Public Finance - Chapter 4: Public Expenditure PDF

Public Finance Chapter 4 Public Expenditure Dr / Dalia Farouk  Contents 1.Public expenditure Definition 2.Public expenditure classification 3.Macroeconomic relations 4.Public expenditure dynamics 1-Public expenditure Definition: Is the flow of financial means within the publ...

Public Finance Chapter 4 Public Expenditure Dr / Dalia Farouk  Contents 1.Public expenditure Definition 2.Public expenditure classification 3.Macroeconomic relations 4.Public expenditure dynamics 1-Public expenditure Definition: Is the flow of financial means within the public budget system. Thus, the funds are allocated within the state’s fiscal functions. (Public expenditure) are flows of public funds flowing from the state to various economic entities. 2-Public expenditure classification: a.government expenditure (G), b.Transfers (Tr). c.Other classification of public expenditure.  a-government expenditure (G), Is divided by its character into: -government consumption expenditure (CG) -government investment expenditure (IG). Both categories contain funds not only for funding institutions, but also for public projects and public expenditure programs.  b-Transfers (Tr). Therefore, transfers are sometimes also called “negative taxes”. Transfers may influence people’s behavior regarding their efforts for reaching a certain level of income, either by work or by investment. Transfers mean the performance of the state redistribution fiscal function. c-Other classification of public expenditure: 1- The entity responsible for it (central government, regions,…), 2- The set of expenditure included in it (total public expenditure, central budget expenditure, public organization expenditure, etc.); 3- Place as domestic and international; 4- Time as short-term, medium-term and long- term.  3-Macroeconomic relations public expenditure is a necessary component of income and expenditure circulation in economy; public expenditure for purchasing goods and services (G) forms important part of aggregate demand; growth/drop in this expenditure and related growth/drop in the public sector influences the total rate of employment and production in economy; public expenditure exceeding public income give rise to public debt.  4-Public expenditure dynamics A deeper insight into the dynamics of public finance is analyzed with public expenditure elasticity in relation to GDP. The calculation of public expenditure elasticity in relation to GDP is following: (𝐏𝐄𝐭+𝟏 −𝐏𝐄𝐭 )/𝐏𝐄𝐭 𝐄𝐏𝐄/𝐆𝐃𝐏 = (𝐆𝐃𝐏𝐭+𝟏 −𝐆𝐃𝐏𝐭 )/𝐆𝐃𝐏𝐭  The value E states whether the public expenditure PE grows: under-proportionally (E1) in relation to GDP.  Example Years Public Expenditures GDP 2017 50 450 2018 75 500 2019 150 1000 2020 250 2000 Required : calculate of public expenditure elasticity in relation to GDP for 2017, 2018,2019  Answer (𝐏𝐄𝐭+𝟏 −𝐏𝐄𝐭 )/𝐏𝐄𝐭 𝐄 𝐏𝐄 (𝟐𝟎𝟏𝟕) = 𝐆𝐃𝐏 (𝐆𝐃𝐏𝐭+𝟏 −𝐆𝐃𝐏𝐭 )/𝐆𝐃𝐏𝐭 (𝟕𝟓 − 𝟓𝟎)/𝟓𝟎 𝐄 𝐏𝐄 (𝟐𝟎𝟏𝟕) = 𝐆𝐃𝐏 (𝟓𝟎𝟎 − 𝟒𝟓𝟎)/𝟒𝟓𝟎 𝟎.𝟓 = = 4.50 > 1 𝟎.𝟏𝟏 Public expenditures grow non-proportionally (E>1) (more elastic) in relation to GDP.  (𝐏𝐄𝐭+𝟏 −𝐏𝐄𝐭 )/𝐏𝐄𝐭 𝐄 𝐏𝐄 (𝟐𝟎𝟏𝟖) = 𝐆𝐃𝐏 (𝐆𝐃𝐏𝐭+𝟏 −𝐆𝐃𝐏𝐭 )/𝐆𝐃𝐏𝐭 (𝟏𝟓𝟎 − 𝟕𝟓)/𝟕𝟓 𝐄 𝐏𝐄 (𝟐𝟎𝟏𝟖) = 𝐆𝐃𝐏 (𝟏𝟎𝟎𝟎 − 𝟓𝟎𝟎)/𝟓𝟎𝟎 𝟏 = =1 = 1 𝟏 Public expenditures grow proportionally (E=1) (unitary elastic) in relation to GDP.  (𝐏𝐄𝐭+𝟏 −𝐏𝐄𝐭 )/𝐏𝐄𝐭 𝐄 𝐏𝐄 (𝟐𝟎𝟏𝟗) = 𝐆𝐃𝐏 (𝐆𝐃𝐏𝐭+𝟏 −𝐆𝐃𝐏𝐭 )/𝐆𝐃𝐏𝐭 (𝟐𝟓𝟎 − 𝟏𝟓𝟎)/𝟏𝟓𝟎 𝐄 𝐏𝐄 (𝟐𝟎𝟏𝟗) = 𝐆𝐃𝐏 (𝟐𝟎𝟎𝟎 − 𝟏𝟎𝟎𝟎)/𝟏𝟎𝟎𝟎 𝟎.𝟔𝟔 = = 0.66 < 1 𝟏 Public expenditures grow under-proportionally (E