The state budget is a balance of state revenues and expenditures for a certain period of time (usually a year), which is the main financial plan of the country, which, after its adoption by the legislative body (parliament, state duma, congress, etc.), acquires the force of law and is mandatory for execution.
In the performance of its functions, the state bears numerous costs. By purpose, state expenditures can be divided into expenditures:
For political purposes: 1) spending on national defense and security, ie. maintenance of the army, police, courts, etc.; 2) expenses for the maintenance of the state administration apparatus
For economic purposes: 1) the cost of maintaining and ensuring the functioning of the public sector of the economy, 2) the cost of assistance (subsidizing) to the private sector of the economy
For social purposes: 1) social security expenses (payment of pensions, scholarships, allowances); 2) expenditures on education, healthcare, development of fundamental science, environmental protection.
From a macroeconomic point of view, all government spending is divided into:
- public procurement of goods and services (their value is included in GDP);
- transfers (their value is not included in GDP);
- interest payments on government bonds (public debt servicing).
- taxes (including social security contributions);
- profits of state enterprises;
- seigniorage (income from the issue of money);
- income from privatization.
Types of states of the state budget
The difference between state revenues and expenditures is the balance (state) of the state budget. The state budget can be in three different states:
1) when budget revenues exceed expenditures (T > G), the budget balance is positive, which corresponds to a surplus (or surplus) of the state budget;
2) when revenues are equal to expenditures (G = T), the budget balance is zero, i.e. the budget is balanced;
3) when budget revenues are less than expenditures (T
At different phases of the economic cycle, the state budget is different. During a recession, budget revenues are reduced (because business activity and, consequently, the tax base is reduced), so the budget deficit (if it existed initially) increases, and the surplus (if there was one) decreases. In a boom, on the contrary, the budget deficit decreases (since tax revenues, i.e., budget revenues, increase), and the surplus increases.
State budget deficit and its types
There are structural, cyclical and actual budget deficits. The structural deficit is the difference between government spending and budget revenues that would have gone into it under conditions of full employment of resources under the current taxation system:
The cyclical deficit is the difference between the actual deficit and the structural deficit:
During a recession, the actual deficit is greater than the structural deficit, since a cyclical deficit is added to the structural deficit, since during a recession Y Y*. Structural deficit is the result of expansionary discretionary fiscal policy, while cyclical deficit is the result of automatic fiscal policy, a consequence of built-in stabilizers.
There are also current budget deficit and primary deficit. The current budget deficit is the total government budget deficit. The primary deficit is the difference between the total (current) deficit and the amount of government debt service payments.
Concepts of the state budget
The attitude to the state budget deficit is usually negative. The most popular idea is a balanced budget. Historically, three concepts have been put forward in relation to the state budget: 1) the idea of an annually balanced budget; 2) the idea of a budget balanced by the phases of the economic cycle (on a cyclical basis); 3) the idea of balancing not the budget, but the economy.
The concept of an annual balanced budget is that, regardless of the phase of the economic cycle, every year budget expenditures should be equal to income. This means that, for example, during a recession, when budget revenues (tax revenues) are minimal, the state must reduce public spending (government purchases and transfers) to ensure a balanced budget. And since the reduction of both government purchases and transfers leads to a decrease in aggregate demand, and, consequently, output, this measure will lead to an even deeper recession. And, conversely, if the economy is booming, i.e. maximum tax revenues, then in order to balance budget expenditures with revenues, the state must increase government spending, provoking even more overheating of the economy and, consequently, even higher inflation. Thus, the theoretical inconsistency of such an approach to budget regulation is quite obvious.
The concept of a cyclically balanced state budget is that it is not necessary to have a balanced budget every year. It is important that the budget be balanced as a whole during the economic cycle: the budget surplus, which increases during the boom (highest business activity), when budget revenues are maximum, should be used to finance the budget deficit that occurs during the recession (lowest business activity), when budget revenues fall sharply. This concept also has a significant drawback. The fact is that boom and recession phases differ in duration and depth, so the amounts of the budget surplus that can be accumulated during a boom period and the deficit that accumulates during a recession, as a rule, do not match, so a balanced budget cannot be ensured.
The concept that the goal of the state should not be the balance of the budget, but the stability of the economy, has become most widespread. This idea was put forward by Keynes in his work "The General Theory of Employment, Interest and Money" (1936) and was actively used in the economies of developed countries until the mid-1970s. According to Keynes's views, the instruments of the state budget (government purchases, taxes and transfers) should be used as counter-cyclical regulators, stabilizing the economy at different phases of the cycle. If the economy is in a recession, then the government, in order to stimulate business activity and ensure economic recovery, should increase its spending (government purchases and transfers) and reduce taxes, which will lead to an increase in aggregate demand. And, conversely, if the economy is booming (overheating), then the state should cut costs and increase taxes (revenues), which hinders business activity and "cools" the economy, leading to its stabilization. The state of the state budget does not matter. Since Keynes's theory was aimed at developing recipes for combating a recession, with a recession in the economy, which was proposed to be carried out using, first of all, budgetary regulation tools (increase in government purchases and transfers, i.e. budget expenditures and tax cuts, i.e. . budget revenues), then this theory is based on the idea of "deficit financing". As a result of the use of Keynesian recipes for regulating the economy in most developed countries in the 1950s and 1960s, the problem of chronic state budget deficit became one of the main macroeconomic problems by the mid-1970s, which was one of the reasons for the intensification of inflationary processes.
Ways to finance the state budget deficit
The state budget deficit can be financed in three ways: 1) by issuing money; 2) at the expense of a loan from the population of their country (domestic debt); 3) at the expense of a loan from other countries or international financial organizations (external debt).
The first method is called the emission or cash method, and the second and third are called the debt method of financing the state budget deficit. Consider the advantages and disadvantages of each method.
Emission method of financing the state budget deficit. This method consists in the fact that the state (Central Bank) increases the money supply, i.e. issues additional money into circulation, with the help of which it covers the excess of its expenses over income. Advantages of the emission method of financing:
The growth of the money supply is a factor in the increase in aggregate demand and, consequently, output. An increase in the money supply causes a decrease in the interest rate in the money market (decrease in the price of a loan), which stimulates investment and ensures the growth of total spending and total output. This measure, therefore, has a stimulating effect on the economy and can serve as a means of exiting a recession.
This is a measure that can be implemented quickly. An increase in the money supply occurs either when the Central Bank conducts operations on the open market and buys government securities and, paying sellers (households and firms) for the cost of these securities, issues additional money into circulation (it can make such a purchase at any time and at any time). required amount), or through the direct issue of money (for any required amount).
Flaws:
The main drawback of the emission method of financing the state budget deficit is that in the long run, an increase in the money supply leads to inflation, i.e. it is an inflationary way of financing.
This method can have a destabilizing effect on the economy during a period of overheating. A decrease in the interest rate as a result of an increase in the money supply stimulates an increase in total spending (primarily investment) and leads to an even greater increase in business activity, widening the inflationary gap and accelerating inflation.
Financing the state budget deficit at the expense of domestic debt. This method consists in the fact that the state issues securities (government bonds and treasury bills), sells them to the public (households and firms), and uses the proceeds to finance the excess of government spending over income.
