Good Ppt on PF s1-Cadrage-2009

8/9/2019 Good Ppt on PF s1-Cadrage-2009

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PSE Public Finance Sandrine Duchne1

Public financeCourse 1

Framework and tools


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Introduction

What is public finance ?

Study of the taxing and spending activities of a governmentSomething 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 affectoverall level or GDP or unemployment => usually taught in separates courses(A. Epaulard). Here special look : linkages between public finances and the

business cycles (European framework for public finance analysis)


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Introduction

Not in our field, but quite important => regulatory policies , which haveimportant effects on resource allocation

Sometimes, goals can be achieved by regulation or by tax and spendinginstruments.

3 examples:

i. Environmental considerations : caps, permits, market instruments,taxation

ii. Labor market : economists admit that regulation/institutions can have agreat influence on employment : labor contract, labor duration/ tax cutsdiminishing labor costs

iii. Purchasing power : direct subsidies (especially to the poor)/ stimulating

concurrence on the goods markets.


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Introduction

Progr am

I The macro framework : why monitoring public finance ?

1. Data, facts and concepts2. Public finance and the business cycle3. Do we care about long term ?4. Are budgetary rules useful ?

II The micro tools and main issues for reforms

1. Tax policy: some theoretical concepts2. Reforming our tax system: some issues3. Public expenditure: public goods, education, social insurance


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Introduction

C hapte r I-1 Data, facts, and c oncepts

1. The role of the public sector: current issues2. Public finance in EMU: an overview3. Example: the French situation (what is the problem ?)4. To practice: some calculation5. Concepts and data; procedures.


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1- R ole of the public sector/current issues

I llustration: Public expenditure breakdown

France UE-25 Germany Spain Italy Poland UK Sweden

General public services 7,4 6,7 6,3 5, 8,8 5,9 4,7 8,2

2 Defence ,9 ,7 ,2 , ,5 ,2 2,7 2,

3 Public order and safety ,3 ,7 ,6 ,8 2,0 ,7 2,5 ,44 Economic affairs 3,2 4,0 3,9 4,3 4, 3,3 2,9 4,9

5 Environmental protection 0,8 0,7 0,5 0,9 0,8 0,6 0,7 0,3

6 Housing and community amenities ,8 ,0 , , 0,7 ,5 0,6 0,9

7 Health 7,2 6,7 6,3 5, 8,8 5,9 4,7 8,2

8 Recreation, culture and religion ,4 ,0 0,7 ,4 0,9 0,9 0,6 ,

9 Education 6,4 5,4 4,2 4,4 5, 6, 5,7 7,30 Social protection 22,0 9, 22,5 3,0 7,9 9,0 6, 24,7

total expenditure 53,4 47,6 48,4 38,3 48, 44,5 43,2 58,2Source INSEE, 2003


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A llocation

Justifications for the S tate intervention in the provision of public goods arewell known: the very nature of public goods, externalities, endogenousgrowth justice, defense, security, education, healthbut also directinterventions 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 areconcerned.Public intervention proper area? Public coverage for expenditure (education,health).Quality of public finance, allowing better growth in the long term?Public policy evaluation



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D istribution

Social insurance, horizontal and vertical distribution.Difficult to disentangle from the third function (stabilization): insuranceaims 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 economicdistorsions, flat tax in Eastern European countriesRooms for manoeuvre: how to deal with the increase in the age-relatedexpenditures?Acceptable inequities in a society? Efficiency/equity dilemma. Fiscalcompetition issues. New social contract: rights and duties issues



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S tabilization

Size and effectiveness of automatic stabilizersJustifications for discretionary action along the business cycle

QuestionsEffectiveness of automatic stabilizers revisited in the context of fiscalretrenchments (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



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2 - Public finance in Europe : an overview

The budgetary framework: initial framework (up to 2005)

Treaty (Maastricht 1992, then A msterdam 1997)Member states have to avoid excessive deficits, with respect todeficit and debt reference valuesThese references are defined in an annexed protocol (n20): 3% of GDP and 60%.

