Public Finance Lecture 3 PDF

Dr. Mona Mahmoud Lecture 3 The Allocation of Resources between Sectors The resources governments obtain (taxes) are used to provide citizens with goods and services, such as roads, police and fire protection, and national defense. These government goods and services are shared by all....

Dr. Mona Mahmoud Lecture 3 The Allocation of Resources between Sectors The resources governments obtain (taxes) are used to provide citizens with goods and services, such as roads, police and fire protection, and national defense. These government goods and services are shared by all. While private good is the good which is exclusive use by one person or family such as food and clothing. NOTE THAT: the role of governments depend on the types of economic systems. Comparison between Public and Private Goods and Services Public goods and services Private goods and services Shared by all citizens Exclusive to one citizen Not available for sale in Available for sale in markets markets Provided by government Provided by private sectors For example, roads and For example, cars and clothes bridges  Any increase of government provisions from G1 to G2 requires the sacrifice of private goods from X1 to X2, which makes the movement from point A to B, which is called the opportunity cost NOTE THAT: An opportunity cost is the value of the option not taken when making a decision. Types of Economic Systems A. Free Market Economy: The free market is an economic system based on supply and demand with little or no government control. In a free market, companies and resources are owned by private individuals or entities who are free to produce and trade contracts with each other. Characteristics of a Free Market…… &Public Finance. 1. Private ownership of resources 2. Thriving financial markets 3. Freedom to participate B. Social Economy An economic system regulated by government controls, called command economy, where a central government agency plans the factors of production and use of resources and sets prices. Principles of socialism include: 1. Public ownership 2. Economic planning 3. Provision of basic needs 4. No competition 5. Price control C. A Mixed Economic System It is a system that combines aspects of both capitalism and socialism. A mixed economic system protects private property and allows a level of economic freedom in the use of capital, but also allows for governments to interfere in economic activities in order to achieve social aims.  A mixed economy is an economy organized with some free-market elements and some socialistic elements, which lies on a continuum somewhere between pure capitalism and pure socialism. Mixed economies typically maintain private ownership of most of the means of production, with the government intervening through regulations. Mixed economies socialize select industries that are deemed essential or that produce public goods. Circular Flow in The Mixed Economic Householders: 1- Sell their resources in input markets. 2- Buy goods and services in output markets. Firms: 1- Buy (hire) resources in input markets. 2- Produce and sell goods and services in output markets. Government: 1- Buys resources in input markets. 2- Buys goods and services in output markets. 3-Produces goods and services for firms and households – Provides income support & subsidies. Economic Functions of the Government (Reasons for the Growth of Public Expenditure) 1- Improving economic efficiency 2- Reducing economic inequality 3- Stabilizing the economy: government try to smooth out the ups and downs of the business cycle 4- Conducting international economic relation: reducing trade barriers (by reducing tariffs) 5- Conducting assistance programs (improving the position of poor countries as direct foreign aids) 6- Coordinating macroeconomic policies: fiscal and monetary policies of other nations affect inflation, unemployment rate and exchange rate…. 7- Protecting the environment Definition of Public Expenditure Public expenditure is the amount of money spent by a public person for the purpose of public benefit. Conditions of Public Expenditure : 1- Public expenditure is cash: The state, represented by ministries and public bodies (public persons), spends cash for the goods and services needed to run public utilities. 2- Public expenditure is carried out by a public person: the public expenditures are those expenditures by public legal persons (government). The amounts spent by natural and legal private persons are not considered public expenditure even if they are intended to achieve public services, such as donation for construction of school. 3- Public expenditure is achieving public benefit: public expenditures should be primarily aimed at satisfying public needs. Principles of Public Expenditure 1- Principle of Benefit: achieve maximum social welfare, which means the public expense should be done in such a way that it will be profitable (as a whole) for the society. 