Advantages of this financing method:
It does not lead to inflation, since the money supply does not change, i.e. it is a non-inflationary way of financing.
This is a fairly quick way, since the issue and placement (sale) of government securities can be ensured quickly. The population in developed countries is happy to buy government securities, because they are highly liquid (they can be easily and quickly sold - this is “almost money”), highly reliable (guaranteed by the government, which enjoys confidence) and quite profitable (interest is paid on them).
Flaws:
Debts must be paid. Obviously, the population will not buy government bonds if they do not generate income, i.e. unless interest is paid on them. The payment of interest on government bonds is called "servicing the public debt." The larger the public debt (i.e., the more government bonds issued), the larger the amounts that must go to service the debt. And the payment of interest on government bonds is part of the state budget expenditures, and the more they are, the greater the budget deficit. It turns out a vicious circle: the state issues bonds to finance the state budget deficit, the payment of interest on which provokes an even greater deficit.
Paradoxically, this method is not non-inflationary in the long run. Two American economists Thomas Sargent (Nobel Prize winner) and Neil Wallace proved that debt financing of the state budget deficit in the long run can lead to even higher inflation than emission financing. This idea is known in the economic literature as the Sargent-Wallace theorem. The fact is that the state, financing the budget deficit through an internal loan (issuing government bonds), as a rule, builds a financial pyramid (refinances the debt), i.e. pays off past debts with a loan in the present, which will need to be repaid in the future, and the repayment of the debt includes both the amount of the debt itself and the interest on the debt. If the government uses only this method of financing the public deficit, then there may come a point in the future when the deficit is so large (i.e., so many government bonds will be issued and the cost of servicing the public debt will be so significant) that its financing by debt way will be impossible, and equity financing will have to be used. But at the same time, the amount of emission will be much larger than if it is carried out in a reasonable amount (in small portions) every year. This can lead to a surge in inflation and even cause high inflation.
As Sargent and Wallace have shown, in order to avoid high inflation, it is wiser not to abandon the issuance method of financing, but to use it in combination with debt.
A significant drawback of the debt method of financing is the "crowding out effect" of private investment. We have already considered its mechanism when analyzing the shortcomings of fiscal policy in terms of the impact on the economy of an increase in budget expenditures (government purchases and transfers) and a reduction in budget revenues (taxes), which generates a budget deficit. Now consider the economic meaning of the "crowding out effect" in terms of financing this deficit. This effect is that an increase in the number of government bonds in the securities market leads to the fact that part of household savings is spent on the purchase of government securities (which provides financing for the government budget deficit, i.e. goes to non-productive purposes), and not to the purchase of securities of private firms (which ensures the expansion of production and economic growth). This reduces the financial resources of private firms and therefore investment. As a result, the volume of production is reduced.
The economic mechanism of the “crowding out effect” is as follows: an increase in the number of government bonds leads to an increase in the supply of bonds in the securities market. An increase in the supply of bonds leads to a decrease in their market price, and the price of a bond is inversely related to the interest rate, therefore, the interest rate rises. An increase in the interest rate causes a reduction in private investment and a reduction in output.
The debt method of financing the state budget deficit can lead to a deficit in the balance of payments. It is no coincidence that in the mid-1980s the term "twin-deficits" appeared in the United States. These two types of deficits can be interdependent. Recall the identity of injections and withdrawals: I + G + Ex = S + T + Im, where I is investment, G is government purchases, Ex is exports, S is savings, T is net taxes, Im is imports.
Regroup: (G - T) \u003d (S - I) + (Im - Ex)
From this equality it follows that with the growth of the state budget deficit, either savings should increase, or investment should decrease, or the trade deficit should increase. The mechanism of the impact of the growth of the state budget deficit on the economy and its financing at the expense of domestic debt has already been considered in the analysis of the “crowding out effect” of private investment and output as a result of an increase in the interest rate. However, along with internal crowding out, an increase in the interest rate leads to a crowding out of net exports, i.e. increases the trade deficit.
The mechanism of external crowding out is as follows: an increase in the domestic interest rate compared to the world rate makes the securities of this country more profitable, which increases the demand for them from foreign investors, which in turn increases the demand for the national currency of this country and leads to an increase in the exchange rate of the national currency , making the goods of a given country relatively more expensive for foreigners (foreigners now have to exchange more of their currency in order to buy the same amount of goods from this country as before), and imports become relatively cheaper for domestic buyers (who now have to exchange less national currency to buy the same amount of imported goods), which reduces exports and increases imports, causing a reduction in net exports, i.e. causes a trade deficit.
Financing the state budget deficit with the help of external debt. In this case, the budget deficit is financed by loans from other countries or international financial organizations (International Monetary Fund - IMF, World Bank, London Club, Paris Club, etc.). Those. it is also a type of debt financing, but through external borrowing.
Advantages of this method:
- Opportunity to receive large sums
- Non-inflationary character
Flaws:
- The need to repay the debt and service the debt (i.e., the payment of both the amount of the debt itself and the interest on the debt)
- The impossibility of building a financial pyramid to pay off foreign debt
- The need to divert funds from the country's economy to pay off external debt and service it, which leads to a reduction in domestic production and a recession in the economy
- With a deficit in the balance of payments, the possibility of depleting the country's gold and foreign exchange reserves
So, all three ways of financing the state budget deficit have their advantages and disadvantages.
Public debt, its types and consequences
Public debt is the sum of accumulated budget deficits adjusted for budget surpluses (if any). Government debt is thus a measure of a stock because it is calculated at a specific point in time (for example, as of January 1, 2000) as opposed to the government deficit, which is a measure of flow because it is calculated over a specific period of time (per year). There are two types of public debt: 1) internal and 2) external. Both types of public debt have been discussed above.
It is impossible to determine its burden on the economy by the absolute value of public debt. For this, the ratio of the amount of public debt to the amount of national income or GDP is used, i.e. d = D/Y. If the growth rate of debt is less than the growth rate of GDP (economy), then the debt is not terrible. With low economic growth rates, public debt becomes a serious macroeconomic problem.
The danger of a large public debt is not that the government may go bankrupt. This is impossible, because, as a rule, the government does not repay the debt, but refinances, i.e. builds a financial pyramid, issuing new government loans and making new debts to pay off old ones. In addition, the government may raise taxes or issue additional money to finance its spending.
Serious problems and negative consequences of a large public debt are as follows:
- The efficiency of the economy decreases, since funds are diverted from the manufacturing sector of the economy both for servicing the debt and for paying the amount of the debt itself;
- Redistributed income from the private sector to the public sector;
- Income inequality is on the rise;
- Debt refinancing leads to an increase in the interest rate, which causes a crowding out of investments in the short run, which in the long run can lead to a reduction in the capital stock and a reduction in the country's productive potential;
- The need to pay interest on debt may require higher taxes, undermining economic stimulus
- There is a threat of high inflation in the long run
- Places the burden of debt repayment on future generations, which can lead to a decline in their level of well-being
- The payment of interest or principal to foreigners causes the transfer of a certain part of GDP abroad
- There may be a threat of a debt and currency crisis
3. The state budget. Budget deficit and public debt.
The state budget - it is a fund of financial resources that exists in the form of a balance of cash income and expenditure of the state for a certain period of time. Functions of the state budget redistribution of national income (from 20 to 60%); stabilization of social reproduction, economy; implementation of state social policy.
