance the public nances at any one point in time. Pragmatism and eclecticism are likely to be in uenced over time by developments in economy and society. For example, the relatively recent and rapid development of service sectors in modern economies has massively expanded job opportunities for all groups in society. The traditional dependence of families upon male heads of household as the sole breadwinner has progressively disappeared in most developed countries. The shift from heavy industrial jobs requiring manual strength towards of ce employment requiring more intellectual abilities led to sharp increases in the proportion of the population receiving post-school education and also of women in paid employment. Higher proportions of physically disabled people are now able to work in of ce-type environments. There are more opportunities for part-time and casualised employment. Family structures are becoming increasingly uid. Personal mobility (and so access to employment) has increased enormously as transport infrastructures have developed. Rates of self-employment have increased in many developed countries. Socioeconomic changes have increased the ability of people to support themselves through work in increasingly educated, skilled, meritocratic, less paternalistic societies. The increasing complexity of modern economies means that governments are increasingly less able to make the ‘right choices’ (if ever they could) on behalf of their citizens. This shift has profound implications for the role of the state and so for public nance. It was noted above that some developed countries have introduced a shift from unconditional welfare payments to those dependent upon recipients undertaking training, education or work experience programmes with a view to reducing their dependence on state handouts. Thus, in many countries, the expression of state paternalism has shifted from ‘workless welfare’ to ‘work-based welfare’. Increasing capacity in the private sectors of many countries means that governments no longer have to be direct providers of public services. An increasing customer focus in the private sector brought about by increased competition is paralleled by similar developments in the public sector. Such changes in the ability of people to make decisions for themselves and to have those decisions validated by the market sector have arguably led to a NeoLiberal resurgence in many countries. AN ANALYTICAL FRAMEWORK FOR STUDYING PUBLIC FINANCE An analytical framework is necessary for the study of public nance. Such a framework can be derived from the three political philosophies described above. They implicitly provide operationally relevant objectives in terms of their differing interpretations of equity, ef ciency, economy and effectiveness. The new public management fi fi fi fi fl fl fi fl fi fi fi fi  literature has paid increasing attention to the need to secure economy, ef ciency and effectiveness in use of public nance, Philosophical and Analytical Frameworks for Public Finance 19 referring to them as ‘the 3Es’. Social policy activists have emphasised equity issues, the ‘4th E’. Table 1.2 provides a summary integration of the 4Es with the de ning features, beliefs and implications of the three categories of political philosophy summarised in Table 1.1. Table 1.2 recapitulates some of the philosophical propositions considered above. It demonstrates the ambiguous meanings of each of the 4Es, each philosophical viewpoint having a fundamentally different interpretation of them. ‘Ef ciency’ as de ned by Libertarians is the ability of free markets to minimise the costs of producing the goods and services demanded by consumers and also to minimise their prices. This requires ef ciency at the level of the individual rm (that is, minimum production costs) and at the level of the economy (that is, goods and services are produced in the quantities consumers are willing to buy). In this way ‘market ef ciency’ enables consumers to maximise their consumption of commodities within the limits of their incomes and wealth. Any use of public nance beyond that necessary to aid the functioning of markets by securing property rights (that is, negative rights) is inef cient. Collectivists simply do not accept market-based concepts of ef ciency, arguing that ef ciency can only be de ned in social terms. ‘Social ef ciency’ is concerned with community bene ts, not private bene ts. It avoids the social costs of unemployment and other market failures whilst ensuring the social bene ts of equal educational, health and other outcomes. Neo-Liberals agree that persistent unemployment, industrial dereliction, inadequate services and other market- driven economic inef ciencies must be avoided. However, this does not mean that the state should adopt the Collectivist solution based on creating jobs directly, nationalising land and providing services directly to achieve ef ciency. Instead, the Neo-Liberal state achieves ef ciency by enabling the creation of employment opportunities and investment potential, modifying inef cient markets to remove the barriers to jobs and investment caused by market failure. Thus the Neo-Liberal conception of ef ciency is ‘modi ed market ef ciency’. Table 1.2 Alternative philosophical interpretations of the 4Es Libertarian Neo-Liberal Collectivist Ef ciency Very narrow concept: Modi ed market ef ciency: Very broad concept: market ef ciency quali ed by the public interest social ef ciency Equity Judged in terms of free- Judged in terms of Judged in terms of market