S tability and Growth Pact endorsed in 1 :

Two regulations: preventive arm, corrective armStability programsDefinition of medium term objectives (MTO): close to balance or in surplus



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Main I ssues for the conduct of fiscal policies in Europe

O ne common fiscal framework = common rulesTreaty and the reference values

Stability and Growth Pact (amended in 2005)Addressing heterogeneous situations (as concerns deficit levels,cyclical conditions or sustainability conditions)I n 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 viewis currently challenged by the huge economic downturn (Pact issuspended)I n the long run , address the problem of an increasing age-burden :achieving budgetary consolidation (stability programs)



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The initial budgetary framework: strongly critized

From a theoretical point of view: lack of economic bases. Nominaltargets independent on cyclical conditions, and on specificities of thecountries ( one size fits all)From a practical point of view (crisis in 2003)

Economic reflexion had already started in 200 1-2002, continued till 2005.

R eformed S GP in 2005Better attention paid to cyclical evolutions (course 2)Better attention paid to the long term and sustainabitity questions, withlinkage to the MT O (course 3)



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Fiscal heterogeneity in Europe:crossing data on the level of public deficit and debt :


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Consolidation efforts in 2007: dispersion


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L ong term sustainability conditions


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3 - T he 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 socialchoices)Tax ratio: high level in the context of fiscal competition

A ll these elements are linked together

Expenditure monitoring is not stringent enough (compared to GDPevolutions)No room for fiscal adjustmentsNo room for significant tax cuts



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Public expenditure: long term trend and composition


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Expenditure level : a French exception ?High level, compared to other countriesStability since 10 years


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S ince 20 years, public expenditure in line with G D P growth=> no room for budgetary adjustment


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3 - T he French situation : what is the problem ?(iii) Public receipts

Tax ratio

Source : OCDE

10

15

20

25

30

35

40

45

50

55

1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006

Allemagne Italie

Espagne Royaume-Uni

10

15

20

25

30

35

40

45

50

55

1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006Etats-Unis France

Sude UE 15


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4- Some calculation

Question 1You just have been elected at the Presidency.You are discovering the budgetary situation.

What is the current deficit ? The primary balance ?

A ssumptions

GDP = 2000 MdExpenditure level = 50% of GDP

Receipts level = 48% of GDPDebt level = 60% of GDPNominal interest rate : 5%


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4- Some calculation

sr b !

% of GDP MdSpending 50 1000including interest payments 3 60Public receipts 48 960alance -2 -40

primarybalance 1 20debt 60 1200

dficit b

surplusb

0

0R

H

d r i !

ibalance primaryb !


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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 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 ?


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4- Some calculation

N otations

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: inflation of GDP

g+ : GDP growth in nominal termsgs: spending growth in real terms

t

t t

t

t t

t

t t

GDP S

s

GDP

Rr

GDP B

b

!

!

!

t t t

t t t

sr b

S R B!

!

t t

t t

S gsS

R g R

)1(

)1(

1

1

T

T

!

!


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4- Some calculation

Equation for deficit variation :

GDP S

GDP R

GDP B

t

t

t

t

t

t

1

1

1

1

1

1 !

GDP S

GDP R

b t t

t

t

t g

gs

g

g !

)1(

)1(

)1(

)1(1 T

T

T

T

sr b t t t g gs} ))()(1(1 T T

sbbb t t t t gs g }!( )(11

sr b t t t g gs} ))1)(1(1 T T First order approx

s sr b t t t t g gs} )(1

0,5 in Europe , 0, 3 5 in the US


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4- Some calculation

)(5,01

gs g bt }(

GDP growthin real terms Expenditure growthin real terms

= MA R GIN for deficit reduction

Here : 0,5 =( 2 ,5 - gs)* 0,5Gs= 2 ,5 -1 = 1 ,5

I f gsg : deficit increases

V ery pr actical back on the envel o p

f or mula


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4- Some calculation

Equation for debt accumulation :

GDP B

GDP D

GDP D

t

t

t

t

t

t

g g !

)1()1(1

1

1

T T

)1()1(11

T T } g g bd d t t t

}( bd d t t t g 11 )( T

}( d eficit g stabilizind eficit d t 1

Stab d ef = 6 0% *0.0 4= 2 ,4 Def = 1 ,5 Debt variation = - 0,9

bd d d t t t t g 11 )(} T


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4- Some calculation

Question 3

Your administration presents you the technical forecasts.

Clearly the claimed evolution of expenditure is not realistic : medium termtrend 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 G D P

t t

t

t t

t

t t

R g R

GDP

GDP GDP R

R R

))(1(1

1

1

T I

I

!

!