Income budget items: tax revenues (direct and indirect) – up to 90% of receipts; non-tax revenues (income from the use and sale of state property, targeted transfers to the state); government loans (issuance and sale of securities); issue of money.
Expenditure items of the budget: financing of socio-cultural institutions (education, science, culture, healthcare); measures to finance the national economy (industry, energy, transport, agriculture, etc.); expenses for the liquidation of the disaster at the Chernobyl nuclear power plant; defense spending (including border and railway troops, defense, sports and technical societies); replenishment of state stocks and reserves; maintenance of internal affairs bodies (including internal troops); public administration; service of the public debt.
budget deficit – Excess of spending over budget revenues Surplus– excess of income over expenses.
Reasons for the budget deficit:
implementation of major state programs for the development of the economy;
growth of administrative expenses, subsidies to unprofitable enterprises;
militarization, the growth of state military spending;
military and natural disasters;
economic crises.
There are structural and cyclic deficits. Structural called the deficit that occurs at a given level of government spending, taxes and the natural rate of unemployment. The real deficit may exceed the structural deficit in the event of a decline in production (as a result, revenues are reduced, tax revenues to the treasury are reduced, and government spending on benefits and social programs is increased). The difference between real and structural deficit is called cyclical budget deficit.
The level of the state budget deficit – the ratio of the absolute value of the deficit to the volume of the budget in terms of expenditures or to the volume of GNP (the financial situation is normal when the budget deficit does not exceed 4-5% of GNP).
Options for financing the state budget deficit
1) increase in taxes (increase in state taxes);
2) issue of the required amount of money;
3) issue of state loans;
4) attraction of external loans;
5) sale of state property (during the transitional period).
The concept of balancing the state budget deficit
annual balancing of income and expenses – each financial year, revenues must equal expenditures (the possibility of budgetary and tax regulation is limited depending on the state of the economy, which leads to a budget deficit or a surplus);
business cycle – during a downturn in production, the government increases spending – the growth of the deficit, and during the period of recovery – reduces costs, which increases the surplus of income, which at the end of the industrial cycle will cover the deficit;
functional finance – ensuring macroeconomic balance, even if this leads to a government budget deficit.
A persistent budget deficit leads to an increase in public debt.
State debt – the amount of debt of the state to internal or external individuals and legal entities. (The sum of budget deficits of previous years minus budget surpluses).
domestic debt – debt of the government to residents of the given country (owners of securities). They make loans, deposits of the population, banknotes, lottery tickets, short-term obligations.
External debt is the debt of the state to other countries, foreign companies, banks, international organizations (IMF, IBRD). It is estimated by such indicators as its share in GNP, the ratio of the annual volume of payments on external debt to the volume of foreign exchange earnings for the year (which should not exceed 25%).
Domestic Debt Issues:
Paying interest on debt increases income inequality (securities are bought by the wealthiest citizens, and financing of interest comes from taxes that everyone pays);
to pay off debt and pay interest, they raise tax rates, and this reduces incentives for investment, slows down the development of the economy, and causes social tension in the country;
the issuance of new government securities into circulation leads to an increase in the loan interest rate, which negatively affects the process of investing capital;
a large domestic debt scares off foreign investors and makes the population of the country uncertain about the future.
External debt problems are associated with the need to increase exports and reduce imports, while the increase in revenue is used not for development purposes, but for debt repayment, which reduces the pace of development and the standard of living of the population.
Fiscal policy is the deliberate manipulation of the state budget aimed at stabilizing economic development. The mechanism of action of fiscal policy includes two parts: 1) discretionary fiscal policy, implemented through a deliberate change in taxes (tax rates) and government spending (public procurement of goods and services and transfer payments; 2) non-discretionary fiscal policy or a policy of built-in stabilizers based on dependence changes in tax revenues and government transfers from the business cycle.
The purpose of fiscal policy- ensuring non-inflationary production in conditions of full employment and stimulating economic growth.
Before we turn to the analysis of the essence of fiscal policy, let us dwell on its main components: state budget and tax system.
The state budget- this is a list of state revenues and expenditures for a certain period, usually for a year, approved by law.
The construction of the budget is based on the observance of certain principles:
1. The principle of unity - the concentration in the budget of all expenditures and all state revenues. The state should have a unified budget system, uniformity of financial documents and budget classification.
2. The principle of completeness means that for each budget item all costs and receipts are taken into account.
3. The principle of reality implies a true reflection of income and expenses.
4. The principle of publicity is the obligatory informing of the population about the main expenses and sources of income.
5. The principle of obligation - once the budget is adopted, it must be executed.
The balance of the budget implies equality of income and expenditure. If expenditures exceed revenues, then there is a budget deficit. The excess of revenues over expenditures means a budget surplus.
Usually, the state budget is understood not only as the budget of the central government, but also as a set of budgets of all levels of state administrative-territorial authorities. Extra-budgetary funds are closely related to budgets - state funds that have a special purpose and are created at the expense of special (targeted) taxes, loans, subsidies from the budget. An example would be the Pension Fund of Russia, the Social Insurance Fund.
Revenue part of the state budget generated mainly by tax revenues.
The expenses usually include:
1. Financing of the social sphere;
3. Financing of the national economy;
5. Servicing the public debt;
The ratio between expenditure items depends on many factors: the position of the country in the world economy, the level of development, the role of states and the role of the public sector in the economy, the political situation, national characteristics, etc. But in general, the trend is as follows: the structure of public expenditures of developed countries in modern conditions changed in favor of social programs. Thus, in the structure of the US federal budget, military spending is 28%, and social spending is 47.3%. In other countries, the social sphere sometimes absorbs more than 50% of budget expenditures.
The financing of the national economy usually includes: a) capital investments in infrastructure, subsidies to state-owned enterprises, subsidies to agriculture, and spending on various government programs. The share of these expenses varies within 10 - 20%, it all depends on the size of the public sector.
State budget expenditures perform the functions of political, social and economic regulation.
The ideal execution of the budget is full coverage of expenses by income, but, as a rule, this situation is extremely rare. One of the most important issues of public finance is the problem of the budget deficit and public debt.
Budget deficit, as already noted, is the amount by which budget expenditures exceed its revenues in a given year.
In economic theory, a distinction is made between structural and cyclical budget deficits.
Structural deficit is the federal budget deficit at a natural unemployment rate of 6%. The difference between real and structural deficit is defined as cyclical deficit.
Changes in structural and cyclical deficits depend on the state of the economy. For example, during a period of upswing in business activity, the cyclical deficit is reduced due to reductions in unemployment benefits, large tax revenues to the budget. At the same time, the structural deficit may grow, in particular, due to increased spending on defense or on various social programs.
The reasons for the budget deficit include the following:
The decline in social production;
Unnecessarily inflated social programs;
Increased costs of financing the military-industrial complex;
The turnover of "shadow" capital on a huge scale;
The practice of state financing of unprofitable, unprofitable enterprises;
The imperfection of the tax system, which allows individual producers to receive unreasonable tax benefits, hide their income from taxation;
Excessive expenses for the maintenance of the administrative apparatus.
