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

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 (IG)

Gov. consumption (CG)

G

Tr Transfers)T (Taxes)

Public expenditures classificationPublic 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 + IG + G + Xn

• 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 1930

9

85+

80-84

75-79

70-74

65-69

55-59

50-54

45-49

40-44

35-39

30-34

25-29

20-24

15-19

10-14

5-9

0-4

60-64

•menwomen

•menwomen

Population structure in the CR by age group and sex in 1990

10

•menwomen

•menwomen

11

12

13

•6 000 • 8 000 • 10 000 • 12 000 • 14 000

30

50

70

• %

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

15

X1,X2 – consumption of good X before and after subsidy

Y1,Y2 – consumption of good Y before and after subsidy

I1,12 Budget Lines

U1, U2 Indifference Curves

X1,X2 – consumption of good X before and after subsidy

Y1,Y2 – consumption of good Y before and after subsidy

I1,12 Budget Lines

U1, U2 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.

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Interes t expenditure; 34; 3%

Subs idies ; 59; 5%Capital form ation;

138; 11%

Other; 45; 4%

Collective consum ption; 311;

25%

Social trans fers ; 639; 52%

State budget expenditures items1. 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

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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