Introduction to Public Finance

Transcription

1 Introduction to Public Finance Lecture 4: Do we need a big government? Functions of the government, governments expenditure trends in long run, international comparisons of expenditure trends. 1

2 Outline of the lecture What is government expenditure? Governments expenditure trends in long run International comparisons of expenditure trends Models of the state Reasons of government s growth Composition of public expenditure Expenditure uncertainties 2

3 What is government expenditure? Government/public expenditure is the value of goods and services bought by the State. Public expenditure plays four main roles: 1. it contributes to current effective demand; 2. it expresses a coordinated impulse on the economy, which can be used for stabilization, business cycle inversion, and growth purposes; 3. it increases the public endowment of goods for everybody; 4. it gives rise to positive externalities to economy and society, the more so through its capital component. 3

4 Governments expenditure trends in long run Long-Term Trends in Government Spending Public spending represented a relatively small share of overall national economic activity in the late 19th The cross-country average public spending in 1900 stood at 13% and by 1950 this had increased to 24 % of GDP. From 1950 onwards on average, the Anglo-Saxon countries lagged behind with average of about 42% of GDP allocated to public spending near the end of the century. The Continental European group more than doubled the size of the public sector moving from about 24% up to about 49% in In the Nordic group of countries the public sector s share of GDP moved from less than 25% to nearly 60%. In 1995 the cross-country average general government spending had achieved an average level 48% of GDP. 4

5 % of GDP Governments expenditure trends in long run Cusack, Fuchs (2002) 5

6 International comparisons of expenditure trends Cusack, Fuchs (2002) 6

7 International comparisons of expenditure trends dr Grzegorz Kula, Total government spending relative to the size of the economy, % of GDP Austria 50,34 50,98 50,20 49,10 49,79 54,10 52,73 50,88 51,01 50,89 Belgium 48,68 50,88 47,68 47,57 49,44 53,20 52,33 53,24 54,80 54,42 Denmark 52,69 51,22 49,82 49,58 50,52 56,80 57,06 56,84 58,81 57,08 Finland 48,01 49,28 48,34 46,80 48,26 54,76 54,77 54,36 56,14 57,56 France 51,13 52,88 52,49 52,23 52,99 56,76 56,44 55,92 56,80 57,05 Germany 44,63 46,04 44,53 42,69 43,42 47,36 47,10 44,49 44,11 44,15 Ireland 31,06 33,48 34,04 35,94 42,00 47,55 66,05 46,19 42,23 40,60 Italy 45,48 47,12 47,61 46,77 47,81 51,13 49,85 49,12 50,79 50,79 Japan 36,45 35,96 35,90 37,62 41,86 40,61 42,19 41,95 42,38 Netherlands 41,77 42,32 43,04 42,45 43,57 48,18 48,21 47,01 47,13 46,21 Norway 42,06 40,81 41,44 40,25 46,09 45,01 43,81 42,93 44,04 Portugal 42,64 46,68 45,24 44,49 45,34 50,22 51,82 49,98 48,82 50,61 Spain 39,09 38,31 38,27 38,92 41,15 45,77 45,62 45,45 47,32 44,30 Sweden 53,59 52,69 51,35 49,65 50,34 53,10 52,04 51,44 52,59 53,37 Switzerland 34,02 32,22 30,97 31,16 33,12 32,91 32,90 33,25 United Kingdom 37,94 42,85 42,98 42,88 46,60 49,72 48,64 46,80 46,97 45,54 United States 33,67 36,40 36,14 36,90 38,95 42,91 42,59 41,49 40,06 38,72 OECD data 7

8 International comparisons of expenditure trends Scandinavian Anglo-Saxon 20 Continental 10 South Europe Cusack, Fuchs (2002) 8

9 Models of the state 1. The minimal state, where only justice, public order, foreign policy and some other basic functions should be carried out by the state, relying on private initiative for the others; 2. The welfare state, where the State cares about the people's well-being directly, also through expenditure in schooling, health, support for the poor, the old, the disadvantages; 3. The developmental state, where the State takes the responsibility of fostering economic development, also through expenditure in infrastructure, support for firms, export and production in general. 9

10 Reasons of government s growth As societies are getting richer, the size of government services is growing. Why? Two (three) major shifts over the last century or so have affected huge parts of the population: (1) the decline of the agricultural sector and the rise of the industrial sector (2) rise in the service economy (3) democratization. 10

