Public Economics: Who Pays the Bills?

The State, in modern society, is an extremely complex entity to manage. Being composed of human beings, it tends to be dynamic and frequently changes direction, not infrequently making very rapid U-turns. Consequently, politics must be able to navigate between the different currents of thought within its borders, trying to make everyone happy in times of fat cows or, at the very least, to make people as sad as possible in times of lean cows. Furthermore, living in a globalized world—characterized by dense economic, political, and military relations with very many countries—politics must also keep a watchful eye on what happens outside so as to be ready to take action to solve problems that, if neglected, could become enormous. One needs only to think of the coronavirus pandemic between 2020 and 2021, when underestimating the problem at the beginning led to months of lockdown, billions in losses, the closure of very many small and medium-sized enterprises, and a surge in unemployment.

There exists, however, an element that connects any request of the people. Whatever society asks for and whatever solution must be adopted to face external events, everything is always tied hand in glove to a small detail that is difficult to overlook: money. Everything society desires always has to do with some money that must be spent.

Yes, today I want to talk about Public Economics, perhaps the most discussed component of society absolutely and the one that causes the most stomach aches.

Let's start from a parallelism that came to my mind while I was in the bathroom. Politics, when it comes to economics, behaves a bit like parents, while society is like a group of children who continually want to buy something. And just like any family, the State must make ends meet, trying to please the children as much as possible. A family must understand how much it has available each year and how much it needs to spend, eventually cutting superfluous costs and moving resources where they are most necessary at that moment.

The state too, in this sense, does exactly the same, except it does not move in the order of thousands of euros but of billions. But the concept is identical. Don't believe me? Well, then you just have to read on.

From this moment on, to make the discourse easy to understand, I will use precisely the metaphor of the family, because the parallelism is truly enormous! I could have used the example of a company, but not everyone has in mind how a corporation works; everyone, instead, knows perfectly how Mom and Dad must make ends meet, both because today we are the ones doing it as parents and because we saw our mom and dad do it in the past.

Public Economics - Purpose.

This is the point from which to start; otherwise, the sense of this post would not be understood. The main purpose for a family is to make ends meet. To avoid ending up under a bridge, especially in case of problems or lean periods, the family must achieve a certain parity: that is, outlays must equal income. The ideal goal, obviously, is to manage to earn more than one spends, but in any case it is fundamental to manage one's finances in such a way as not to go into a loss in a constant and irreversible manner. A month or two in the red can even be afforded, but over the long term that color must be avoided as much as possible.

A state has exactly the same goal: to make sure that expenses are equal to or lower than income. When one frequently hears talk of a "balanced budget," reference is being made precisely to this, namely, to the fact that state outlays do not exceed income.

Now, for a family, income and outlays are rather variable over the course of time. For example, new subscriptions are signed, others are canceled, utility rates change, different insurances are paid, and so much more. In the case of children, there are medical and school expenses, clothes, food, and everything a son or daughter needs to be happy. Within the span of just ten years, the expenses of a household can vary drastically, both in value and in type.

The same thing applies to income. A person can have just one job, or two, or both partners can have a job, or maybe a double job. One of the two could be a businessman or businesswoman or, even better, one wins the lottery, and all problems are solved in a single shot. As you can see, under a free market regime, the working opportunities are many, and the possibilities of earning are even more so.

And for a state? How does it work for a state? Does it have the same freedom of movement? Absolutely not. The state cannot hope for a lucky lottery ticket. It is one of those very rigid organizations that always have the same expenses and the same channels of collection. The amounts can change, but the structure remains identical, year after year.

Public Economics - Outlays.

For a family, outlays are the sum of all ordinary and extraordinary expenses: they range from grocery shopping at the supermarket to utility bills, from the children's school up to taking out a new mortgage or an unexpected surgical operation.

But for a state, instead, what are they? Economists call it "public spending," which is the sum of all the costs that politics must sustain to keep the state machine functioning. Unlike what happens in a household, the items that compose public spending are infinite, and one can easily get lost.

To manage to untangle oneself in what is, for all intents and purposes, a jungle of numbers, it is convenient to use the classical subdivision used by experts: current expenditures and capital expenditures.

