PUBLIC FINANCE
1
LEARNING OBJECTIVES
1. To know how to define public
finance;
2. To understand the role of public
organizations in a market
economy;
3. To understand forms of taxation.
2
WHAT IS PUBLIC
FINANCE?
https://www.youtube.com/watch?v=HcEZa3-mQxs
3
WHAT IS PUBLIC
FINANCE?
Public finance is the study of the
role of the government in the
economy.
It is the branch of economics that
assesses the government revenue
and government expenditure of
the public authorities and the
adjustment of one or the other to
achieve desirable effects and
avoid undesirable ones. 4
WHAT IS PUBLIC
FINANCE?
•It is the study of how governments
collect and spend money and real
resources
•How do governments collect/spend
money? Positive analysis
•How should governments
collect/spend money? Normative
analysis
•Assumption: we will be studying 5
NON-MARKET ECONOMY
There is no private property.
The government is distributing
goods and services to the
population. This population is
however not the owner of these
benefits (Cuba, North Korea).
Existence of a Public
Distribution System.
6
POSITIVE ANALYSIS
These are factual
statements and describe:
•what was,
•what is
•what would be.
7
NORMATIVE ANALYSIS
This is the process of
making recommendations
about:
•what action should be taken;
•what are the goals of an
economy?
8
WHAT ARE THE FUNCTIONS
OF A GOVERNMENT?
1.To maintain and improve the
welfare of the population;
2.To protect people from harm;
3.To provide institutions that
allow market to function (e.g.
protection of property rights);
4.To provide the essential goods
and services that markets fail
to adequately provide. 9
EFFICIENCY OF
TAXATION
If a government increases
taxation, does it mean that
global welfare will be
improved?
1) If T increased then what are
the consequences for the
revenue of the considered
population.
10
THE LAFFER CURVE
11
THE ECONOMISTS OF
PUBLIC FINANCE
James Buchanan (1919-2013):
Buchanan is largely responsible for a
renaissance of political economy in the
academic field.
He emphasizes that the public
economy can no longer be seen only in
terms of redistribution but must always
concern itself with the rules of the
game which generate norms of
exchange and distribution.
12
THE ECONOMISTS OF
PUBLIC FINANCE
Richard Musgrave (1910-2007)
Musgrave defined the three main functions of the
state:
1. The state must activities generating positive
externalities and curb those which produce negative
externalities). The state must also establish
collective goods.
2. The redistribution of income and assets, the basic
concern in terms of its activities is a concern for
equity (justice). This function is used to reduce (or
increase) inequalities.
3. Regulation of the economic situation: the State must
stimulate economic activity. He adds, following a 13
Keynesian point of view that the market does not
MERCANTILISM
Mercantilism is a national economic policy that is designed to
maximize the exports of a nation.
Mercantilism was dominant in modernized parts of Europe from
the 16th to the 18th centuries before falling into decline.
It promotes Government regulation of a nation's economy for
the purpose of augmenting state power at the expense of rival
national powers.
Mercantilism includes a national economic policy aimed at
accumulating monetary reserves through a positive balance of
trade, especially of finished goods.
Historically, such policies frequently led to war and also
motivated colonial expansion.
High tariffs, especially on manufactured goods, were an almost
universal feature of mercantilist policy.
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DRIVERS OF THE
MERCANTILISM 1/2
The Austrian lawyer and scholar Philipp Wilhelm von Hornick, one
of the pioneers of Cameralism (Management of Public Finances),
detailed a nine-point program of what he deemed effective
national economy in his Austria Over All, If She Only Will of 1684,
which comprehensively sums up the tenets of mercantilism:
That every little bit of a country's soil be utilized for agriculture,
mining or manufacturing.
That all raw materials found in a country be used in domestic
manufacture, since finished goods have a higher value than raw
materials.
That a large, working population be encouraged.
That all exports of gold and silver be prohibited and all domestic
money be kept in circulation. That all imports of foreign goods be
discouraged as much as possible.
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DRIVERS OF THE
MERCANTILISM 2/2
That where certain imports are indispensable they be
obtained at first hand, in exchange for other domestic
goods instead of gold and silver.
That as much as possible, imports be confined to raw
materials that can be finished [in the home country].
That opportunities be constantly sought for selling a
country's surplus manufactures to foreigners, so far as
necessary, for gold and silver.
That no importation be allowed if such goods are
sufficiently and suitably supplied at home.