The budget deficit must be financed. There are several options for covering it. The budget deficit can be financed by issue of new money. The consequences of such a measure are well known. Uncontrolled inflation develops, incentives for long-term investment are undermined, the savings of the population are depreciated, and a budget deficit is reproduced. To avoid this, most countries in their constitutions have secured the independence of the national bank of issue from the executive and legislative branches, which is not obliged to finance the government.
Another coverage option is government loans both internal and external. They are carried out in the form of the sale of government securities, loans from extra-budgetary funds (for example, from a pension fund) and in the order of obtaining loans from banks. The last form of financing the budget deficit in developed countries is usually practiced by local authorities. The government, on the other hand, can count on a loan from the Central Bank only in exceptional cases, specially stipulated by law, since its regular lending can lead to inflationary processes.
State loans are less dangerous than emission, but they also have a certain negative impact on the country's economy. By placing securities on the money market, the state takes funds that could become investments. In addition, if the state expands the supply of its bonds, then their rate decreases, and interest rates rise. Investment costs are inversely proportional to the interest rate. Consequently, government borrowing will "push out" some of the costs of private investors, thus holding back the development of the economy. In economics, this phenomenon is called "crowding out effect".
The increase in the budget deficit in the economy leads to the emergence and growth of public debt.
State debt- this is the amount accumulated in the country for a certain period of budget deficits, minus the positive budget balances available during this time.
Public debt is divided into internal (i.e. debt to its population), external (i.e. debt to foreign states, organizations and individuals), as well as short-term (up to 1 year), medium-term (from 1 year to 5 years) and long-term (over 5 years). How does public debt and its growth affect the functioning of the economy? Usually, two dangers are seen in public debt: the possibility of bankruptcy of the nation and the danger of shifting the debt burden onto future generations. Regarding the first danger, the following can be noted: private firms can go bankrupt, the state cannot, since the government, unlike firms, has ample opportunity to fulfill its financial obligations. How? 1) Through refinancing - the state sells new bonds and uses the proceeds to pay the holders of redeemable bonds; 2) by levying new taxes that go towards paying interest and the total amount of the public debt; 3) by creating new money. As for the second danger, the specifics of the internal debt, which makes up the bulk of the public debt, is such that we kind of owe ourselves. While the public debt is the sum of the obligations to the citizens of the country as to the taxpayers, most of the same debt is also the assets of the citizens as bondholders. Therefore, it can be said that future generations, inheriting government debts, simultaneously become heirs of government bonds for the same amount.
However, rising government debt has real negative economic consequences:
1. Paying interest on government debt increases income inequality. Money flows from the less well off to the more well off, who, as a rule, are the bondholders;
2. Increasing tax rates to finance public debt can undermine economic stimulus, reduce investment in production, increase social tensions in society, etc.;
3. External debt involves the transfer of part of the product created within the country abroad;
4. The growth of external debt reduces the international authority of the country. So, if payments on external debt make up 20-30% of the country's foreign economic activity, then it becomes difficult to attract new loans from abroad, the country may fall into the position of bad debtors;
5. If the state pushes out private investment by spending borrowed money on building bridges, highways, ports, etc., or investing in “human capital” in the health and education system, then future potential is strengthened country. But if the increase in government spending comes at the expense of an increase in consumer spending, then the future generation may inherit an economy with reduced productive potential and have a correspondingly lower standard of living.
The growth of public debt is observed today in almost all countries.
Discretionary fiscal policy
Discretionary fiscal policy is the deliberate manipulation of government spending and taxes in order to change the real volume of national production and employment, control inflation and accelerate economic growth.
Suppose the government decides to purchase $20 billion worth of goods and services, no matter what the NNP is. By adding government purchases to private spending (C + In + Xn), we get a higher level of total spending, i.e. C + + In Xn + G, where G is public or government spending. An increase in government spending, as well as an increase in private spending, will lead to an increase in the equilibrium NNP. According to Keynes, government spending is subject to a multiplier effect. If a $20 billion increase in government purchases caused an $80 billion increase in equilibrium NNP, then the multiplier in this case is 4.
It is important to emphasize that the increase in government spending by $20 billion is not financed by an increase in tax revenues, since an increase in taxes will lead to a decrease in the equilibrium NNP. To have a stimulating effect, government spending must be accompanied by a budget deficit. Keynes's fundamental recommendations included increasing deficit financing to overcome a recession or depression.
What are the consequences of cutting government spending? In any case, the result is a multiple reduction in the equilibrium NNP. If government spending is reduced from $20 billion to $10 billion, then the equilibrium NNP will fall by $40 billion at a multiplier of 4.
The government not only spends money, but also collects taxes. How does taxation affect the equilibrium NNP? Answer: an increase in taxes will cause a reduction in the value of the equilibrium NNP (Fig. 32.1).
Balanced budget multiplier
The balanced budget multiplier shows that equal increases in government spending and taxes cause an increase in the equilibrium NNP by the amount of their increase.
For example, an increase in G and T by $20 billion causes an increase in NNP by $20 billion.
At the same time, changes in government spending have a larger impact on total spending than changes in taxes of the same magnitude. Government spending has a direct impact on total spending.
Changes in taxes also indirectly affect total spending, through changes in after-tax income and through changes in consumption. The basis of the so-called balanced budget multiplier is revealed in Figure 32.2.
The balanced budget multiplier is equal to one. The same increase in taxes and government spending will cause an increase in NNP by an amount equal to the increase in government spending and taxes. With a marginal propensity to consume (MPC) of 3/4, a $20 billion increase in taxes would reduce after-tax income by $20 billion and reduce consumer spending by $15 billion. Since the multiplier is 4, NNP would fall by $60 billion. $20 billion in government spending, however, would cause a more than offset increase in NNP of $80 billion. Therefore, the net increase in NNP would be $20 billion, which is equal to the increase in government spending and taxes.
The balanced budget multiplier operates regardless of the marginal propensities to consume and save.
Fiscal Policy Goals
The fundamental goal of fiscal policy is to eliminate unemployment or inflation. During the recession, the question of the elimination of unemployment, therefore, of stimulating fiscal policy, appears on the agenda. Stimulating fiscal policy includes: 1) an increase in government spending, or 2) tax cuts, or 3) a combination of the first and second. If there is a balanced budget, fiscal policy should move in the direction of the government's budget deficit during a recession or depression. Conversely, if the economy is experiencing inflation caused by excess demand, this case corresponds to a contractionary fiscal policy. Contractionary fiscal policy includes: 1) reducing government spending, or 2) increasing taxes, or 3) a combination of the first and second. Fiscal policy should be guided by a government budget surplus if the economy faces the problem of controlling inflation.
However, it must be remembered that the size of NNP depends not only on the difference between government spending and taxes (ie, on the size of the deficit or positive balance), but also on the absolute size of the budget. In our illustration of the balanced budget multiple, the $20 billion increase in G and T increased NNP by $20 billion. If G and T increased by only $10 billion, then the equilibrium NNP would increase by only $10 billion.