2- Principle of Economy: government should spend minimum amount on every aspect. Principles of Public Expenditure 3- Principle of Authorization: without the permission of officials or the government no public expenses can occur. Every governmental department should have freedom to spend till a limit but beyond this limit expenses occur only when the related officials gives a permission. 4- Principle of Surplus: avoiding loss by making budget surplus in inflation time and budget deficit in recession time. Principles of Public Expenditure 5- Principle of Elasticity: according to this principle, public expenditure should be flexible and change according to the economic situation of the economy. 6- Principle of Equitable Distribution: This aim can only be achieved when the more gain reaches to the poor people by public expenditures. 7- Principle of Productivity: state encourages production, and maximum public expenses should be made for production and development. Revenues, Expenditures, and Overall Fiscal and Primary Balance as a % of GDP Government Revenues in Egypt (2017/2018) Total revenues registered LE 805.7 billion (18.3 %of GDP) in FY 2017/2018, against LE 659.2 billion (19.0 %of GDP) in the preceding FY, up by LE 146.5 billion or 22.2 %. This came as a consequence of the increase in tax revenues by LE 166.1 billion or 35.9 percent to LE 628.1 billion (78.0 %of total revenues), and the fall in non-tax revenues by LE 19.6 billion or 9.9 %to LE 177.6 billion (22.0 %of total revenues). Government Revenues and Expenditures in Egypt (2017/2018) Government Expenditures in Egypt (2017/2018) Total expenditures reached LE 1229.1 billion (27.9 % of GDP) in FY 2017/2018, compared with LE 1031.9 billion (29.7 % of GDP) in the preceding FY, up by LE 197.2 billion or 19.1 percent primarily as a result of: The increase in interest payments on domestic and external debts by LE 120.8 billion or 38.1 % to LE 437.4 billion (against LE 316.6 billion). Government Expenditures in Egypt (2017/2018) The rise in subsidies, grants and social benefits by LE 52.4 billion, mainly as follows: Subsidy costs rose by LE 41.0 billion, due to the rise in subsidies of supply commodities by LE 33.0 billion, oil subsidy by LE 5.8 billion, and other miscellaneous subsidy items by LE 2.2 billion. Social benefits moved up by LE 13.6 billion, ascribable to the country's higher contribution to pension funds. Grants extended by the government to some international institutions, foreign governments and general government entities scaled down by LE 2.2 billion Government Expenditures in Egypt (2017/2018) The rise in state workers' wages and compensations by LE 11.4 billion or 5.1 % to stand at LE 236.9 billion (against LE 225.5 billion). - The increase in spending on purchases of goods and services by LE 5.4 billion. - The decrease in investments of budget sector related entities by LE 3.5 billion in FY 2016/2017). Chronic Budget Deficit in Egypt Budget Deficit in Egypt has long history, consolidated fiscal deficit recorded 1.2% of GDP FY 99/2000, 2.2% 2000/01, 2.5% 2001/02, and 3.4% 2002/03. Data of fiscal operations of the state budget shows that FY 2017/2018, the overall deficit widened by LE 53.1 billion to stand at LE 432.7 billion (against LE 379.6 billion in the previous FY). Despite the rise in the budget deficit as an absolute value, its ratio to GDP fell to 9.8%( from10.9%). Chronic Budget Deficit in Egypt Effects of Public Expenditures 1- Effects on production: government expenditures should aim at increasing production by increasing the ability to work, save and invest. 2- Effects on the ability to work, save and invest: government expenditures could increase the ability of people to work, save and invest in many ways. The expenditure on education, medical insurance, economic housing, all of these increase the ability of people to work. Effects of Public Expenditures 3- Effects on distribution: the government uses expenditures to remove the inequality of income distribution between rich and poor. 4- Effects on economic stability: public expenditures could be used to achieve economic stability as in case of (inflation), the government should reduce its expenditures to face the increasing trend in prices. On the other hand, in case of recession, the government should encourage the aggregate demand by increasing public expenditures. Types of Public Expenditures 1- Regressive Expenditures: if the government expenditures provide more benefit to rich and less to poor. For example, when the government spends money on the primary education for the children of high class instead of the primary education of the children of poor people. 2- Proportional Expenditures: if different sections got benefit in the ratio of their income by the public expenditures. For example, with the increase in income of the workers. 3- Progressive Expenditures: if the government expenditures provide more benefit to poor and less to rich, like free education for poor people, expenditures on medical care and old age pension.