Theme 6 - Public Expenditures

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

2. Structure of lecture • Public expenditures • System of public budgets • State budget

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

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

5. Public expenditures classification Public expenditures can be split into two groups: • Current expenditures for: • goods and services, • interest payments, • subsidies, • transfers. • Capital expenditures.

6. Macro-economic aspects of public expenditures • Public expenditures areimportant 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.

7. Public expenditures are growing „The public sector grows with increasing income per capita“ Alfred Wagner (1835 – 1917)

8. 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 servicesat the market are offset by higher wages BUTin 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.

9. 85+ • menwomen 80-84 75-79 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 Demographicfactors: Population structure in the CR by age group and sex in 1930

10. menwomen Population structure in the CR by age group and sex in 1990

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

16. SubstitutionEffectof Public Expenditure (CommoditySubsidy) 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

17. IncomeEffectof Public Expenditure (IncomeSubsidy) 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

18. 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.

19. State budget expenditures items

20. 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

21. Ratio of Public Expenditures to GDP, Czech Republic and EU27, 1998 – 2012 (in %) EU27, average Czech Republic