Finance THE PUBLIC FINANCE SYSTEM – BASIC RULES

Finance Lecture outline  The concept of public budget  The components of government expenditures and revenue  Public debt and deficit

Finance Source: Government Finance Statistics IMF Government Finance Statistics IMF

Finance 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

Finance 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

Finance 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

Finance What is it for?  The main functions of the government budget are:  The allocation of resources,  The distribution of income  Macroeconomic stabilisation

Finance 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 Finance

The tax rate around the world Source:

Finance Source: wikipedia.en

Finance The redistribution of income  By means of the government budget the national income can be redistributed among the respective citizens or institutions

Finance Income inequality around the world Source:

Finance 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”

Finance 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)

Finance The public budget principles  Budgetary balance  Commonness  Disclosure  Annuality

Finance 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

Finance 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

Finance Source:Eurostat The budgetary balance in European countries

Finance The budgetary balance in European countries

Finance The commonness principle  Each entity of the economy is related to the public budget  The relation can be established via taxes, transfers, subsidies etc.

Finance 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

Finance The disclosure of the budget  The information about the budget is available to the public  The information is published in legal acts

Finance 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

Finance How is public expenditure financed?  Government revenue  Government borrowing

Finance 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

Finance Tax revenue  T axes 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

Finance 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.”

Finance Governement balance  The difference between the central governement revenue and expenditure  Government deficit  Government surplus

Finance 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

Finance 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 Finance

Government debt to GDP in the world Source: Wikipedia.

Finance 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