Theme 6 Public Expenditures The only good budget

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

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

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 + IG + 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“ Alfred Wagner (1835 – 1917) 7

Factors influencing growth of public expenditures • • demographic factors connected with social and health care programs : – age structure changes, – shift from self-sufficiency on farm with large family to urban mutual dependence etc. threshold effect inflation trends (inflation drives up the cost of providing public services: in private sector higher prices for goods and services at the market are offset by higher wages BUT in public sector higher wages are not offset by selling the goods), technological changes (increased labour productivity in market sectors and stagnant productivity in public sectors – Baumol‘s cost disease), production volumes growth – increase of incoming taxes (tax base, government revenue), increasing expectations of citizens – popular programs (health care…), political influences (bureaucracy, lack of budget constraints, before elections) etc. 8

Demographic factors: Population structure in the CR by age group and sex in 1930 85+ 80 -84 75 -79 • men women 70 -74 65 -69 60 -64 55 -59 50 -54 45 -49 40 -44 35 -39 30 -34 25 -29 20 -24 15 -19 10 -14 5 -9 0 -4 9

Population structure in the CR by age group and sex in 1990 • men women 10

11

12

13

• Size of the public sector as % of GDP • % 70 SWE. ITAL. FR. AUT. 50 GER BELG. U. K. NOR. CAN. JAP. AUST. USA 30 • 6 000 • 8 000 • 10 000 • 12 000 • 14 000 GDP per capita 14

15

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, 12 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, 12 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

• 1, 200, 000 • 1, 000 Growth of Expenditures of Central Government of the Czech Republic, 1998 – 2012 (in thousands CZK) • 800, 000 • 600, 000 • 400, 000 • 200, 000 • 0 • 1998 • 1999 • 2000 • 2001 • 2002 • 2003 • 2004 • 2005 • 2006 • 2007 • 2008 • 2009 • 2010 • 2011 • 2012 • Skutečné výdaje celkem (v tis. Kč) (1998) v cenách roku 1998 Total Expenditures, real prices • Skutečné výdaje MPSV real (v tis. prices Kč) v cenách Social Expenditures, (1998) roku 1998 • Skutečné výdaje MŠMT (v tis. real Kč) vprices cenách(1998) roku 1998 Educational Expenditures, Total Expenditures, current prices • Skutečné výdaje celkem (v tis. Kč) v běžných cenách Social Expenditures, • Skutečné výdaje MPSV current (v tis. Kč)prices v běžných cenách Educational Expenditures, pricescenách • Skutečné výdaje MŠMT (v tis. current Kč) v běžných

Ratio of Public Expenditures to GDP, Czech Republic and EU 27, 1998 – 2012 (in %) • 60 • 50 • 40 • 30 • 20 • 10 • Průměr za Evropskou unii (27 EU 27, average států) Czech Republic • Česká republika • 0 • 1998 • 1999 • 2000 • 2001 • 2002 • 2003 • 2004 • 2005 • 2006 • 2007 • 2008 • 2009 • 2010 • 2011 • 2012