welfare outcomes: work-based welfare: rights social welfare: vertical reward for effort and talent and responsibilities equity and social needs Economy Secured by restricting Secured by only pursuing Not a relevant concept government intervention equality of opportunity when meeting collecto safeguard only negative through modi ed markets tive needs through rights equality of outcome Effectiveness Best achieved by Limiting markets’ maximising Best achieved by laissez-faire, freeing behaviour where necessary eschewing markets’ markets to maximise to avoid market failure whilst maximising behaviour productivity and pro ts recognising the possibility of in favour of governand relying on trickle government failure ment intervention to down to poor groups of secure socially acceptthe bene ts of economic able outcomes growth. ‘Equity’ is de ned by Libertarians solely in terms of rewards or other outcomes delivered by the market system re ecting the aptitudes, abilities and application of people to generate income and pro ts. Hence, equity is the same as market welfare. Collectivists simply do not accept that markets can deliver equitable outcomes and believe that there must be extensive government intervention, using the public nances to secure ‘social welfare’ in terms of socially acceptable outcomes. This requires redistribution of income from rich to poor through taxation and public expenditure (that is, ‘vertical equity’). Neo-Liberals accept the equity of market outcomes in principle but believe that unregulated markets may not afford everyone the opportunity to bene t from work. Thus there may be a need for government intervention to ensure that people in similar circumstances have the same opportunities (that is, ‘horizontal equity’) through work-based welfare, not unconditional handouts to those who choose not to support themselves and their dependants. ‘Economy’ refers to minimising the cost of government intervention. At an operational level, economy refers to minimising the costs of inputs and processes for a given range and level of services. This ‘operational economy’ is the meaning adopted in the new public management literature and is common to the three political philosophies. At a strategic level, economy is achieved by avoiding fi fi fi fi fi fi fi fi fi fi fi fi fl fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi  wasteful provision of public services, in terms of unwanted or unnecessary outputs and/or outputs that are ineffective in terms of delivering objectives set in terms of outcomes. For Libertarians, this ‘strategic economy’ in the use of public nance is best achieved by minimal state intervention, only that amount of public nance which is absolutely necessary to ensure negative rights. For Collectivists strategic economy is simply not a relevant concept since public nance should be at whatever level is necessary to secure collective needs and full positive rights. For NeoLiberals, operational and strategic economy in achieving (limited) positive rights is best achieved by an enabling state modifying market processes so that they operate ef ciently. For example, markets for labour can be made more ef cient by subsidising low-paid jobs and/or retraining for the longterm unemployed, instead of simply giving them unemployment bene ts over the long term. Likewise, energy markets can be made more ef cient by taxing polluting activities in order to reduce their scale and so reduce the associated costs of ill health and environmental degradation. This avoids the state having to pay for treatment of those adverse effects that would otherwise have been caused by the higher level of pollution. By such means, strategic economy in the use of public nance is secured in being the minimum amount necessary to modify (rather than replace) markets. Any other level of public nance is unnecessary and wasteful. ‘Effectiveness’ is de ned by Libertarians as ‘market outcomes’, leaving markets to do what they are best at, namely generating pro ts and economic growth. As already noted, the economic welfare resulting from laissez-faire is assumed to trickle down to all social groups. Government attempts to generate pro ts are bound to fail simply because the state does not have the requisite entrepreneurial skills and business acumen. Laissez- faire therefore limits government intervention to negative rights. Any other level of intervention is doomed to be ineffective in its use of public nance. Collectivists judge effectiveness in terms of ‘social outcomes’. They argue that markets are ineffective as a means of delivering socially acceptable outcomes in terms of service provision and redistribution. Securing them requires copious amounts of public nance. Neo-Liberals accept the need to abandon laissez-faire when market processes lead to substantial social and environmental costs. However, just as laissez-faire may be ineffective because markets sometimes fail, so might government intervention because governments may fail too. Indeed, ‘government failure’ may be greater than ‘market failure’. Thus there should be a presumption against government intervention unless it is incontrovertibly bene cial, namely where it improves the functioning of markets. Hence, government intervention has to be justi ed on a case-by-case basis if public nance is to be used effectively. It is clear that any attempt to de ne equity, ef ciency, economy and effectiveness in absolutely unambiguous and indisputable terms is doomed to failure. Any one writer’s de nitions of each of the 4Es