Methods of financing deficits and ways to get rid of budget surpluses. Given the size of the state budget deficit, its stimulating effect on the economy will depend on the methods of financing the deficit. Similarly: given the value of the budget surplus, its inflationary impact depends on how it will be liquidated.
There are two different ways in which the federal government can finance the deficit: by borrowing from the public (through the sale of interest-bearing paper) or by issuing new money to its creditors. The impact on total costs will be different in each case.
1. Borrowing.
If the government enters the money market and places its loans here, it competes with private entrepreneurs for funds. Consequently, government borrowing will tend to increase the level of interest rates and, thus, will “push out” some of the costs of private investors and interest-sensitive consumer costs.
2. Creation of money.
If government spending in a deficit budget is financed by issuing new money, pushing out private investment can be avoided. Federal spending can increase without having a detrimental effect on investment or consumption. Thus, the creation of new money is by nature a more stimulating way of financing deficit spending than is the expansion of borrowing.
Inflation caused by excess demand requires fiscal action on the part of the government, which could create a budget surplus. However, the anti-inflationary effect of such a surplus depends on how the government uses it. There are two possible ways here:
1. Debt repayment.
Since the federal government has accumulated debt, it is logical that the government could use additional funds to pay off the debt. This measure, however, may somewhat reduce the anti-inflationary impact of the budget surplus. By buying back its debt obligations from the public, the government transfers its excess tax revenue back to the money market, causing the interest rate to fall and thus stimulating investment and consumption.
2. Withdrawal from circulation.
The government can achieve a greater anti-inflationary impact of its budget surplus simply by withdrawing these excess amounts, suspending any subsequent use of them. Surplus withdrawal means that the government takes some amount of purchasing power out of the general flow of income and expenditure and retains it. If excess tax revenues are not re-infused into the economy, then there is no possibility of spending even some of the budget surplus, i.e. there is no longer any chance that these funds will create an inflationary effect counteracting the deflationary effect of the surplus as such. It can be concluded that the complete withdrawal of the budget surplus is a more restrictive measure compared to the use of these same funds to pay off the public debt.
Which do you prefer: government spending or taxes?
The answer to this question depends largely on the individual perspective of the politician and on how large the public sector is. "Liberal" economists who believe that the public sector should be expanded may recommend expanding aggregate spending during a downturn by increasing government purchases and limiting aggregate spending during rising inflation by increasing taxes. Conversely, "conservative" economists who believe that the public sector is unnecessarily bloated and inefficient may argue for increasing aggregate spending during a downturn through tax cuts, and in a period of rising inflation, suggest reducing aggregate spending by cutting government spending. It is important to note that an active fiscal policy aimed at stabilizing the economy can rely on both an expanding and shrinking public sector.
Non-discretionary fiscal policy: built-in stabilizers
When considering discretionary fiscal policy, the existence of a constant tax was assumed, which provides for the withdrawal of the same tax amount at different NNP values. With a non-discretionary fiscal policy, built-in, or automatic, stability arises due to the fact that in reality the tax system provides for the withdrawal of such a net tax, which changes in proportion to the value of NNP. The net tax is equal to the total tax minus transfer payments and subsidies. Almost all taxes will increase tax revenue as NNP rises. In particular, the personal income tax has progressive rates and, as the NNP rises, gives a more than proportional increase in tax revenues. Moreover, as NNP rises and purchases of goods and services increase, revenues from corporate income tax, turnover tax and excises will increase. And similarly, payroll taxes increase as new jobs are created in the course of the economic recovery. On the contrary, if NNP falls, tax revenues from all these sources will fall. Transfer payments (or "negative taxes") have exactly the opposite behavior. Unemployment benefits, poverty benefits, subsidies to farmers - they all decrease during an economic recovery and increase during a downturn.
If tax revenue fluctuates in the same direction as NNP, then deficits, which tend to automatically appear during recessions, help to overcome the recession. On the contrary, budgetary surpluses, which tend to automatically appear during economic booms, will help to overcome possible inflation.
Figure 32.3 is a good illustration of how the tax system enhances built-in stability. Government spending (G) in this scheme is assumed to be given and independent of NNP; expenditures are approved by Parliament at a permanent fixed level. But parliament does not determine the amount of tax revenue, rather, it determines the size of tax rates. Tax revenues then fluctuate in the same direction as the level of NNP that the economy reaches. The direct relationship between tax revenues and NNP is recorded as a slightly rising line T.
The economic significance of these direct relationships between tax revenues and the value of NNP is of particular importance due to the fact that: 1) taxes represent an leakage or loss of potential purchasing power in the economy and 2) from the point of view of stability, it is desirable to increase the volume of such leakages (withdrawals) during periods when the economy moves towards inflation, and, conversely, the amount of purchasing power withdrawals should be minimized during a period of slowing growth. The tax system depicted in Figure 32.3 creates some element of stability in the economy by automatically causing changes in tax revenues and hence in the government budget that counteract both inflation and unemployment. So, a built-in stabilizer is any measure that tends to increase the government budget deficit (or reduce its surplus) during a recession and increase its surplus (or decrease its deficit) during an inflation period, without the need for any special action from the government. This exactly what the tax system does. As NNP rises during a period of prosperity, tax revenue automatically rises and—because it is a "leak"—contains economic recovery. In other words, as the economy moves towards a higher level of NNP, tax revenue increases automatically and tends to eliminate the budget deficit and create a budget surplus. Conversely, when NNP declines during a recession, tax revenue automatically declines, and this reduction cushions the economic downturn: i.e. with NNP falling, tax revenues also fall and push the government budget from a budget surplus to a deficit. The built-in stability provided by the tax system cushioned the severity of economic fluctuations. However, stabilizers are not always capable of correcting undesirable changes in the equilibrium NNP.
All stabilizers do is limit the scope or depth of economic fluctuations. Therefore, Keynesian economists agree that to correct inflation or recession, discretionary fiscal measures are required on the part of the government, i.e. changes in tax rates; and government spending. In the US today, built-in stabilizers are estimated to be able to reduce fluctuations in national income by about one-third.
Crowding effect
The essence of the crowding out effect is that an stimulating (deficit) fiscal policy will lead to an increase in interest rates and a reduction in investment spending, thus weakening or completely undermining the stimulating effect of fiscal policy.
It looks like this:
Suppose the economy is in a recession and the government, as one measure of current fiscal policy, increases government spending. The government now enters the money market to finance the deficit. paid for borrowing money. Because costs vary inversely with interest rates, some investments will be rejected or crowded out. Then an increase in government spending can cause a decrease in private investment. If investment were reduced by the same amount as government spending increased, then fiscal policy would be completely ineffective.
The extent of the "crowding out effect" is the subject of lively debate. For example, some economists believe that in the case of high unemployment, this crowding out will be insignificant. The rationale here is that in a downturn, the stimulus created by increased government spending can improve profitability expectations for entrepreneurs, which is an important determinant of investment demand. If the demand curve for investment shifts to the right, then investment spending should not fall—it may even increase, even though the rate of interest rises.
Fiscal policy in an open economy
Additional difficulties in the implementation of fiscal policy arise when the economy is part of the world economy, i.e. open economy.
