Iveta Štarhová
322996@mail.muni.cz
Introduction to
Public finance

Introduction to public finance
}Public finance
}Public expenditure
}Governement functions
}Public revenues
}Trends in public finance
}

Introduction to public finance
}Public finance
}Financial operations between public institutions and other subjects (citizens,  households,
companies, non-profit organizations etc.)
}Yet not any united definition
}
}

Public finance X Public sector
}Public Finance
} Financial operations, relations and its tools
}Public sector
}Part of national economy
}Financed from public  budgets
}
}How to measure
}the size of public sector?

Public expenditure in Europe (2014, % GDP)



Growth factors of the public sector
}geographic factors (floods, hurricanes, volcanic activity, ...)
}demographic factors (population boom influence priorities within public expenditure)
}urban factors (urbanization – higher demand on social and technical infrastructure)
}technical and technological factors (state assistance for implementation of significant
discoveries - eg. linking technology)
}social factor (form of the welfare state and its changes)

Growth factors of the public sector
}inflation (↑ share of public expenditure/ GDP, growth of relative prices of public goods in
comaprison with private goods)
} demonstration effect (citizens "want" what they see abroad)
}fiscal illusion (overconsumption, inefficiency)
} Other influences especially political and social (social justice,ideology)

Principles of public finance
}Non-recovery principle – nobody has claim to return expenditure in some specific form (eg. Social
transfers, public goods etc.)
}
}Non-equivalency principle – the purpose of paid tax is not known in advance
}
}Non-voluntarily principle – taxpayers are forced to pay taxes (nobody want to pay voluntarily)

Public expenditures
}Part of the GDP which is related to realization of government functions
}
}Part of the GDP which is consumed rather collectively than privately
}
}Several levels:
}State budget expenditures
}Government expenditures (including governmental organizations)
}Public expenditures (including local budget)
}
}

Public expenditure - two main categories
}Government purchases (eg. Labour force, consumer goods etc.) and capital expenditure (eg.
Investment to highway, education, hospitals etc.) – purchase of input from the public sector side
}
}Transfers expenditures (Pensions, social benefits, Interest on debt, etc.) – to ensure
redistribution function of public sector, public sector is only mediator

Mandatory and quazi-mandatory expenditures
}Mandatory expenditures
}expenditures, which has to be paid and can’t be changed (are determined by law or arising from
commitment)
}e.g. retirments, social benefits
}About 60% of public expenditures
}
}Quazi-mandatory expenditures
}Are not determined by law, but goverment is highly expected to pay them
}e. g. salaries of state employees
}About 20% of public expenditures

Mandatory expenditure
}Monitored:
}the amount of mandatory expenditure to GDP
}the amount of mandatory expediture to total public expediture
}The amount of mandatory expediture to total public revenues
}
}
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014*
2015*
GDP (billion  CZK)
2984
3222
3535
3689
3628
3667
3814
3 846
3 884
4 061
4 216
Share of mandatory expenditure
15,8
16,2
15,7
15,8
17,1
17,1
17,1
17,0
17,3
17,3
17,0
Share of quasi-mandatory expenditure
6,9
6,7
6,2
5,8
6,3
5,9
5,3
5,3
5,3
5,1
5,1
Share of total mandatory expenditure
22,7
23,0
21,9
21,6
23,5
23,0
22,4
22,3
22,6
22,4
22,1
State budget expenditure (billion CZK)
923
1021
1092
1084
1167
1157
1191
1 152
1 173
1211
1218
Share of mandatory expenditure
51,1
51,3
50,8
53,7
53,3
54,3
56,5
56,7
57,2
58,1
58,7
Share of quasi-mandatory expenditure
22,3
21,3
20,1
19,9
19,6
18,7
17,7
17,7
17,5
16,9
17,6
Share of total mandatory expenditure
73,4
72,5
70,9
73,6
72,9
73,0
74,2
74,4
74,7
75,0
76,3
State budget revenues (billion CZK)
866
923
1026
1064
975
1000
1013
1051
1091
1099
1118
Share of mandatory expenditure
54,4
56,7
54,0
54,7
63,8
62,8
64,5
62,1
61,5
64,0
63,9
Share of quasi-mandatory expenditure
23,8
23,5
21,5
20,3
23,5
21,6
20,2
19,4
18,8
18,7
19,1
Share of total mandatory expenditure
78,2
80,2
75,5
75,0
87,3
84,4
84,7
81,5
80,3
82,7
83,0

Public expenditures
}Indicitors of size of the public expenditures
}percentage of public expenditures on GDP (source: worldbank)
}percentage to the increase of other economic indicators etc…
}
}