necessarily re ects his or her political philosophy, even if that person’s philosophy is ill-de ned. Ideally, those who write about the 4Es should make their political and philosophical positions explicit. This analytical framework will be used in subsequent chapters to examine public nance. CONCLUSIONS Public nance is about much more than just money. It crucially re ects the dominant political philosophy of a country or region. Hence, whilst public nance has been de ned as any revenues or expenditures passing through state budgets, those nancial ows re ect the relationship between the citizen and the state. That relationship differs between the Libertarian, Neo-Liberal and Collectivist political philosophies. Ultimately, therefore, political philosophy (albeit tempered by pragmatism) determines the levels of government expenditures and revenues from taxation, borrowing and other sources. Hence, there is no clear consensus about the appropriate role and functions of public nance. Libertarians would restrict public nance to securing negative rights only; Neo-Liberals to these plus limited positive rights; Col22 Strategic Public Finance lectivists setting no limits on the role and functions of public nance. Expressed in more philosophical terms, the role and functions of public nance are to: Allow autonomous citizens to exercise full individual responsibility for their own standard of living whilst remaining totally free of state control (Libertarian role) Enable responsible citizens to have the potential to secure an adequate standard of living by affording equality of opportunity in the marketplace (Neo- Liberal role) Guarantee protected citizens adequate standards of living through direct state control fl fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fi fl fi fi fl fi fl fi fi  of their everyday lives in terms of access to and outcomes of state-provided services (Collectivist role). Clearly, the role of public nance is not rst and foremost the provision of services (a practitioner’s perspective), nor the redistribution of incomes and wealth (a social policy activist’s perspective), nor the recti cation of failed private sector markets (an economist’s perspective). Instead, the role of public nance is to underpin the citizen–state relationship. The role of public nance is therefore rst and foremost a constitutional role, its other perceived roles having only subservient status. Thus the role and functions of public nance give effect to the constitutional relationship between state and citizen, that is, primacy of the citizen or the state. Public nance is used to secure the positive and/or negative rights of citizens arising from that fundamental constitutional relationship. Thus taxes and other sources of public revenues nance the provision of services, redistribute incomes and wealth and offset market failures to degrees consistent with the fundamental constitutional relationship between state and citizen. In re ecting political philosophy, public nance is clearly not the sole preserve of any one discipline such as economics. Instead, the study of public nance has to be undertaken within a multidisciplinary perspective if it is to result in a comprehensive understanding of the subject. This book attempts to provide such a multidisciplinary approach by adopting an analytical framework much broader than that traditionally used by economists. Whilst ef ciency de ned in terms of maximum economic welfare is a powerful analytical tool for the study of public nance, so too are equity, economy and effectiveness. The de nition of equity, ef ciency, economy and effectiveness is problematic. The precise de nition of each of the 4Es is different for each of the three broad categories of political philosophy. Therefore the study of public nance provided by any text will de nitely not yield de nitive answers to frequently posed questions such as whether public expenditure, taxation and borrowing are too large, too small or just about right. Such questions can only be addressed by giving quali ed answers couched in terms of each of the three political philosophies. What is an acceptable level of public nance for Neo-Liberals will be deemed excessive by Libertarians and insuf cient by Collectivists. Recently there seems to have been a shift in the scale of public nance deemed acceptable by most countries, re ecting a move towards the Libertarian end of the philosophical scale and away from the Collectivist end. Collectivist approaches towards the organisation of economy and society have waned globally as communist regimes collapsed, their constituent parts becoming economies in transition away from central planning and towards capitalism. Even less extreme forms of Collectivism, such as socialism, appear to have been on the wane as ruling political parties increasingly adopted Neo-Liberal policies, most notably privatisation and work-based welfare. Thus, perceptions of public nance have changed radically over the course of the last century, initially being couched in free-market Libertarian terms, supplanted by paternalistic cradle-to-grave Collectivist terms and now increasingly recon gured in Neo-Liberal terms. In the economies in transition the shift has been from one political philosophy to another, from Collectivism to Neo-Liberalism. Elsewhere, the shift has arguably been one of degree rather than category, a shift along the Neo-Liberal spectrum from more state intervention to less, from state ownership of assets to privatisation, from unconditional state support to conditi