It is known that developments and economic policy measures taken abroad affect net exports and the economy. As such, one may be exposed to unforeseen international shocks to aggregate demand, which could reduce NNP and invalidate fiscal policy measures. The issue is that increasing participation in the global economy brings with it the complexities of international interdependence, along with the benefits of participating in specialization and trade. An example is the net export effect that operates through international trade, undermining the effectiveness of fiscal policy. The bottom line is this: By reducing the domestic interest rate, contractionary fiscal policy tends to increase net exports. And vice versa: “simulating fiscal policy can raise the level of domestic rates and ultimately reduce net exports.
Supply-side fiscal policy
It was assumed that fiscal policy affects only demand, i.e. the amount of total spending and aggregate demand. But economists have recognized that fiscal policy - especially changes in taxes - can change aggregate supply and therefore affect the changes that fiscal policy can cause in the price level-real production ratio.
Proponents of the concept of "supply-side economics" believe that lower tax rates should not necessarily lead to a reduction in tax revenues. In fact, it can be expected that the reduction in tax rates will provide an increase in tax revenues due to a significant increase in national output and income. This expanded tax base will ensure that tax revenues rise even at lower rates. Thus, from the point of view of Keynesian approaches, tax cuts will cause a reduction in tax revenues and increase the budget deficit, the "supply-side economics" approach suggests that tax cuts can be organized in such a way that it will increase tax revenues and reduce deficits.
Most economists are wary of the “supply-side” interpretation of tax cuts described above: 1) they feel that the expected positive impact of tax cuts on incentives to work, save and invest, and risk-taking may not actually be as strong as they hope proponents of "supply-side economics"; 2) any shifts in the aggregate supply curve to the right are long-term in nature, while the impact on demand will be felt in the economy much faster.
budget deficit
The budget deficit is the amount by which government spending exceeds its revenue in a given year.
The concept of budget regulation.
A. Annually balanced budget. Before the Great Depression in the 1930s an annually balanced budget was generally recognized as a desirable goal of public finance. But the annually balanced budget basically excludes the fiscal activity of the state as a counter-cyclical and stabilizing force.
The annually balanced budget must: 1) either increase tax rates; 2) either reduce government spending; 3) or use a combination of these two measures. The problem is that all of these measures are restrictive in nature; each of them further reduces, rather than stimulates, aggregate demand. Similarly, an annually balanced budget will cause inflation to accelerate. . In order to eliminate future budgetary surpluses, the government in this situation must: 1) either reduce tax rates; 2) or increase government spending; 3) or use a combination of both approaches. It is clear that the use of any of these three approaches will increase the inflationary phenomenon in the economy.
So, an annually balanced budget is not economically neutral; such a policy is pro-, not anti-cyclical.
"Conservative" economists have come out in favor of a budget balanced on an annual basis, thinking most of all not about the dangers of deficits and rising public debt as such, but that, from their point of view, an annually balanced budget is absolutely necessary in order to limit the undesirable and uneconomic expansion of the public sector. Budget deficits, from their point of view, are a clear demonstration of political irresponsibility.
Deficits allow politicians to give back to society the benefits of growing government spending programs while avoiding the associated costs of higher taxes. In other words, these "fiscal conservatives" believe that government programs tend to grow faster than they should because there is much less public opposition to growth when it is funded by growing deficits, not tax increases.
Conservative economists and related politicians would like to have legislation or constitutional amendment introducing a balanced budget to slow the growth of government programs. They see the rise in deficits as a manifestation of a more fundamental problem - government encroachment on the very existence of the private sector.
Balanced budget on a cyclical basis. The idea of a budget balanced on a cyclical basis suggests that the government implements counter-cyclical policies and at the same time balances the budget. In this case, the budget does not have to be balanced annually. It is enough that it be balanced in the course of the economic cycle.
The rationale behind this budget concept is quite simple. To counter the recession, the government must cut taxes and increase spending, i.e. deliberately causing a deficit. In the course of the subsequent inflationary recovery, it is necessary to raise taxes and cut government spending. The resulting budget surplus can be used to cover the federal debt incurred during the recession. Thus, government fiscal actions should create a positive counter-cyclical force, and the government, even under this condition, can balance the budget, not on an annual basis, but over a period of several years.
The key problem of this concept of the budget is that ups and downs in the economic cycle can be unequal in depth and duration and, therefore, the task of stabilization conflicts with the task of balancing the budget during the cycle. For example, a long and deep recession followed by a short and modest period of prosperity would mean a large deficit in a recession, a small or no surplus in a period of prosperity, and therefore a cyclical fiscal deficit.
State debt
Public debt - is the total accumulated sum of all the positive balances of the budgets of the federal government, minus all the deficits that have occurred in the country.
Public debt arises as a result of increased military spending, especially during periods of economic downturns, and tax cut policies (both income and business profits). The federal budget is primarily a tool for achieving and maintaining macroeconomic stability. The government should not hesitate to introduce any deficits or surpluses to achieve this goal.
The level of public debt requires annual interest payments. If not to use the increase in the size of the debt, these annual interest payments must be made from the amount of tax revenues. Such additional taxes can offset the drive to take risks, the drive to innovate, to invest, to work. The existence of large public debt can undermine economic growth. The ratio of interest payments to GNP shows the level of taxation that is required to pay interest on the debt. Therefore, some economists are concerned about the fact that this figure has increased dramatically in recent years.
Obviously, the payment of interest and the amount of the debt requires the transfer of part of the national real output to the disposal of other countries. It should be noted that the share of public debt attributable to foreign creditors has been increasing in recent years in all countries. This is a cause for serious concern, especially for Russia.
Can the state shift the real economic burden of its debt onto the shoulders of future generations, or leave future generations with smaller fixed assets - say, a smaller "national factory"? This possibility is due to the crowding out effect, which is determined by the fact that scarce financing increases interest rates and, therefore, reduces investment costs. If this happens, successive generations will inherit an economy with reduced productive potential, and hence, other things being equal, living standards will be lower than in other cases.
There are several factors behind the growing concerns about deficits and public debt:
the question of the size of the debt remains open;
interest payments associated with government debt are growing very fast;
It is worrying that the annual deficits have formed in a peaceful economy that is operating very close to full employment.
The large deficits that exist during the period of full employment raise several questions:
1) the most significant likelihood of "crowding out" occurs when the economy is operating at full employment;
2) the stimulus effect of such deficits can cause excess demand inflation;
3) a large budget deficit makes it difficult for the country to achieve a balance in international trade. Large annual budget deficits tend to stimulate imports and deter exports and often lead to a sale of national wealth.
In financing its deficits, the government must enter the capital market and compete with the private sector for funds. This pushes interest rates up.
The increase in interest rates, in turn, also has two important consequences.
First, it does not encourage private investment spending.
By all accounts, deficits are pushing the economy onto a path of slow growth in the long run.
Second, higher interest rates on government and private securities make financial investments more attractive to foreigners. The influx of foreign funds can help finance both the deficit and private investment. But such an inflow of funds represents an increase in external debt. And the payment of interest and the repayment of debts to foreigners causes a reduction in future national production.
Third, the reduction in net exports has a dampening effect on the economy. Note that the above considerations reinforce our earlier conclusion that an expansionary fiscal policy may be much less stimulating for an economy than the simple Keynesian model suggests. Thus, the stimulating effect of the deficit can be offset by both the crowding out effect and the negative net export effect caused by the deficit.
