Prsentation PowerPoint

1
Public finance Course 1 Framework and tools
2
Introduction

• What is public finance ?
• Study of the taxing and spending activities of
  a government
• Something misleading because not financial (
  not related to money)
• Economics of the public sector, public
  economics
• micro functions allocation of resources,
  distribution of income
• macro functions use of taxing, spending and
  monetary policies to affect overall level or GDP
  or unemployment gt usually taught in separates
  courses (A. Epaulard). Here special look
  linkages between public finances and the business
  cycles (European framework for public finance
  analysis)

3
Introduction

• Not in our field, but quite important gt
  regulatory policies, which have important effects
  on resource allocation
• Sometimes, goals can be achieved by regulation
  or by tax and spending instruments.
• 3 examples
• Environmental considerations caps, permits,
  market instruments, taxation
• Labor market economists admit that
  regulation/institutions can have a great
  influence on employment labor contract, labor
  duration/ tax cuts diminishing labor costs
• Purchasing power direct subsidies (especially
  to the poor)/ stimulating concurrence on the
  goods markets.

4
Introduction

• Program
• I The  macro  framework why monitoring public
  finance ?
• Data, facts and concepts
• Public finance and the business cycle
• Do we care about long term ?
• Are budgetary rules useful ?
• II The  micro  tools and main issues for
  reforms
• Tax policy some theoretical concepts
• Reforming our tax system some issues
• Public expenditure public goods, education,
  social insurance

5
Introduction

• Chapter I-1 Data, facts, and concepts
• The role of the public sector current issues
• Public finance in EMU an overview
• Example the French situation (what is the
  problem ?)
• To practice some calculation
• Concepts and data procedures.

6
1- Role of the public sector/current issues

• What is public finance ? By tradition (Musgrave),
  three roles devoted to the public sector
• Allocation Public good provision
• Redistribution social transfers, progressivity
  in the tax system
• Stabilization automatic stabilizers
• Do these 3 objectives conflict ? The answer is
  yes.
• Trade-off efficiency/equity
• Room for macroeconomic stabilization when there
  are pressures for a fiscal adjustment ?

7
1- Role of the public sector/current issues
Illustration Public expenditure breakdown
8
1- Role of the public sector/current issues

• Allocation
• Justifications for the State intervention in the
  provision of public goods are well known the
  very nature of public goods, externalities,
  endogenous growth justice, defense, security,
  education, healthbut also direct interventions
  to corporations and individuals.
• Questions
• Cost/effectiveness of public policies? Efficiency
  of public spending?
• What is the good production model? Distinguishing
  between financing and producing (delegation,
  agencies models) education, health, defense are
  concerned.
• Public intervention proper area? Public coverage
  for expenditure (education, health).
• Quality of public finance, allowing better growth
  in the long term?
• Public policy evaluation

9
1- Role of the public sector/current issues

• Distribution
• Social insurance, horizontal and vertical
  distribution.
• Difficult to disentangle from the third function
  (stabilization) insurance aims at avoiding
  hysteresis effects in bad times (unemployment
  insurance, on-the-job training, minimum benefits)
• Current re-visited (old) questions
• Justification for the public action? Minimalist
  State avoiding economic distorsions, flat tax in
  Eastern European countries
• Rooms for manoeuvre how to deal with the
  increase in the age-related expenditures?
• Acceptable inequities in a society?
  Efficiency/equity dilemma. Fiscal competition
  issues.
• New social contract rights and duties issues
  

10
1- Role of the public sector/current issues

• Stabilization
• Size and effectiveness of automatic stabilizers
• Justifications for discretionary action along
  the business cycle
• Questions
• Effectiveness of automatic stabilizers revisited
  in the context of fiscal retrenchments
  (keynesian/non-keynesian effects). Effectiveness
  of discretionary policies has been questioned
• At the European level, leave enough margins to
  let automatic stabilizers play (mimimum
  benchmark)
• Fiscal policy in the current crisis and
  discretionary policy framework has to be adapted

