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Lecture 5: The system of public expenses

1. Economic content of public expenses 2. Classification of public expenses 3. Trends and evolution of public expenses 1. Economic content of public expenses In the process of performance the functions and tasks, the State provides public needs coverage. Therefore, the state needs significant financial (money) resources to be mobilized through financial relations. The use of financial resources thus mobilized, takes place through public expenditures. According to the Romanian scholar I. Vcrel, the Public Expenditures (PE) express the economic and social relations in the monetary form, which occurs between the state on the one hand, and natural and legal persons, on the other hand, at the distribution and use of state financial resources, in order to accomplish its functions. Peggy and Richard A. Musgrave concern PE as "targeted use of public sector resources to meet needs in public utilities and implementation of redistribution measures justified from the standpoint of social equity" . Public Expenditures are materialized into payments made by the state from resources mobilized in various ways, for the purchase of goods or services necessary to meet the different objectives of state policy. The economic significance of Public Expenditures is closely related to their destination. Thus, some expenditures express final consumption of GDP, representing the amount of payments which are made by public institutions in specific forms of current expenses, but other Public Expenditures express an advancement of GDP, representing the State's participation in financing gross capital, as both the production area material and the immaterial sphere. Currently, Public Expenditures are extremely diverse. The economic influence of Public Expenditures vary over time. Some are manifested directly by the state funding of public institutions in order to function. Other have indirect influences on the economic and social environment and are thus instruments of transformation policy, that may improve the environment (extra income distribution, increasing public orders, investment growth). According to R. Musgrave, problems that are solved in the spending of public funds can be divided into three categories: - Social aid (indemnities granted to disabled people); - Compulsory insurance (sickness, unemployment); - Production and acquisition of material goods and services to meet the needs for which the state assumes responsibility. It is necessary to distinguish between public expenditure and budgetary ones. Public expenditures, according to the scholar Iu. Vcrel refers to all expenses incurred in the public sector through public institutions (state apparatus, social and cultural institutions, army, autonomous enterprises), which are covered either by the state budget (central or local) or from their own budgets, on account of income.

The composition of public expenditures within the following main categories: Budgetary expenditure, covered up by public resources at the: - State budget; - Social insurance budget; - UAT budgets; - FAOAM funds. Expenditures of extra budgetary funds, which are covered by public financial resources constituted outside the state budget and social security budget; Expenditures of special funds, which are covered by special purpose funds managed by government or other public body;

Expenditures of enterprises, financial and banking institutions with state capital; Spending on public international organizations, financed from resources mobilized by their members, and from member states of these organizations.

Budget expenditures refer to those expenses which covers by the state government budget, local budgets or state social insurance budget and funds for compulsory medical insurance. So, the budget expenditures sphere is smaller than the public expenditures in which are included. The distinctions made between these categories of expenditures target on: How to made these expenses: Public expenditures made on the base of the funds established outside the budget; Budgetary expenditures made on the provision of budget and are determined by the accomplishment of legal requirements, not only by the existence of the funds; Way of approval:

Public Expenditures - approved by authorizing officer; Budgetary Expenditures approved by the Parliament or local councils. The complexity of modern state functions has led to diversification of PE, improvement methods of optimization and sizing by objectives and beneficiaries.

2. Classification of public expenses


The importance of classification of public spending is clear from the fact that each category of expenditure its characteristic way of determination and use of financial resources. The classification of public expenditures is made in several criteria. The most frequently types of classifications are: a) administrative; b) economic; c) financial; d) classification used by ONU. Administrative classification knows many variations, which differ from each other due to set criteria based on: - Institutional (structure of public expenditure will be drawn up depending on the ministries); - Administrative-territorial (representing the distribution of public spending between counties, cities, districts). Administrative classification has operational significance. Further changes of management structures diminish its importance, especially in the analysis of long intervals. Economic classification considers the influence that they exert on the economy of different categories of public expenditures. This classification know more variants: I Variant: Divide public expenditures in: - Capital expenditures (buying buildings for schools, hospitals, housing, etc..) - Current expenditures (including personnel costs: salaries, bonuses, ..., expenses for providing services and maintenance: textbooks, medicines, repair ...; transfers: subsidies, pensions, allowances, scholarships, etc..) II Variant: Divide public expenditures in: - Expenditures for public services (administrative); - Transferred expenditures (of distribution); III Variant: More contemporary and frequently used to divide the economic classification of public expenditures as follows: - Expenses for salaries and other personnel rights; - Expenses for maintenance and operation;