Bibliography
For the preparation of this work, materials from the site matfak.ru/
fiscal policy is the procedure for the formation of state revenues and taxation, aimed at ensuring economic growth, full employment, maintaining the stability of the economy and reducing inflation. An integral element of the economic system, implements the functions of the state. A set of government financial measures to regulate the economy.
Fiscal policy in the United States is carried out by two bodies: Council of Economic Advisers (CEC) created to provide assistance and advice on economic issues to the President of the United States. Collects and analyzes economic information to make forecasts, develop programs and formulate policies for the national economy.
Public Economic Committee (OEK) considers a wide range of economic problems of national importance (employment, social protection of the population, etc.).
Fiscal policy is based on financial relationships.
financial relations- economic monetary relations that mediate the production, distribution, redistribution of the gross national product (GNP) through a unilateral, non-equivalent, gratuitous and irrevocable movement of funds in financial system.
Financial system- these are financial relations and the bodies implementing them. The center of the financial system is the state budget.
The state budget- the financial plan of the state, the balance of its income and expenses by sources of income and the main areas of use of funds.
There are concepts: consolidated, cyclical, structural, real budget, full employment budget.
Consolidated budget- state budget and regional budgets.
cyclical budget takes into account changes in government revenues and expenditures depending on the phase of the cycle, c. which is the economy.
Structural budget reflects the change in government revenues and expenditures as a result of structural adjustment in the economy.
Real budget- is determined by the actual income and expenditure of the state. Their ratio may be different.
Full employment budget shows what would be government surplus or deficits, if the economy were operating at full employment.
Budget surpluses - a positive budget balance, the excess of state revenues over its expenditures.
budget deficit- a negative balance of the budget, a steady excess of government spending over its revenues.
Exists: structural, cyclical and real budget deficit.
Structural budget deficit- the result of government fiscal policy. Occurs when the economy operates within the potential volume of production, but in a changing relationship between sectors of the economy.
Cyclical budget deficit- a consequence of changes in the industrial cycle occurs when the economy is in one or another phase of the reproduction process.
Real budget deficit determined by the actually existing excess of expenditures" over state revenues.
Budget balancing methods:
1) annually balanced budget;
2) budget balanced on a cyclical basis;
3) functional budget.
Annually balanced budget makes it possible to achieve economic growth; overcomes unemployment and inflation. At the same time, this balancing method reduces the government's fiscal capacity, deepens business cycle fluctuations, and causes economic growth and inflation to fall. Implemented by government increases in tax rates and cuts in government spending.
There is a concept balanced budget multiplier.
Balanced budget multiplier is an equal increase in government spending, taxation, leading to a corresponding increase in the equilibrium NNP. It is equal to one.
Budget balanced on a cyclical basis- associated with counter-cyclical policy. To counter the decline in production, the government is lowering tax rates and increasing its spending.
Functional budget- a method of balancing the budget, in which all the efforts of the state are focused on ensuring full employment, stabilizing the economy, and reducing inflation.
There are three ways to finance the state budget: 1) through loans from the population (internal loan); 2) through the sale of interest-bearing securities abroad (external loan); 3) through the issuance (issue) of new money.
Domestic loan- issue and placement government bonds and other securities among the population and firms in the amount of the budget deficit or part of it. The increase in state spending is carried out at the expense of society's consumption.
External loan- an agreement with the government of another country on the provision of material assets or money at the disposal of a foreign borrower, on the terms of return, for a period and with the payment of interest. Increases external public debt, but does not reduce private consumption in the creditor country.
Emission- a method of financing the budget deficit by additional issuance of money into circulation. Leads to higher inflation.
Fiscal policy happens automatic and discretionary.
Automatic fiscal policy- the so-called "built-in stabilizers" policy. With it, a progressive taxation scale brings the change in tax revenues into direct correspondence with the level of NNP, or national income; used when automatic stabilization economy.
"Built-in (built-in) stabilizer" Any measure that tends to reduce the government budget surplus during a downturn and increase the surplus (or decrease the deficit) during an inflationary period, without the need for any special government action.
Automatic stabilization uses elements of the automatic fiscal policy of the state, including: 1) automatic change in budget revenues with changes in the incomes of entrepreneurs and the population; 2) assistance to the unemployed and other social payments; 3) benefits to farmers; 4) savings (retained earnings
corporations and the accumulation of funds by the population).
Discretionary fiscal policy consists in deliberately manipulating tax rates, the structure of taxation, the size of government spending in order to change the volume of national production and employment, control inflation and accelerate economic growth. It happens stimulating and deterrent.
Stimulating discretionary policy includes: 1) an increase in government spending; 2) tax cuts; 3) their combination. A balanced budget during a recession or depression requires a budget deficit.
Restraining discretionary policy includes: 1) reduction of government spending; 2) increase in tax rates; 3) their combination. Should focus on a positive budget balance if the economy is experiencing inflation.
Exists straight and indirect fiscal methods of economic regulation.
Direct Methods- methods of budgetary regulation, when the state budget funds are used to finance the costs of expanded reproduction and covering the non-productive costs of the state, government investment and structural policy.
Public financial resources are used to provide subsidies and subsidies firms and sectors of the economy, targeted loans; implementation public procurement goods and services in order to stabilize the economic situation.
Subsidy- financial assistance in the form of cash benefits provided by the government at the expense of the state budget to entrepreneurs in their country, foreign firms and states.
Grant- a form of centralized regulation of income and expenses of firms whose costs exceed their profits. Financial assistance from the state budget to compensate for the losses of enterprises and organizations in the production and non-production sectors.
Target loans- commercial and investment loans provided to firms for strictly defined purposes.
State procurements- procurement by the state from firms and corporations of goods and services under a contract, or state order with their subsequent processing and sale in the domestic or foreign markets.
Government order- a task for manufacturers to produce a scarce or special product of national importance, in demand within the country and abroad.
Indirect methods of budget regulation- measures by which the state influences the financial capabilities of producers and the size of consumer demand through tax system and politics accelerated depreciation.
Taxation system- set of obligatory payments (taxes) legal entities and individuals to the state budget; the main instrument of state regulation of the economy. The list of taxes and their rates are determined by the government of the country.
taxes- obligatory payments of enterprises, organizations, population; the main source of income for the state budget, local budgets. They affect the costs and profits of enterprises, the purchasing power of the population and the standard of living.
Taxes are:
On the subject of taxation (profit, property, etc.);
By institutions that receive taxes (federal,
local budget)
By subject of taxation (firms, citizens);
By way of collection (ad valorem, chord, lump sum);
According to the collection mechanism (straight, indirect);
accrual method (progressive, regressive,
proportional).
Taxation system of Ukraine- approved by the law "On the Taxation System", adopted on June 25, 1991, which defines the following taxes, fees and obligatory payments:
Income taxes;
Income tax of foreign legal entities from
activities in Ukraine;
- sales tax;
- excise duty;
- value added tax;
Export and import tax;
Income tax from citizens;
Payment for natural resources;
Environmental tax;
State fees (eg from vehicle owners, etc.);
Customs duties.