11
2- Public finance in Europe an overview

• The budgetary framework initial framework (up to
  2005)
• Treaty (Maastricht 1992, then Amsterdam 1997)
• Member states have to avoid excessive deficits,
  with respect to deficit and debt reference
  values
• These references are defined in an annexed
  protocol (n20) 3 of GDP and 60.
•  
• Stability and Growth Pact endorsed in 1997
• Two regulations preventive arm, corrective arm
• Stability programs
• Definition of medium term objectives (MTO)
  close to balance or in surplus
•  

12
2- Public finance in Europe an overview

• Main Issues for the conduct of fiscal policies in
  Europe
• One common fiscal framework common rules
• Treaty and the reference values
• Stability and Growth Pact (amended in 2005)
• Addressing heterogeneous situations (as concerns
  deficit levels, cyclical conditions or
  sustainability conditions)
• In the short run, enforce the whole play of
  automatic stabilizers (preventive arm of the
  Pact), better interpret the cyclical conditions
  (preventive and offensive arm), prevent
  pro-cyclical biais. This view is currently
  challenged by the huge economic downturn (Pact is
  suspended)
• In the long run, address the problem of an
  increasing age-burden achieving budgetary
  consolidation (stability programs)

13
2- Public finance in Europe an overview

• The initial budgetary framework strongly
  critized
•  
• From a theoretical point of view lack of
  economic bases. Nominal targets independent on
  cyclical conditions, and on specificities of the
  countries (one size fits all)
• From a practical point of view (crisis in 2003)
•  
• Economic reflexion had already started in
  2001-2002, continued till 2005.
•  
• Reformed SGP in 2005
• Better attention paid to cyclical evolutions
  (course 2)
• Better attention paid to the long term and
  sustainabitity questions, with linkage to the MTO
  (course 3)

14
2- Public finance in Europe an overview
Fiscal heterogeneity in Europe crossing data on
the level of public deficit and debt
15
2- Public finance in Europe an overview
Consolidation efforts in 2007 dispersion
16
2- Public finance in Europe an overview
17
2- Public finance in Europe an overview
Long term sustainability conditions
18
3- The French situation what is the problem ?

• France the pathologic case? A brief look at some
  facts
• Public deficit still high, around 3
• Public debt increasing
• Public expenditure high compared to other
  countries (reflects social choices)
• Tax ratio high level in the context of fiscal
  competition
• All these elements are linked together
• Expenditure monitoring is not stringent enough
  (compared to GDP evolutions)
• No room for fiscal adjustments
• No room for significant tax cuts

19
3- The French situation what is the problem ?
20
3- The French situation what is the problem ?
21
3- The French situation what is the problem ?
Public expenditure long term trend and
composition
22
3- The French situation what is the problem ?

• Expenditure level a French exception ?
• High level, compared to other countries
• Stability since 10 years

23
3- The French situation what is the problem ?
Since 20 years, public expenditure in line with
GDP growth gt no room for budgetary adjustment
24
3- The French situation what is the problem
?(iii) Public receipts

• Tax ratio

Source OCDE
25
4- Some calculation

• Assumptions
• GDP 2000 Md
• Expenditure level 50 of GDP
• Receipts level 48 of GDP
• Debt level 60 of GDP
• Nominal interest rate 5

Question 1 You just have been elected at the
Presidency. You are discovering the budgetary
situation. What is the current deficit ? The
primary balance ?
26
4- Some calculation
27
4- Some calculation
Question 2 You are building the budget law for
2008. You forecast GDP growth 2,5
Inflation rate 1,5 Suppose the public
receipts are in line with GDP growth. Just after
your election, you meet your peers at the
Ecofin Council. You claim that you will respect
the Pact. So you announce that you intend to
reduce public deficit by ½ percentage point of
GDP next year. What must be the for the
growth rate of public expenditure ? What will
be the deficit and debt ratio next year ?
What is the stabilizing deficit ?
28
4- Some calculation