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THE FALL OF THE
MERCANTILISM
Scholars are also divided over the cause of mercantilism's end.
Some believe the theory was simply an error hold that its replacement
was inevitable as soon as Smith's more accurate ideas were unveiled.
Those who feel that mercantilism amounted to rent seeking hold that it
ended only when major power shifts occurred.
In Britain, mercantilism faded as the Parliament gained the monarch's
power to grant monopolies. While the wealthy capitalists who controlled
the House of Commons benefited from these monopolies, Parliament
found it difficult to implement them because of the high cost of group
decision making.
Mercantilist regulations were steadily removed over the course of the
18th century in Britain, and during the 19th century the British
government fully embraced free trade and Smith's laissez-faire
economics.
On the continent, the process was somewhat different. In France,
economic control remained in the hands of the royal family, and
mercantilism continued until the French Revolution.
In Germany mercantilism remained an important ideology in the 19th and
early 20th centuries. 17
COMPARATIVE
ANALYSIS: PUBLIC
FINANCE/CORPORATE Public Finance Corporate Finance
The decision • Public institutions • The Management
&transmissions makers • Politicians Board
• Managers
The framework • Dependance toward • National Taxation
international systems SystemAccounting
(The EU, IMF,…) norms (GAAP, IFRS)
The aims • On a regional • Maximise the profit of
framework, to comply the company
with macro indicators • Increase the value of
of a specific economic the company
area (ASEAN, EU, etc.)
Sources of capital • Retail and sovereign • Shares, corporate
bonds bonds
• International loans • Financial loans
• Corporate bonds.
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THE CASE OF RATING
AGENCIES
A Rating agency is rating
the state of an economy.
A rating agency is also
rating companies.
Example: S&P, Moodys,
Fitch, Coface, KRUK.
Best rating: AAA (Triple A) 19
EXAMPLE
A rating agency is assessing the
forecasts related to the
economy of Poland:
1. Forecasts are good <=>
Lower cost of debt.
Appreciation of the currency.
2. Forecasts are poor <=>
Higher cost of debt.
Depreciation of the currency. 20
OPTIMALIZATION AND
ALLOCATION
Optimalizing public finances
means optimizing the collection
of resources and the execution
of public expenditure so as to
acquire the highest possible
optimal production of public
goods that provides consumers
of public goods with optimal
satisfaction.
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OPTIMALIZATION AND
ALLOCATION
However, the traditional theory of
public finance and the practice
that countries have made of it, do
not allow the production of public
goods to be carried out at their
optimal level.
Indeed, the theory has, so far,
sought to determine only the
optimum collection of fiscal
resources without taking into 22
OPTIMIZATION AND
ALLOCATION
Since the objective of any public
policy is the production of public
goods as much as possible, it is
obvious that optimal collection
without optimal allocation cannot
make it possible to reach the
highest possible level of the curve
of possibilities for the production
of public goods.
It is therefore necessary to seek 23
OPTIMIZATION AND
ALLOCATION
The optimal allocation of all
resources, fiscal and non-
fiscal, should make it possible
to achieve the optimum
production of public goods
that would lie on the highest
possible production possibility
curve.
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THE GDP
•The Gross Domestic Product is measure of the value added
of produced goods and services. The GDP is usually related
to the economy of a large economic unit, which is a country.
•The GDP is a measure of the economic growth but not of
the economic development.
•The sum of spendings on goods and services.
•The sum of the value of goods and services produced by a
specific economy.
• It is one of the main measure which will allow us to assess
about the state of an economy.
• GDP = Consumption + Investments + Public Spendings +
Exports – Imports.
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ECONOMIC GROWTH
AND DEVELOPMENT
https://www.youtube.com/watch?v=4D_36i4zVFs
1. The economic growth is measured on a monetary
basis (currency, unit).
2. The development is not automatically measured
through some monetary indicators.
3. The economic growth is measured mainly by the
GDP but also by some other macroecomic indicators
(GNI, unemployment rate, inflation).
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GDP CATEGORIES
The Real GDP
The GDP is adjusted with the inflation.
The Nominal GDP
The GDP is calculated with the inflation.
The GNP (The Gross National Product) also
named as the GNI (General National Income)
The value of the production of the national factors of
production, regardless where the production took place.
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THE PUBLIC DEFICIT
The Public Deficit is defined as being the difference
between the inflow of revenues and the outflows of
spendings for a state economy.