Current expenditures are the costs of daily "consumption," which, once paid, are exhausted. We are talking about all those outlays that serve exclusively to keep the structure of the state standing. Can you imagine a state without offices and without public workers? It would be a total disaster.

Then we have capital expenditures, which represent the true sore point of every government. These are actual investments, destined to create a value that remains over time. These allocations are almost always tied to those structural reforms that the people demand with a loud voice but which politics punctually postpones and realizes poorly or does not realize at all. But social disappointment, as we know, is another matter.

Given that this post wants to be exhaustive and offer a general overview of what a state finds itself having to pay, let's go slightly more into detail to analyze these single items, both current and capital.

Current expenditures.

As we have said, current expenditures are those necessary to keep the services and the structure of the state active; once paid, they are "exhausted" during the course of the year, exactly like the expense for food or bills in a family.

Healthcare.

For a family, healthcare concerns include medical expenses for medicines, specialist visits, or the classic stomach ache for which one turns to the primary care physician. For the State, instead, healthcare translates into paying that physician and the hospital where the family goes.

Here a fundamental distinction must be made: if healthcare is private, as happens in the United States, the state does not have to sustain great costs, given that the entire system bases itself principally on health insurances paid by single citizens. If you are familiar with the TV series Grey's Anatomy, you have a rather precise idea of how it works. The hospital is managed by a board of directors that elects a chief executive officer; the latter manages relationships with insurance companies, finds investors, keeps the structure functioning, and tries to elevate its qualitative level. Everything revolves around the concept of making the hospital a money machine, even before a structure of care. In this context, if you are in danger of life or in emergency conditions, you are still received and stabilized; however, when it comes to ordinary care, specialist visits, long-term therapies, or programmed interventions, if a patient does not have health insurance, they seriously risk remaining excluded because the hospital can legitimately refuse to receive them if they are not able to pay.

If, instead, healthcare is public, as occurs in Europe, the hospitals and everything that allows them to function are paid entirely by the state, and the structures are managed by directors appointed by politics or by associations tied to the public sector. Every essential medical service is accessible to anyone. Even in European countries, insurances exist, but in this case they serve to cover or to see reimbursed the costs of private visits or extra services. The fundamental difference with the American private system is that, even without any policy, the patient is treated exactly like everyone else.

School and university.

For a family, school represents the cost of textbooks, educational material, and eventually university tuition. For the government in office, instead, education is the cost necessary to guarantee compulsory schooling.

In principle, politics must guarantee education up to the moment a youth is not considered able to work, or anyway, until reaching the age of majority. For this reason, schools are almost always public and managed by personnel paid by the state. Furthermore, the entire teaching body receives its salary from public coffers and must follow the directives of the Ministry of Education (or the ministry that has management of the school system of the country).

The small clarification lies in the fact that private education obviously also exists. Fundamentally, this type of education weighs much less on state costs, since universities and schools of every order and grade are managed by private entities to which families pay often very expensive tuitions. However, compared to healthcare, the dynamic here is slightly different. Private school poses itself as an alternative to public school: by paying thousands of euros or dollars a year, the private sector should—in theory—guarantee a better education, more modern structures, or more exclusive relational channels.

The fundamental difference compared to American private healthcare is that, if a family is in economic difficulty and cannot afford private tuition, the state, through public school, always and anyway guarantees the education of the new arrival on the planet. Education is a duty-right so fundamental that, in the event a family wanted to deliberately prevent a child from attending lessons, the state can activate itself through social services and judicial authorities, arriving in the most serious cases to suspend parental responsibility and remove the minor just to guarantee them the right to study.

Pensions and Social Aids.

Here there are no differences or clarifications. All pension checks, subsidies, and economic supports to families come from a public body that guarantees that the entire pension system and financial aid are disbursed and the applications checked and validated.

Theoretically, a private form for one's pension also exists here, but it is a matter of personal choice and no obligation. Simply, the worker can invest in funds or savings plans to have more money once retired. But it is not an obligation, given that the state always guarantees a pension if the requirements are matured or a social check in case one has not worked enough and a minimum existence is not guaranteed.