• Notations
• B general government balance (Md)
• b general government balance ( of GDP)
• Public deficit - b
• R public receipts (Md)
• r public receipts ( of GDP)
• S public spending or public expenditure (Md)
• s public spending or public expenditure ( of
  GDP)
• g GDP growth in real terms
• p inflation of GDP
• g p GDP growth in nominal terms
• gs spending growth in real terms

29
4- Some calculation
Equation for deficit variation
First order approx
0,5 in Europe, 0,35 in the US
30
4- Some calculation
Very practical back on the envelop  formula

GDP growth in real terms
Expenditure growth in real terms
MARGIN for deficit reduction
If gsltg deficit reduces If gsgtg deficit
increases
Here 0,5(2,5-gs)0,5 Gs2,5-11,5
31
4- Some calculation
Equation for debt accumulation
Stab def 600.042,4 Def 1,5 Debt variation
-0,9
32
4- Some calculation
Question 3 Your administration presents you the
technical forecasts. Clearly the claimed
evolution of expenditure is not realistic
medium term trend is rather 2 in volume per
year. What will the true deficit be ? What
can you do (to make the public finance forecast
more presentable) ? To help you, you use the
elasticity of the receipts with respect to
GDP
33
4- Some calculation
34
4- Some calculation
Equation for deficit variation
35
4- Some calculation
36
4- Some calculation
Question 4 In addition you are fulfilling you
campaign engagements. You decide tax cuts to
support activity and employment paquet fiscal
amount 1 point of GDP. What do you do
??? Describe several options ð
technical ð fulfilling European commitment
(expenditure/elasticity options)
37
4- Some calculation
38
4- Some calculation
Question 5 Finally you decide announce a
stabilization of the deficit next year, at its
current level. You choose 1,2 for the
elasticity of receipts with respect to GDP.
Describe the key figures of the forecasts
Prepare your arguments for the journalists !
39
4- Some calculation
40
4- Some calculation

• Question 6
• Bad luck, GDP growth collapses during 2008.
• Finally
• GDP growth is 1.
• Elasticity (which is a bit cyclical) is 0,8.
• Expenditure rate is 2 in real terms.
• What is deficit and debt ratio ?
• You decide privatizations during the year (1
  of GDP) what are the final deficit and debt
  ratio ?

41
4- Some calculation
42
4- Some calculation

• Conclusion
• In April 2009, you notify the 2008 results to the
  European Commission
• Observing that you are above 3, the Commission
  launches the excessive deficit procedure against
  your country.
• Well done !!

43
5- Concepts, data, and procedures

• What is a budget?
• Distinguishing budget preparation (ex ante),
  vote, and execution (ex post)
• Juridical dimensions authorization, vote by the
  Parliament. Strictly defined and bounded. Main
  issues to allow information and control from the
  Parliament.
• Procedure dimensions elaboration of the budget
  law, voting rules and procedures. Technical
  questions bottom-up or top-down procedures? How
  to better involve the Parliament?
• Questions about accounting systems reliability
  of the figures, accrued/cash presentations.
  Defining principles inspired by the rules applied
  to the private sector (if possible?)

44
5- Concepts, data, and procedures

• Two Finance laws voted each year
  (october-december)
• budget law for the state
• Social Security budget law
• 3 types LFI, LFR (collectif budgétaire) , loi
  de règlement
• Two organic laws establishing the budgeting
  rules, recently revised
• LOLF (2001), ordonnance de 1959
• Organic law for the Social Security (2005)
• Local budget are adopted by the local executives.
  
• Financial autonomy delivered by our constitution,
  but limited
• Vote of tax rates (but not tax bases),
  expenditure, debt

45
5- Concepts, data, and procedures

• Principles for budgeting the four classic
  principals
• 1- Annualité
• authorization is given for one year.
• Strongly criticized for a form of short sight (at
  the broad level, in the global monitoring of
  public finance/ at the micro level, for the
  managers who are in charge of structural reforms)
• Current issues pluriannuality. In september 2008
  vote of a multi-annual budget for the state,
  covering a 3-year period (2009-2011)
• 2- Unité
• One document for one procedure.
• To ensure transparency and coherence of the
  budgeting elements. To make the political choices
  or trade-offs more explicit. (exceptions comptes
  spéciaux du trésor, budgets annexes).
• Current issues débudgétisations.

