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THE PUBLIC FINANCE SYSTEM – BASIC RULES

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Lecture outline

The concept of public budget

The components of government

expenditures and revenue

Public debt and deficit

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Source:Government Finance Statistics IMF

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The public budget (1)

The public budget encompasses the revenue and expenses of the central and local governments

The income and expenses are laid down in legal acts e.g. in Poland in the constitution and in the specific budget legislation acts

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The public budget (2)

The term public budget may refer to: A monetary resource available to the

government The annual plan of government income and

expenses

The legal act enabling the government to

accumulate monetary resources and expend

them

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The public budget - measurement

International accounting standards laid down in:

The Government Finance Statistics Manual

The regulations are in line with the System of National

Accounts

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What is it for?

The main functions of the government budget are:

The allocation of resources, The distribution of income Macroeconomic stabilisation

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The allocation of resources

By means of the government budget the

economic resources are divided into public

and private resources

The tax rate influences the extent of the

economic resource which will be managed on

the level of private and public finance

The allocation of resources-examples

The share of public finance resources in

the overall monetary resources depends

largely on the economic model pursued

Various tax laws and tax burden

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The tax rate around the world

Source: http://www.oecd.org/document/60/0,2340,en_2649_34533_1942460_1_1_1_1,00.htm

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Source: wikipedia.en

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The redistribution of income

By means of the government budget the

national income can be redistributed

among the respective citizens or

institutions

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Income inequality around the world

Source:https://www.cia.gov/library/publications/the-world-factbook/fields/2172.htm

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Macroeconomic stabilisation

The public budget is a policy tool, which

helps to mitigate cyclical fluctuations

The budget can fulfill this stabilization

function provided the revenue and expenses

are countercyclical

The countercyclicality of the budget depends

on the share of “fixed expenses”

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Fixed expenses

Fixed expenses constitute the part of the overall

budgetary expenses which are laid down in legal

acts and has to borne independently from the

cyclical situation e.g. social and administrative

expenses

Fixed expenditure in Poland (bln PLN)

0

50

100

150

200

250

2002 2003 2004 2005 2006

Overallexpenditure

Fixedexpenditure

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The public budget principles

Budgetary balance

Commonness

Disclosure

Annuality

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Budgetary balance

The budgetary balance refers to a state

when all expenses are covered by

budgetary revenue

This principle was followed by all market

economies until the 30-ties in the XXth

century

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Intertemporal budgetary balance

The restrictive following of the budgetary balance principle may impose constraints on economic activity

The concept of intertemporal budgetary balance-

an economy may incur a budget deficit in one

period provided that the expenses and

investments undertaken will enable to reach a

budgetary surplus in the future

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Source:Eurostat

The budgetary balance in European countries

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The budgetary balance in European countries

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The commonness principle

Each entity of the economy is related to

the public budget

The relation can be established via taxes,

transfers, subsidies etc.

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The annuality of the budget

The public budget is compiled over a years time

The budget project is laid down for a one-years

perspective

Government programs are compiled for multiple

yearly budget plans

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The disclosure of the budget

The information about the budget is

available to the public

The information is published in legal acts

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The public expenditure

The public consumption e.g. compensation of

the administration employees

Public investment e.g. technical infrastructure

Transfer payments e.g. subsidies, social security

payments

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How is public expenditure financed?

Government revenue

Government borrowing

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The government revenue

Tax revenue

Social contributions- healthcare system, pension system

Grants- e.g from other governments or international

organizations

Revenue from public owned corporations

Seignorage

Other revenue

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Tax revenue

Taxes on income, profits, and capital gains; Taxes on payroll and workforce; Taxes on property; Taxes on goods and services; Taxes on international trade and transactions; Other taxes

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Seignorage

“Seigniorage is the net revenue derived

from the issuing of currency. It arises from

the difference between the “face value of a

coin or bank note and the cost of

producing, distributing and eventually

retiring it from circulation.”

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Governement balance

The difference between the central governement

revenue and expenditure

Government deficit

Government surplus

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Government debt (1)

The government debt or public debt is the debt

of the central government.

The government deficit refers to an annual

period- and increase of the debt over one year

The debt is the accummulated value of the

deficit

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Government debt (2)

External and internal government debt- the

classification depends on whether the debt is

owed to lenders within or outside the country

Short term debt- up to 1 year

Medium term debt- between 1 and 10 years

Long term debt- over 10 years

How can the government borrow?

Issuing sovereign bonds

International lending facilities

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Government debt to GDP in the world

Source: Wikipedia.

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Literature

R.W.Melicher, E.A.Norton, Introduction to Finance. Markets, Investments and Financial Management, John Wiley&Sons,2007

The Government Finance Statistics Manual 2001 available at www.imf.org