11 Reasons of government s growth Economic transformations in the long-term dynamics of capitalist economies have brought about a decline in the capacity of family units and local communities to provide for their own needs. This has led to increased demand for the state to supply these goods and services. The dynamics of rising income as well as differential patterns of productivity growth have brought vast economic and social problems which culminate in pressure on the state for corrective action. Result: Public provision of services and goods that traditionally would have been on offer in the private market, (but at price levels affordable only to the few). 11

12 Rapid technological progress meant that existing or privately created infrastructure was not sufficient (roads for cars!). Appearance of new markets (services) increased the demand for specialization and education. Growing complexity of life created the demand for intermediaries and regulators. Result: Reasons of government s growth Governments have more and more duties to perform, creating infrastructure, financing education, establishing new institutions. 12

13 Reasons of government s growth Tocqueville has pointed out that the expansion of participation in political decision-making provided by democratic forms of government places great pressure on the state to increase government spending. Median voter theorem - Meltzer and Richard (1983, 1985) note that this development brings greater pressure on government to expand the size of the public sector as ever more people with low or no income enter the electorate. 13

14 Reasons of government s growth Political parties reflect the preferences of a party s voters. In the traditional terminology, which does not work very well nowadays: Parties of the left are assumed to be representative of the less-advantaged classes of society who favor a large and active state, particularly one committed to egalitarian forms of redistribution. The constituencies of rightist parties are far more socio-economically advantaged and have exactly the opposite interests in terms of the size and activities of the state. 14

15 Composition of public expenditure 1. Public expenditure can be classified in terms of the kind of goods and services bought, also with very general items: 1. capital goods; 2. consumption goods; 3. personnel expenditure. 15

16 Composition of public expenditure 2. Public expenditure can be classified according to the official body and organization from which budget it is paid, as for example: 1. the central state and its ministries; 2. regional and local authorities; 3. separate public bodies; 4. international organizations. Expenditure of state-owned firms usually is not counted to government expenditures. 16

17 Composition of public expenditure 3. Public expenditure can be classified according to the macro-function at which it is directed: - justice and public order; - infrastructure (roads, railways,...); - military system; - education system; - health care... In different places and over time, those macrofunctions have largely changed their level of priority and even the social acceptance of the idea that the state that must care of them. 17

18 Composition of public expenditure Trends in public spending OECD components of general government spending 17 countires. Cusack, Fuchs (2002) 18

19 Composition of public expenditure Social protection Education Health Housing and community amenities Environment protection 20 Economic affairs 15 Public order and safety 10 Defence 5 General public services Average for Belgium, Czech Republic, Denmark, Germany, Ireland, Spain, France, Italy, Latvia, Hungary, Malta, Netherlands, Austria, Portugal, Romania, Slovakia, Finland, Sweden, United Kingdom. Source: Eurostat 19

20 EU Belgium Bulgaria Czech Republic Denmark Germany Estonia Ireland Greece Spain France Croatia Italy Cyprus Latvia Lithuania Luxembourg Hungary Malta Netherlands Austria Poland Portugal Romania Slovenia Slovakia Finland Sweden United Kingdom Iceland Norway Switzerland Composition of public expenditure Social protection Education Recreation, culture and religion Health Housing and community amenities Environment protection Economic affairs 10 Public order and safety Defence 0 General public services EU 28 in 2013, Eurostat 20

21 Composition of public expenditure In the EU as a whole as well as in all individual Member States, social protection is the most important function of government expenditure. In % of GDP. The next most important function is health amounting in 2014 to 7.2% of GDP. Government spending on general public services accounted for 6.7% of EU28 GDP. For education EU spent 4,9% of GDP in Government spending on economic affairs accounted for 4.2% of GDP. Spending on the remaining functions was equivalent to 5.7% of EU28 GDP. 21

22 Expenditure uncertainties 1. Ageing of societies 2. Natural disasters/climate change 3. The rise of developing countries (China) 4. Terrorism 5. Pandemics 6. National security concerns 7. Government contingent liabilities in the pension and welfare area 8. Economic crises 9. Other risks 22

23 Bibliography 1. Musgrave P., Musgrave R., Part 3, Expenditure structure and policy chapter 2. Thomas R. Cusack, Susanne Fuchs Ideology, Institutions, and Public Spending, Discussion Paper P , Wissenschaftszentrum Berlin für Sozialforschung Statistics in focus. Economy and finance 11/2006 OECD. Trends in government expenditure by function, Peter S. Heller, David Hauner, Characterizing the Expenditure Uncertainties of Industrial Countries in the 21st Century, IMF Working Paper No. 05/91,