Theme 6 - Public Expenditures “The only good budget is a balanced budget.” (Adam Smith) 1

Structure of lecture Public expenditures System of public budgets State budget 2

Public expenditures 3 Government Expenditures (G) Transfers (Tr) Public Expenditures

Private and Public sectors 4 Private sector Public Sector Consumption (C) Investment (I) Gov. Investment (I G ) Gov. consumption (C G ) G Tr Transfers)T (Taxes)

Public expenditures classification Public expenditures can be split into two groups: Current expenditures for: –goods and services, –interest payments, –subsidies, –transfers. Capital expenditures. 5

Macro-economic aspects of public expenditures Public expenditures are important part of total incomes and expenses. Public expenditures for goods and services (G) = an important part of AD. –Remember? AD (aggregate Demand)= Agg.Expenditure =C + I G + G + X n Trends of G influence employment and production in the economy. G could work as multiplier▼ in fiscal policy. 6

Public expenditures are growing „The public sector grows with increasing income per capita“ 7 Alfred Wagner (1835 – 1917)

Factors influencing growth of public expenditures demographic factors: –shift from self-sufficiency on farm with large family to urban mutual dependence, –age structure changes, –etc. threshold effect, inflation trends (higher costs for goods and services), technological changes (increased labour productivity), production volumes growth – increase of incoming taxes, increasing consumption, political and social influences, etc. 8

Demographic factors: Population structure in the CR by age group and sex in men women

Population structure in the CR by age group and sex in men women

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% ITAL. AUT. U.K. FR. BELG. CAN. GER SWE. USA NOR. JAP. AUST. GDP per capita Size of the public sector as % of GDP 14

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Substitution Effect of Public Expenditure (Commodity Subsidy) X 1,X 2 – consumption of good X before and after subsidy Y 1,Y 2 – consumption of good Y before and after subsidy I 1,1 2 Budget Lines U 1, U 2 Indifference Curves

Income Effect of Public Expenditure (Income Subsidy) X 1,X 2 – consumption of good X before and after subsidy Y 1,Y 2 – consumption of good Y before and after subsidy I 1,1 2 Budget Lines U 1, U 2 Indifference Curves

State budget expenditures ► are the transfers and purchases of goods and services. Transfers = financial flows from state budget to individual subjects (firms and households). Transfers to households: Social insurance, childern allowances, unemployment allowances etc. Transfers to firms: Capital and non-capital subsidies. Govermental purchases of goods and services: capital and non-capital. 18

State budget expenditures items 1.social expenditures 2.education 3.administration (civil service) 4.highway 5.local governments 6.defence expenditures 7.security 8.housing 9.health service 10.support of agriculture and forest 11.personal railage 12.governmental reserve 13.culture 14.subsidies on heating 19

Growth of Expenditures of Central Government of the Czech Republic, 1998 – 2012 (in thousands CZK) Total Expenditures, real prices (1998) Social Expenditures, real prices (1998) Educational Expenditures, real prices (1998) Total Expenditures, current prices Social Expenditures, current prices Educational Expenditures, current prices

Ratio of Public Expenditures to GDP, Czech Republic and EU27, 1998 – 2012 (in %) EU27, average Czech Republic