Security and Justice.

For a family, the expense for justice reduces itself to the fee of a lawyer to whom one turns to protect one's interests in case of necessity. While for private individuals the cost triggers only when the professional is actually brought into play, for the state, justice represents a perpetual cost.

This is perhaps the most well-known current expenditure and, in certain ways, the most crucial of all. Without a justice system that functions and a security system that maintains order in the streets, the state would transform into anarchic chaos, where criminality gets away with it. To avoid this, the state must constantly pay the salaries of law enforcement and magistrates, in addition to the ordinary management expenses of barracks and tribunals. If often justice seems not to work, the fault is not only inadequate laws that leave crimes unpunished or diminish their gravity, but it is also due to the fact that the sectors of justice and security are constantly reduced to hunger, whether out of negligence, ignorance, or a very precise plan.

In this macro-category, the costs for defense also fall. A family, too, can decide to sustain a similar expense, but it is a matter of an entirely optional choice: we are talking about the installation of an alarm system in the house or, in the most extreme cases, the purchase of a pistol for self-defense. For the State, instead, defense is a structural obligation that translates into the salaries of soldiers and the maintenance of the army.

Recently there has been much discussion about the fact that NATO member countries must increase their military spending, bringing it up to 2% or even 3% of the gross domestic product (GDP). We are talking about billions of additional euros that go to weigh heavily on the public budget. These outlays fall fully under current expenditures, since these are funds that must be allocated and made available every year as a fixed cost of management, regardless of whether the military apparatus is then actually employed or not.

Bureaucracy and debt.

There are two other costs to mention. They are "invisible" costs, because we do not see them directly in the form of tangible services, but they weigh heavily on the overall budget.

In the first place, we have bureaucracy and the entire state machine. I am talking about all the salaries of public employees who work for the state, like the clerks of the tax office, the personnel of public libraries, transport workers, and, not least, politicians and everyone who gravitates around politics (because yes, they too are, for all intents and purposes, public employees). If we think of a household, these costs equal the expense for a maid, a babysitter, or a cook for those who obviously can afford them. To this are added for the state the daily management costs (electricity, heating, paper, computers) of ministries, regions, and municipalities. These are expenses all too well known to a family as well, given that bills for electricity, gas, and water must anyway be paid to run the house.

And then we have the interests on the public debt. By now we know it: almost every country in the world has to deal with debt. The state regularly pays an installment of pure interest to whoever lent it the money. This is a discourse that can seem complicated, but the effect is a bit like digging a hole to fill the one made previously. Let me explain: the state contracts a debt with a creditor "A" for a value of 100. When that debt expires, to return the 100 to "A," the state has two paths: either it raises taxes (a decisively unpopular solution) or it issues new government bonds, asking for a loan from the markets and banks. In this way, "A" takes back his 100 and the old hole is closed; too bad, though, that a new one of 100 (plus interest) has just been dug toward the new buyers of the bonds. At that point, at the subsequent expiration, the exact same strategy will repeat itself to pay the new creditors. And so on, potentially into infinity.

A family, too, knows this type of cost well. Unless one is rich from the family or has won the lottery, a household often finds itself making debts with banks for the mortgage of the house or for financing for the car, vacations, renovations, and the university tuition of the children. And just like the state, sometimes families too make new debts to pay old ones. There is only one gigantic basic difference: the state has the capacity to self-finance itself potentially into infinity, a freedom of movement that, for a family, sooner or later, banks would deny without too many compliments.

Capital Expenditures.

Now we pass to the other part of the equation: capital expenditures. This is the money that the state spends to build, buy, or renovate something destined to last in the years to come. If for a family we are talking about those hefty investments that occur once every ten or fifteen years — like the purchase of a house or a major internal renovation — on a state scale we are talking principally about all those great works and reforms that politics promises in election campaigns and then, punctually, does not realize or does poorly.

Infrastructures.