46
5- Concepts, data, and procedures

• Principles for budgeting (continued)
• 3- Universalité
• Double design
• Avoiding contraction between receipts and
  expenditures, describing all the flows in the
  budget law
• No receipt affected to some identified
  expenditure
• Current issues affectation of receipts can be
  justified environmental taxes willingness to
  pay (health care)
• 4- Spécialité
• Budgetary credits have to be affected to a
  precise expenditure
• Specialisation by nature or objective of the
  public expenditure
• Current issues adoption of the new budget
  constitution (LOLF) in 2001, fully applied in
  2006

47
5- Concepts, data, and procedures

• Emergence of new budgetary guidelines
• 1- Sincérité
• Ex ante growth forecasts, receipts forecasts,
  realist evaluations for expenditures. Respecting
  budgeting rules (charte de budgetisation)
• Ex post accounts (LOLF)
• Guidelines for budgetary transparency (IMF, OECD)
• 2- Equilibrium
• 1959 an abstract reference (equilibre
  économique et financier).
• Golden rule for the local governments
• Since Maastricht a juridical constraint,
  enshrined by the SGPgt margins for
  interpretation. A target for the medium term.
• Currently debated reforming the budget
  constitution and introducing an equilibrium
  constraint (for the State or the Social Security)
• 3- Performance/efficiency of public expenditure

48
5- Concepts, data, and procedures

• The LOLF innovation
• A new architecture for the budget
• Missions (34)/programmes/actions, reflecting
  economic concerns
• Better reflecting the government priorities of
  public policies, and have a complete view of the
  amounts devoted to certain objectives
• Role of the Parliament enforced examines the
  whole budget, and not only additional measures.
  Better reporting of the government to the
  Parliament
• Introduction of performance indicators for each
  program
• Better implication of the public managers
• Reform of the public accounts, certification
  process by the Cour des Comptes

49
5- Concepts, data, and procedures

• Budget law is composed of two parts
• First part conditions générales de
  léquilibre financier
• authorization to perceive taxes
• debt authorization
• fiscal measures applying to the year
• spending ceilings
• Equilibrium article
• 2d part
• vote on the different expenditures (vote
  unitymission)
• Evaluative/limitative expenditures or receipts
• Joined documents text in itself bleus (voies
  et moyens, missions, RESF) jaunes, report on
  expenditure evolutions, report on taxes

50
5- Concepts, data, and procedures

• Elaboration of the budget laws
• Actors
• Direction du Budget/Direction de la sécurité
  sociale central role
• Matignon coordination between the Ministry of
  Finance and the ministries, crucial arbitration
  role
• DGTPE (macro and public finance forecasts)
• Direction de la législation fiscale fiscal
  measures
• The  spending  ministries/ Social security
  agencies
• Main issues
• Ensure coherence between both processes (PLF and
  PLFSS) gt creation of the Ministry of Public
  Accounts steps up in this direction.
• Allow discussions at the technical level between
  administrations

51
5- Concepts, data, and procedures

• Elaboration of the budget laws (continued)
• Schedule
• In January,  lettre de cadrage  send by the
  Prime Minister to the Ministers
• Feb/march  conférences déconomies
  structurelles 
• April/may  conférences de budgétisation 
• June/July expenditure ceilings decided,
   lettres-plafond 
• June  Débat dorientation budgétaire  at the
  Parliament
• July/August macro forecasts and receipts
  forecasts. Public Finance forecasts covering the
  whole general government (Maastricht form), final
  decisions concerning State and Social security
• September Conseil des Ministres
• Main issues improve articulation with the
  European commitments, with a better linkage
  between national targets and the stability
  program.