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4- Some calculation

tec ical forecastsgeneral government balance -2,0

general government balance t 1 -1,75de icit variation 0,25spending gro th (in real terms) 2receipts elascticity 1

public debt variation -0,65


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4- Some calculation

Equation for deficit variation :

sr b t t t g gs

g g

)1()1(

)1())(1(

1 T

T

T

T I !

sr bt t t g gs g g ))()(1())()(1(1 T T T T I }

? A)()()1(5,01

gs g g b t !( T I sr bb t t t t gs g g )()))(1((1 } T I 5.0}} sr t t


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4- Some calculation

technical forecasts elasticity>1general government balance -2,0 -2,0

general government balance t+ 1 -1,75 - 1,50deficit variation 0,25 0,50spending growth (in real terms) 2 2receipts elascticity 1 1 ,125

public debt variation -0,65 -0,90


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4- Some calculation

Question 4

In addition you are fulfilling you campaign engagements.

You decide tax cuts to support activity and employment : paquet fiscalamount = 1 point of G D P%.

What do you do ???Describe several options :

technical fulfilling European commitment

(expenditure/elasticity options)

? A pb t t gs g g 11 )()()1(5,0!( T I


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4- Some calculation

technicalforecasts (1) spending growth (2) elasticity>1

general government balance -2,0 -2,0 -2,0

general government balance t+ 1 -2,75 - 1,50 - 1,50deficit variation -0,75 0,50 0,50

tax cuts (% of gdp) 1 1 1spending growth (in real terms) 2 -0,5 2receipts elascticity 1 1 1 ,625

public debt variation 0,35 -0,90 -0,90

S cenarios fulifilling european comitments


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4- Some calculation

Question 5

Finally you decide announce a stabilization of the deficit next year , at itscurrent level.

You choose 1,2 for the elasticity of receipts with respect to GDP.

Describe the key figures of the forecastsPrepare your arguments for the journalists !


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4- Some calculation

tec ical forecasts official forecasts

general government balance -2,0 -2,0general government balance t 1 -2,75 -2,0

de icit variation -0,75 0

tax cuts ( o gdp) 1 1spending gro th (in real terms) 2 1,3receipts elascticity 1 1 ,2

public debt variation 0,35 -0,40


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4- Some calculation

Question 6

Bad luck, G D P 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 finaldeficit and debt ratio ?


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4- Some calculation

technical forecasts Final results

general government balance -2,0 -2,0

general government balance t+ 1 -3,50 -3,75deficit variation - 1,50 -1,75

tax cuts (% of gdp) 1 1spending growth (in real terms) 2 2receipts elascticity 1 0,8

public debt variation 2,00 2,25


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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 theexcessive deficit procedure against your country.

Well done !!


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5 - C oncepts , data , and procedures

W hat is a budget?

Distinguishing budget preparation (ex ante), vote, and execution (ex post)

J uridical dimensions : authorization, vote by the Parliament. Strictly definedand bounded. Main issues: to allow information and control from theParliament.

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 privatesector (if possible?)



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Two Finance laws voted each year (october-december) budget law for the stateSocial Security budget law3 types: LFI, LFR (collectif budgtaire) , loi de rglement

Two organic laws establishing the budgeting rules, recently revisedLOLF (200 1), ordonnance de 1959Organic law for the Social Security (2005)

L ocal budget are adopted by the local executives.Financial autonomy delivered by our constitution, but limitedVote of tax rates (but not tax bases), expenditure, debt



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Principles for budgeting: the four classic principals

1- A nnualitauthorization 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 arein charge of structural reforms)Current issues: pluriannuality. In september 2008 vote of a multi-annual

budget for the state, covering a 3-year period (2009-20 11 )

2-U

nitOne document for one procedure.To ensure transparency and coherence of the budgeting elements. To makethe political choices or trade-offs more explicit. (exceptions: comptesspciaux du trsor, budgets annexes).