In this category we find, first of all, infrastructures: the construction and remaking of roads, highways, bridges, railways, ports, and airports. We all want to travel comfortably, rapidly, and punctually, right? Well, to succeed in it, politics must invest tens of billions to keep everything efficient. A similar discourse applies to water, electricity, gas, and internet networks. Here, however, there is a small detail to consider: politics usually pays for the infrastructure (the pipes, the cables), while for the actual service we citizens pay an external company, which can anyway be state-owned, private, or with state participation. Here, for a family, we talk about extraordinary maintenance, where one must change a pipe, remake a wall, or install a new window.

Healthcare.

Then we meet healthcare again. In this case, however, we do not talk about who works there but about the where. The construction of new hospitals or the purchase of high-technology medical machinery (like MRIs) is a state prerogative. There can be investments or donations by private individuals, but it is a matter of pure charity, without purposes of profit or control. Thisis obvious, except in America, where private individuals pay for every single thing and use hospitals to make a heap of money on the skin of public health.

Education.

Just as for healthcare, school and university buildings too—understood strictly as bricks, making buildings safe (schools and museums), and research laboratories—weigh enormously on the budget. It is an onerous cost that no political party ever really has the desire to sustain. After all, it is too dangerous to have future adults well-educated: they might start thinking with their own heads and rebel against power.

Justice.

The exact identical scheme applies to security and justice. The purchase of new vehicles, like police cars or fire trucks, and the construction of new prisons have always represented a nice problem for governments, perhaps because it means that politics should fight the exact identical people who invested in the financial success of the party. On the bright side, investing billions of euros to find new technological and efficient systems to kill one's neighbor — possibly thousands of lives at a time through defense and armaments — is an investment that politics always makes with very great pleasure.

Public Economics - Income.

Well, we have seen what money is spent on. But we must achieve a balanced budget. Where does the money that is spent come from? Obviously from taxes. Well, let's say not only from taxes, but for sure what is deducted from the gross salary is the main source for a state. Without those hundreds of billions, one does not survive.

Taxes (visible and subtle).

Let's start with taxes. Without those levies that we hate so much, in the long run a state fails, choked by interests on loans. Taxes divide themselves principally into two categories, one more detested than the other.

The first are those on incomes, better known as direct taxes. This is the money that the State retains on every single salary and on the turnover of any company or professional. It is because of them that one always talks about "gross" and "net" salaries for employed workersor "turnover" and "profit" for businesses.

And then we have the taxes that are seen like smoke in the eyes, subtle because often one does not realize they are paying them: taxes on consumption, better known as indirect taxes. This is all that money we shell out every time we buy something (like VAT) or when we fill up with gas (excise duties). They are hated because they are perceived as a double burden: not only are taxes paid at the source on one's earnings, but one is also penalized when deciding to spend what remains.

The solution to make everyone happy, in theory, would be to remove VAT and excise duties. To do so, however, one would first need to cut public spending. Given that the costs of the state are not wanted or cannot be cut, those billions must enter from somewhere anyway. Let's imagine then that politics decides to zero out VAT and excise duties, raising hand in hand the taxes on salaries to compensate for the loss. How would we make a decision of the kind? In itself, on a mathematical level, nothing would change, but the discontents would be immediate and devastating.

Finally, we have copayments and taxes on services: a category that many define as short of infamous. These are all those payments requested to utilize specific public services. Do you want a license renewal? You pay. Do you want to register the car? You pay. Do you want to do a specialist medical visit? You pay. It comes natural to ask oneself: why do we have to pay out of our own pockets for services that should be already covered by the taxes we pay every month? Well, after all, armaments and new defense systems must be paid in some way, right?!

Now let's pass to that part of income that is not so obviousbut that can in some way make a difference.

Crime.

One could assert that also through the fight against crime the State cashes in billions, as in cases of corruption, illicit trafficking, and tax evasion. This is true, but only up to a certain point. As long as it is a matter of seizing real estate or legal movable assets (like automobiles), the state can make cash by reselling them through judicial auctions. However, these represent minimal incomes, without counting that assets are often sold off at prices that do not minimally reflect their real market value. The real big score would be made if the state could place on the market confiscated assets of absolute value, like weapons or drugs; for obvious ethical and legal reasons, however, this trash is destined to rot in judicial warehouses waiting to be destroyed, producing a cost and not an income.