52
5- Concepts, data, and procedures

• Accounting notions
• Several accounting systems public accounting
  systems/national accounts
• Each sector has its own accounting system and
  rules
• State
• Budgetary accounts, budget execution
• Outcome solde budgétaire solde du budget
  général solde des comptes spéciaux du trésor
  (CAS privatisations, CAS pensions, compte de
  dette) solde des budgets annexes
• Limits neither an operating result or gross
  saving, nor a net lending or borrowing result.
  Consolidation? State guarantees?
• General public accounting (LOLF)

53
5- Concepts, data, and procedures

• Accounting notions
• Social security
• Harmonization started in the 90s, now certified
  by the CdC
• Social accounts on an accrued base
• Commission des Comptes in June (N-1) and
  September (N, N1)
• Mostly reported solde du régime général
• Local governments
• M14 accounting system
• Specific presentation in two parts
• The operating section current charges and
  receipts (including taxes and transfers from the
  State)
• The investment section
• Main limit no consolidation

54
5- Concepts, data, and procedures

• State budget balance

55
5- Concepts, data, and procedures

• Social Security balance (Régime général)

56
5- Concepts, data, and procedures

• Social Security balance (social risks)- Social
  Budget Law

57
5- Concepts, data, and procedures

• National accounts
• ESA95 harmonized system of accounts in Europe,
  allows comparability between countries
  (Maastricht criteria, annexed protocol)
• Strict definition for public entities combines
  control and activity (excludes public
  corporations like EDF or SNCF, public financial
  corporation like BDF or CDC)
• 4 sub-sectors State, Other central government
  (900 entities CNRS, CEA, FRR, CADES,
  universities), Local government, Social security
  (larger than the PLFSS field, unemployment
  insurance and hospitals)gt large coverage
• Consolidation between all sectors
• Accrued basis approach
• Economic approach see Musgrave approach
• Non financial (B9)/financial accounts
• Usual aggregates value added, EBE, gross
  savings, net lending/borrowing balance (B9). For
  analysis expenditure/receipts approach is
  convenient

58
5- Concepts, data, and procedures

• Elaboration of public finance national accounts
• Responsibility INSEE (annual, quaterly
  accounts)
• Notification to Eurostat twice a year (1st April
  N, 1st October N),
• INSEE for the past data (until N-1)
• Government for forecasts (year N)
• march N Compte provisoire for the year N-1
• First outcome for the year N-1
• Involves 3 actors DGCP (treatment of public
  accounts for a lot of entities), DGTPE (because
  missing elements have to be evaluated), and INSEE
  (validation, decisions about treatments,
  coherence)
• Links between usual agregates (solde
  budgétaire, solde du Régime général, and the
  B9)
• Data are revised the years after (compte semi
  definitif, compte definitif)
• Final judgeEurostat

59
5- Concepts, data, and procedures

• Non Financial Accounts

60
5- Concepts, data, and procedures
Structure of expenditure and receipts
61
5- Concepts, data, and procedures
Public expenditure at different levels (2006)
62
5- Concepts, data, and procedures
63
5- Concepts, data, and procedures

• Financial/Patrimonial accounts (2007)
• Register all public assets and liabilities.
• Public debt sum of financial liabilities
• Maastricht debtfinancial debt in nominal value,
  gross debt, and consolidated between all
  sub-sectors
• Net public debt
• Net value

64
5- Concepts, data, and procedures

• Advantages
• Provides a complete view on public accounts
  (consolidation), on an accrued basis
• No free lunch some measures improving the
  situation of certain sub-sectors deteriorate the
  situation of another one
• Financial links between State and local
  governments, State and social security
• Measures to respect the State expenditure target
• In theory clear distinction between operations
  above the line and under the line
• Limits
• Limits of accounting systems used as inputs
• grey zones, especially concerning the
  relationships between State and Public
  corporations dividends/patrimonial operations,
  injections of capital, State guarantees. Or
  securitization operations.