Exists double taxation.
Double taxation- this is a tax on the profit of a foreign participant in the joint venture. Initially, this tax is paid when transferring profits abroad; secondarily, taxation is carried out in the country of the foreign partner of the joint venture.
Taxation methods: 1) accrual; 2) retention(payment).
Tax accrual- determination of the amount of debt is carried out by the tax authorities on the basis of tax return(for individuals).
Tax return- an official statement of a person about the amount of his income in the form of a written document, entailing legal and economic liability in case of deliberate misrepresentation of information.
Withholding taxes- deduction from the received income directly (for example, income tax on wages).
ad valorem tax- a fixed interest rate related to the total value of the goods, on the basis of which the relevant payments are made (trade taxes, import duties, etc.).
lump sum payment- license fee, a certain amount firmly fixed in the agreement.
progressive tax- a tax, the average rate of which increases as the taxpayer's income increases and decreases as this income decreases.
Proportional tax- a tax, the average rate of which remains unchanged with an increase or decrease in the income of the taxpayer.
regressive tax- a tax, the average rate of which decreases (increases) as the taxpayer's income increases (decreases).
Direct taxes charged at a fixed interest rate on the amount of income. These include: taxes on income (profit) of firms, corporations; personal income tax, inheritance taxes, vehicle taxes, etc.
Indirect taxes. The mechanism for levying these taxes is pricing. This value added tax, excises, value added tax, customs duties, etc.
value added tax- part of the newly formed value at each technological stage of the production of goods or the provision of services. It enters the budget after their sale, which is carried out at prices increased by the amount of tax.
excise tax- type of indirect tax on consumer goods (wine and vodka, tobacco products, salt, matches, gasoline, etc.). Paid to the state by producers and sellers of goods. The excise is included in the price of goods or tariffs for services.
Sales tax- part of the company's net income, centralized in the budget by the state. It is paid on consumer goods and quantitatively represents a firmly fixed part of the difference between the wholesale price of a product and the cost of its production. The state determines the list of goods whose prices include this tax.
In some cases, the state provides tax incentives.
tax incentives- partial or complete exemption of legal entities or individuals from paying taxes; element of tax policy; pursue economic or social goals. Benefits include tax holidays.
tax holidays- the period established by law during which a particular group of firms is exempt from paying a certain type of tax.
tax havens- small states, regions, territories and settlements (ports), focused on attracting capital, both domestic and from abroad, by providing tax and other benefits in the form of exemptions from certain taxes or lower tax rates.
Accelerated Depreciation Policy comes down to the exemption of entrepreneurs from paying taxes on part of the profit artificially redistributed to the depreciation fund. It contributes to economic growth and, at the same time, reduces the real purchasing power of the population due to rising costs and, consequently, prices for goods.
Deficit funding from the budget is associated with education public debt.
Public debt is formed government loan.
State loan- credit relations regarding the accumulation by the state on the basis of repayment of funds to finance government spending, cover the budget deficit, stabilize the economy, including money circulation.
Lenders are legal entities and individuals, the borrower is the state.
State debt- this is the debt of the state to one or another economic, legal or other entities that have loaned money, material values, economic objects, etc. Represents the temporary mobilization of funds to cover the costs of the state through the issuance of government loans. It happens internal and external.
Domestic public debt- this is the debt of the state to citizens, firms, organizations of their country. Such debt exists in the form of government-issued securities. (bonds, certificates, personal checks etc.).
Bonds- securities certifying the deposit of funds by its owner and confirming the obligation of the state to reimburse their nominal value within the prescribed period with the payment of a fixed percentage. They can be both nominal and bearer, target, winning, freely circulating (market) or with a limited circulation (non-market), savings, treasury and etc.
savings bond- a written certificate of the state, certifying the owner's right to receive the amount of the bond and interest on it after the expiration of the established period.
Treasury bonds- type of securities, certifying the contribution of their holder of funds to the budget and giving the right to receive a fixed income during the period of ownership. Placed on a voluntary basis among legal entities and individuals.
By maturity, bonds are divided into short-term (up to 1 year), medium-term (up to 5 years) and long-term (over 5 years). Maturity can be government consolidated.
Consolidation of public debt- Extension of loan terms.
Certificate (cash)- a security that certifies the right of its owner to receive a certain amount of money and interest.
personal check- A check issued to a specific person.
External debt- this is the debt of the government of the country to foreign citizens, firms, states, international organizations and funds.
Servicing the public debt- repayment of the principal amount of the debt and payment of interest on it. In Ukraine, debt service on internal and external public debt is entrusted to the National Bank (NBU).
External debt service rate is derived as the ratio of a country's payments to service its external debt to the volume of its exports. This norm shows what part of the foreign exchange earnings in a given period is withdrawn from the country's economy and cannot be used for the purposes of accumulation or consumption.
Public debt is formalized by government loans.
Government loans (internal and external) issued by both the government and local governments. Divided into bonds and Non-bond.
Non-bond loans these are loans from banks or external intergovernmental loans, international organizations and funds. An example of a bond-free domestic loan is the issuance of various kinds of treasury bills, bills of exchange, lending by the Central Bank to the state budget, etc.
There are four areas of public debt exposure: income distribution, incentives, external relations, "crowding out effect".
Income distribution In connection with the public debt, the ownership of bonds and the receipt of interest on them by certain groups of the population is carried out unevenly and leads to their differentiation.
Stimulation - paying interest on the public debt forces the state to raise tax rates, and this reduces the motivation for entrepreneurship.
External Relations- external public debt contributes to the strengthening of foreign economic contacts.
"Wipe Out Effect" means a reduction in private investment due to scarce public funding.
The essence of the "crowding out effect" is that fiscal policy, which tends to increase tax rates, undermines the investment effect of private entrepreneurs.
Factors counteracting the "crowding out effect": 1) increase in government spending on consumer needs and infrastructure; 2) the presence of unemployment in the country, which increases government spending on social benefits.
In the hands of the state there are tools for managing public debt: refinancing, taxation, "money creation".
Refinancing- this is the issue and placement of new bonds and the redemption of the previous issue at this expense.
Taxation- a way to manage public debt by manipulating its structure and tax rates.
"Money Creation"- an increase in the mass of money in circulation, through the use of the emission mechanism in the hands of the state.
For buyers of government bonds there are: financial, credit, market, percentage and investment risks.
Risk- quantitative size of potential financial losses. When a certain level of risk is exceeded, a situation arises in which investor refuses to take the risk.
Investor- a subject of investment activity that invests its own funds in securities (stocks, bonds), production, construction, etc.
Investments- investing in financial assets (securities) and economic activity.
financial risk- associated with the possibility of deterioration in the financial position of the issuer of bonds (the state), which is unable to fulfill its obligations under the public debt.
Credit risk- the risk of non-payment of principal and interest due to the insolvency or bankruptcy of the borrower, neutralized by the requirement of guarantees, the study of the creditworthiness of the debtor.
Market risk- arises as a result of unforeseen changes in the bond market, the attractiveness of which, as an investment object, may be lost.
Interest risk- change in interest rates and the associated decrease in the market price of bonds.
Investment risk- the possibility of obtaining income from investments in a smaller amount than previously calculated by the investor.