Worldbank:
http://data.worldbank.org/indicator/GC.XPN.TOTL.GD.ZS/countries/CZ-FR-DE-US-ES-PL-GR?display=graph

Government functions
}Allocation
}Stabilization
}Redistribution
}
}

Allocative function
}Providing services in situations where private sector does not generate sufficient quantity or
quality of these services
}This function is associated with remedying market failures
}
}Which market failures you know?
}

Redistributive function
}Peforming by using tax and transfers (main tools)
}„Fair“ allocation of sources
}
}Lorenz curve measures income distribution income in the society
}Gini  coefficient
}- 0 (total equality)
}-  1 (total inequality)
}
}
¨
}
http://ingrimayne.com/econ/AllocatingRationing/Figure6.5.gif

Gini keoficient
}


Social expenditures
}Public and private social expenditures 2007
46325231Chart_SOCX_2010
Source: oecd

CZ has really small part of private social expenditure, almost all social expenditure are paid by
public sector

Redistributive function
}Tools
}Revenues (Taxes – e. g. Progressive taxes)
}Expenditures
¨Subsidies
¨Transfers
}

Stabilization
}Tools
}Monetary (at national level - central banks)
}Discount rate (interest rates of national banks)
}Reserve requirements
}Open market operations
}
}Fiscal
}Public expenditures
}Public revenues (taxes)
}Budgeting of deficit
}
}
http://mrshearingeconomics.weebly.com/uploads/1/0/3/0/10303678/119492_orig.jpg

Public revenues - types



}Tax revenues
}Capital revenues
}Subsidies
}Other
Public revenues – main categories

}Taxes (direct and indirect taxes)
}Fees
}Customs duty
}Social security and health insuarance
Tax revenues
http://europskaunia.sulik.sk/files/2013/06/populizmus-eu-dan-z-finanncnych-transakcii.jpg

Categories of taxes
Direct taxes
Indirect taxes
Income tax
Corporate tax
Wealth tax
VAT (value added tax)
Excise duty
Service tax
CST (central sales tax

}Tax revenues as a percentage of GDP     = tax quota
}(simple, compound)
}
}
}Eurostat (Year 2011)
}Worldbank
}
}
Tax revenues – tax quota
Source: Eurostat

Eurostat: http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Tax_revenue_statistics
Worldbank:
http://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS/countries/CZ-FR-DE-US-ES-PL-GR?display=graph

Structure of tax revenues
}
Source: Eurostat

http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Tax_revenue_statistics

}e. g. from European Union
}
Subsidies
Total budget expenditure in euros for the whole period 2007-2013 per capita (2007 population
figures) are given below. Negative numbers indicate net contributors, positive numbers indicate net
recipients.
Source: http://www.openeurope.org.uk

}
}Revenues from selling state property
}Mostly quite small amounts
}Irregular, one-time revenue
}
Capital revenues
http://img.ihned.cz/attachment.php/280/33601280/iostuvDEGJKMNOkl6Pbcefhpqxyz1ARV/bydleni-dum-slupce
-mince-ilu.jpg

}Revenues from services provided to public (e. g. Highways)
}Penalties
}Revenues from selling non-capital property
}…
Other revenues

Trends in public expenditures



Trends in public finance
}Alfred Wagner – 1890
}„Togother with growing income in economics grows the size of public sector“
}
}Why?
}Technological changes (e. g. health care)
}Social and demographic factors
}Threshold effect (wars, floods…)
}Political reasons
}
}
}
}
}
}
}

Changes in population
}Changes in population  (ageing, low fertility rate)–> why does it affect government spending?
}
}
The number of people in productive age (15-64 years) per person in post-productive age (65 +)
Source: International Data Base (2011)

Economic growth x government size
}Negative relationship
}
•diminishing returns
•
•crowded-out effect to private investment
•
•inefficient expenditure => distorted allocation of resources
•
•space for corruption
}Positive relationship
}
•insurance function to private property
}
•encourage private investment
•
•Improve the investment environment
}

Relationship between Economic Growth and Government Size



Factors affecting the growth of government spending
}Demographic changes (ageing, low fertility)
}Increasing labour productivity and related growth of income (higher tax revenues -> higher
expenditures)
}Increasing living standards
}Increasing unemployment rate
}Technological progress (higher claims on financial resources)
}Inflation
}Politic and social influences (level of welfare state, populism, bureaucracy)
}Demonstration effect and the related effort to cope with living standrads of neighboring countries

Political reasons – welfare state
}Greece…
}Czech republic – social security system, health care system, free education…
}Your country…?

...thank you for your attention