- Transfer costs (for natural persons and legal entities); - Investment costs. The financial classification is made depending on when and how public spending affects the financial resources and groups them in the following categories: 1) final expenditures finalize the distribution of public financial resources and includes expenditures both with investment character and with functional one; 2) temporary expenditures - usually reflected in such transactions: loans, financing the repayment of loans received, and so on. 3) virtual or potential expenditures - are costs that the state undertook to perform under certain conditions: the granting of loan guarantees. The classification used by the ONU specialized agencies is based on two main criteria: 1) Functional - groups the public expenditure share and objectives: public service, general, defense, education, health, social security, economic activities, utilities, other expenses; 2) Economic - includes the following groups: expenditure on final consumption of national income, public debt interest, gross capital formation, capital transfers. In the Republic of Moldova, since 1997, is used the New Budgetary Classification. The Budgetary Classification represents grouping, numbering and legal naming of the State budget revenues and expenditures, mandatory for the content of this budget and state budget accounting records. According to the Budgetary Classification, public expenditures are grouped according to: functional classification of expenditures; organizational classification of budgetary expenditures; economic classifications of budgetary expenditures. The major groups of expenditures relates to: - State general purpose services - Foreign activity - National Defense - Justice - Constitutional jurisdiction - Maintaining public order and national security Education - Science and Innovation - Culture, art, sport and youth actions - Health Care - Insurance and social assistance - Agriculture, forest household, fish household and water household Hydro meteorological and environmental protection Industry and construction Transports, roads household, communications and informatics Communal and housing operating fund Fuel and energy complex State debt service: internal and external Completing State reserves Other services related to the economic activity Misattributed expenses to other main groups

3. Trends and evolution of public expenses


The size and composition of public expenditures varies from country to country and from one period to another. These parameters of public expenditure are in a constant evolution. The period of free competition, when the need for State intervention was denied, the size and composition of public expenditures were determined by the main concerns of the state - significant military activities, maintenance of administrative bodies - police, and so on.

Until the late XIX-th century the public spending in European countries rarely exceeded 10% of national income. The State permanently evolved in the role of general service as security, justice, defense. In the contemporary era the characteristics of public expenditures have changed: 1. Public spending from one period to another increase so as an expression of value, money, and as actual size, absolute. 2. The composition of public expenditures is now determined by the important role that has the state in the economic and social life. In this age in all the developed countries the State has become an essential economic agent. In connection with the real growth of public expenditures, it should be noted that this is caused by a number of factors, including: a) Demographic factors, which are manifested by population growth and change in its structure by age and socioprofessional categories; b) Economic factors pertaining to the economic obligations of the state to finance economic activities cost, maintain production infrastructure, to support unprofitable branches, etc. to avoid economic turmoil. c) Social factors, which are manifested by the expansion of funding by the state of the social and cultural, and above all, health and social security, education, health and so on. d) Military factors, related to research and production of new types of weapons and military equipment, the continued threat of military conflicts and the emergence of a new phenomenon - the destruction and clearance of significant amounts of nuclear, chemical, biological, and so on. e) Historical factors, acting through transmission from one period to another increased expenditure needs and for bearing the burden of those made in previous years by internal and external public loans; f) Political factors, which refer to a considerable tasks increase of the contemporary state due to the transformation of political conception according to the role and functions of public authorities under current conditions. Real growth of public expenditures is based on GDP growth and its increasing part which is distributed for public authorities. Public expenditures viewed as an important tool of influencing economic and social processes in society, so with a purpose of activate ones as well as to stop others. Public expenditures, such private investment, contribute in demand increasing of goods and services. They are reflected in: procurement of goods, service benefits. As a result, firms and households income increases and creates a new high demand. This has a series of economic effects: - Increase the volume of investments; - Use of employment through the creation of new jobs; - Increase of real production volume which means real economic growth (increasing GDP); - Gradual increase of income in society, etc.. Increase of public expenditures produces social effects too: - Reducing unemployment; - Development and improving of social, cultural and public services; - Promoting social protection; - Equitable redistribution of income between groups of individuals, corporate bodies, territories etc. Public authorities from different countries ruled by scientific advice concerning public expenditure use public financial flows to stimulate the economy and solving social problems. Formulating arguments for increasing public expenditure, it should be noted that it is necessary strict and careful follow of their growth to ensure monetary stability. The rapid growth of public expenditures can lead to inflationary phenomena. Public authorities should carefully analyze each type of expenditure and to choose the priority for those who will prove through their efficiency and productivity of public expenditure to ensure achievement of targeted economic and social objectives.

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