ABSTRACT
This chapter discusses public budgetary issues that are the result of political choices, so political and institutional factors matter quite a lot. This was the primary focus of the work by James Buchanan and Gordon Tullock. And, as Alberto Alesina and Roberto Perotti explained, the rules that govern the budget process itself and the structure of government are significant factors in understanding why some countries seem to be more prone to running large budget deficits. The chapter focuses on the principles of modern public finance that began to emerge in 15th-century Florence, taxation in some form is nearly as old as recorded history. Perhaps the most enduring aspect of David Ricardo's analysis of government debt is what is now referred to as the principle of Ricardian Equivalence. The idea is that debt and taxation are equivalent to each other so it is irrelevant whether the government finances its spending through taxation or borrowing.