For tax evasion, then, the story is still different. Sure, on paper the culprit is condemned to compensate the entire amount subtracted from the tax authorities, but in reality, due to endless legal technicalities and appeals, those sums hardly come back. In the best of hypotheses, the state manages to collect fines and late fees, but the billion-dollar "booty" read about in newspaper headlines will never truly re-enter public coffers. This is because, in the meantime, that money has already been reinvested abroad, shielded by shell companies, or hidden where no one will ever be able to find it, or the condemned person has gone bankrupt or is penniless and cannot pay.

Investments.

Returning within the tracks of full legality, we meet the earnings of state companies. Politics directly controls some corporations or holds share quotas in companies often of national strategic interest (think of the giants of energy, postal services, or transport). The profits and dividends that the state cashes from these realities are put back into circulation in the public budget. Contrary to what one might think, however, the state does not act like a private trader on the Forex market or commodities market to speculate on short-term price movements; rather, it manages these participations to guarantee essential services and economic stability to the country.

Continuing in our roundup, we find the rents and sales of public assets. It frequently happens that the state owns disused real estate of which it does not well know what to do: in these cases, either it decides to sell them to make immediate cash or, in the best situations, it rents them out, ensuring a constant income over time. A flashing example is municipal stadiums: today it is a dynamic that is fading because clubs prefer owned facilities, but up until the nineties the state (through municipalities) held ownership of the city stadium and rented it to the local team or to organizers of great concerts. Recent examples of municipal stadiums still active are Milan with San Siro and Berlin with the Olympiastadion.

When it is not a matter of entire buildings, collection occurs through the concession of the right of use of public soil. The most famous example is that of beach concessions, where a private individual can "rent" from the state a piece of beach to open a beach resort and profit on it. The same concept applies to entrance tickets for nature parks, museums, or any other public activity that values the cultural and landscape heritage of the territory.

Finally, we arrive at the most famous method in absolute to make cash, second only to taxes: government bonds. They are the two faces of the same coin we talked about regarding interests on debt. The issuance of these bonds is, for all intents and purposes, a way to obtain billions in very rapid times. These are actual loans that the state asks from citizens, companies, and banks, obligating itself to return the sum at a preestablished expiration together with an interest rate. The enormous advantage of this mechanism is immediate liquidity, spendable right away to cover emergencies; the dramatic reverse of the coin is that that figure will have to be returned "on steroids." And if at expiration the money to pay interest and capital is missing, the state will be forced to issue new bonds to repay the old ones, fueling that infinite cycle of debt we talked about before.

Brief Reflections.

If we look at the entire picture, the situation is rather evident: we have an extended family in which the children (society) continue to legitimately ask for care, education, and safe roads. On the other side, we have the parents (politics) who, instead of managing money with the wisdom of the good father of a family, often prefer to spend billions on expensive and dangerous toys to look good with the neighbors, leaving the children's rooms with the ceiling collapsing.

But the true trap, the true "stomach ache" of the state economy, lies in the way this money enters. If a normal family, when it runs out of funds, rolls up its sleeves, looks for a second job, or stops going to restaurants, the State cannot do it. The state has only two ways to fill its wallet: either it sticks its hands directly into the pockets of its own children through that double burden of direct, indirect taxes, and subtle copayments, or it asks for a loan-shark loan from the markets, digging a hole today to cover the one from yesterday.

The balanced budget, in this system, becomes a mirage flouted on talk shows. The truth is that we are trapped in a continuous cycle: we pay taxes to receive services that often do not work, and in the meantime we accumulate a debt on steroids that our children and grandchildren will have to repay.

Perhaps, after all, the metaphor of the family is not 100% perfect. Because in a normal family, if parents spend all their savings on weapons, leave their children without school, and indebt themselves with loan sharks for generations to come, social services would intervene. In the State, instead, we tend to recall the same parents to the government at the subsequent elections, hoping that this time, by magic, the accounts balance by themselves.

M.