The main inflow of revenues is originating from
taxation.
Other sources of state-revenues are among others:
profits and dividends generated by companies, where
the state is a shareholder, penaltys, excises, exports of
state companies.
Sources of expenditures will include public spendings
but also import of products by state companies.
Usually the deficit is negative usually and is calculated
as a percentage of the GDP. 28
BUDGETARY
EQUILIBRIUM AND
RATIOS
The balance of public resources excluding borrowing and
public expenditure is the public surplus or the public deficit
for the year to judge the financial health of a local
authority, we can look at the “resources excluding
borrowing / expenditure” ratio.
Various ratios make it possible to judge the financial health
of general government as a whole:
1. Government deficit / GDP;
2. Public debt / GDP;
3. Debt service / GDP;
4. Public expenditure / GDP;
5. Compulsory taxes / GDP.
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THE PUBLIC DEBT
The debt is created in order to finance some public
projects dealing especially with essential
infrastructures and services.
The debt is often calculated as a percentage of the
GDP
USD 92 000 bn in 2022. World Data (Source: UN)
The World debt increased by USD 12 000 bn since
2020 (IMF).
High public debt: Japan, US, UK, France, South Korea
(>200%)
Medium debt: Poland (120%)
Low debt: Estonia (17%) 30
THE DEBT SERVICE
The Debt Service are amounts of money required to
pay the debt of a country. We will call it as financial
costs.
How a state can raise money for a debt service? For
instance by raising taxes, or issuing bonds.
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ORGANIC VIEW OF
GOVERNMENT
•Society is a natural organism
•The goals of the society will be set by the state.
• The state will consider the society as a whole. Individals
goals are different from the goals of the society.
• Individual goals are related to their income, satisfaction
among others (microeconomic factors). The goals of the
society are among other: a low unemployment rate, a
growing GDP, a fair distribution of the income created in a
country (macroeconomic factors).
• Regarding the society, the goals will be more extended and
usually related to the macroeconomic equilibrium. These
goals may be even intraconnected with some other
countries. This will be obvious when we consider that 32one
country is belonging to an economic zone. In this scenario,
THE ROLE OF
GOVERNMENT
1. What are the desirable ends?
- From an internal basis, to maintain and improve the
welfare of the people;
- The government would like to maintain a strong position
of its state on external affairs.
2. The realization of their goals will be based on
the utilization of their resources.
3. These resources are available on limited
quantities.
4. The government is deciding on the allocation
of its resources.
5. There is a gap between objective goals and
ideological goals. Ideological goals may not be
related to the needs of the population. 33
PUBLIC FINANCE AND
MILITARY ISSUES
US 2200 bln: world military
spendings in 2023.
Military spendings increased by
9% in 2023 in comparison to
2002.
Cumulated budgets of China,
India, NATO countries and Russia
represent 70% of world military
spendings.
Since 2014 Europe had increased 34
AN EXAMPLE OF EXTERNAL
GOALS: CONVERGENCE CRITERIA
WITHIN THE FRAMEWORK OF THE
EU
1. Sustainable public finances: A deficit (Revenues
minus expenditures) to GDP Ratio not exceeding 3
percent.
2. Price Stability: The inflation cannot be higher than
1.5 points than the average of the three lowest
inflation countries in the EU.
3. Exchange rate stability: fluctuations between a
national currency and the EURO „shall not disrupt
the economic stability”.
35
THE NEOCLASSICAL
ECONOMIC THEORY
AND PUBLIC FINANCE
Assumes humans are rational, self interested,
AND utility maximizers. Assumes perfect
market competition
Empirical studies reject these assumptions.
Assumes in perfect markets invisible hand
leads to efficient allocation: greatest good for
greatest number
Governments always intervene with perfect
functioning of market.
The neoclassical background provides a weak
analysis when discussing about Public
Finance. 36
THE ECOLOGICAL
ECONOMIC THEORY
AND PUBLIC FINANCE
The ecological economics is a field where the main
problems of the society are related to environmental
problems, but also humain well-being and distribution
of wealthness.
The ecological economic theory is related to state
problems and is usually affiliated with left-wings
politician backgrounds.
The father of the ecological economy is named
Nicholas Gheorgescu-Roegen.
1. Ecologically sustainable scale;
2. Socially just distribution.
3. Efficient allocation 3rd priority.
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