13.1: What Is State Finance?

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The story above illustrates the ongoing nature of state finance, and the role of budgets in determining what states do. A budget isn’t simply a static document, it determines how money will flow not only within the governing institutions, but within the overall state economy. In a very real sense, the flow of funds through these institutions is much like the flow of blood in a body. It keeps it alive. A simple definition of a budget is “an estimation of revenue and expenses over a future period of time and is usually complied and re-evaluated on a periodic basis.”⁴ It is an ongoing process that directly involves every agency that receives state funds, and also connects the state with the federal government. Beyond that, it impacts ever person in the state who purchases and item subject to a sales tax.

Just like private organizations, public organizations must be financed. Revenue must be acquired in order to pay for the goods and services it provides. Public financing is different than private financing because public entities can draw taxes, and generally spend funds on items that the electorate approves of either in bond proposals, or though their representatives. Private businesses gain revenue by provide goods and services for a fee, and spend money on the item— labor, raw materials, equipment—necessary to produce those goods and services. This creates a source of revenue that then can be used to create the products that will be sold on the market. Public financing begins with a sovereign government with the power to tax and the responsibility to provide certain goods, benefits, and services for the general public.

4. Akhlesh Ganti, “Budget,” Investopedia, Mar. 18, 2021, https://www.investopedia.com/terms/b/budget.asp.