Current issues: dbudgtisations. PSE Public Finance Sandrine Duchne45


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Principles for budgeting (continued)

3- U niversalitDouble design

Avoiding contraction between receipts and expenditures, describing all

the flows in the budget lawNo receipt affected to some identified expenditureCurrent issues: affectation of receipts can be justified : environmental taxes ;willingness to pay (health care)

4- S pcialitBudgetary credits have to be affected to a precise expenditureSpecialisation by nature or objective of the public expenditureCurrent issues: adoption of the new budget constitution (LOLF) in 200 1,fully applied in 2006



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Emergence of new budgetary guidelines

1- S incritEx 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 conomique et financier).Golden rule for the local governments

Since Maastricht: a juridical constraint, enshrined by the SGP=>margins for interpretation. A target for the medium term.Currently debated: reforming the budget constitution and introducing anequilibrium constraint (for the State or the Social Security)

3- Performance/efficiency of public expenditure



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The LOL F innovation

A new architecture for the budgetMissions (34)/programmes/actions, reflecting economic concerns

Better reflecting the government priorities of public policies, andhave a complete view of the amounts devoted to certain objectives

R ole of the Parliament enforced : examines the whole budget, and notonly additional measures. Better reporting of the government to theParliament

Introduction of performance indicators for each programBetter implication of the public managersReform of the public accounts , certification process by the Cour desComptes



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Budget law is composed of two parts First part : conditions gnrales de lquilibre financier

authorization to perceive taxes debt authorization fiscal measures applying to the year

spending ceilings Equilibrium article

2 d part : vote on the different expenditures (vote unity=mission)

Evaluative/limitative expenditures or receipts

J oined documents: text in itself+ bleus (voies et moyens, missions,RESF)+ jaunes, report on expenditure evolutions, report on taxes



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Elaboration of the budget laws

A ctorsDirection du Budget/Direction de la scurit sociale: central roleMatignon: coordination between the Ministry of Finance and the

ministries, crucial arbitration roleDGTPE (macro and public finance forecasts)Direction de la lgislation fiscale: fiscal measuresThe spending ministries/ Social security agencies

Main issues:Ensure coherence between both processes (PLF and PLFSS) =>

creation of the Ministry of Public Accounts steps up in this direction.Allow discussions at the technical level between administrations



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Elaboration of the budget laws (continued)S chedule

In January, lettre de cadrage send by the Prime Minister to theMinisters

Feb/march: confrences dconomies structurelles April/may: confrences de budgtisation June/ July: expenditure ceilings decided, lettres-plafond J une: D bat dorientation budgtaire at the ParliamentJuly/August: macro forecasts and receipts forecasts. Public Finance

forecasts covering the whole general government (Maastricht form), finaldecisions 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 stabilityprogram.



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A ccounting notions

S everal accounting systems: public accounting systems/nationalaccounts

Each sector has its own accounting system and rules

StateBudgetary accounts, budget execution

o Outcome: solde budgtaire = solde du budget gnral+ solde descomptes spciaux du trsor (CAS privatisations, CAS pensions,

compte de dette)+ solde des budgets annexeso Limits: neither an operating result or gross saving, nor a net

lending or borrowing result. Consolidation? State guarantees?General public accounting (LOLF)



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A ccounting notions

Social securityHarmonization started in the 90s, now certified by the CdCSocial accounts on an accrued baseCommission des Comptes in June ( N-1) and September ( N, N+1)

Mostly reported: solde du rgime gnral

Local governmentsM 14 accounting systemSpecific presentation in two parts :

o The operating section: current charges and receipts (including taxesand transfers from the State)o The investment sectionMain limit: no consolidation



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S tate budget balance



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S ocial S ecurity balance ( R gime gnral)



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S ocial S ecurity balance (social risks)- S ocial Budget L aw



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N ational 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 S NCF, public financial corporation likeBDF or CDC)4 sub-sectors; State, Other central government (900 entities: C NRS, CEA,FRR, CADES, universities), Local government, Social security (larger than the PLFSS field, unemployment insurance and hospitals)=> largecoverageConsolidation between all sectorsA ccrued basis approachEconomic approach : see Musgrave approachNon financial ( B9)/financial accountsUsual aggregates: value added, E BE, gross savings, net lending/borrowing

balance ( B9). For analysis expenditure/receipts approach is convenient PSE Public Finance Sandrine Duchne57


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Elaboration of public finance national accounts

Responsibility = INS EE (annual, quaterly accounts)N otification to Eurostat : twice a year (1 st A pril N , 1st O ctober N ),

I NSEE 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-1Involves 3 actors: DGCP (treatment of public accounts for a lot of entities),DGTPE (because missing elements have to be evaluated), and I NSEE(validation, decisions about treatments, coherence)Links between usual agregates (solde budgtaire, solde du Rgimegnral , and the B9)Data are revised the years after (compte semi definitif, comptedefinitif)Final judge=Eurostat



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S tructure of expenditure and receipts

ota of ic ota of ic

Intermediate nsumption ( ) , taxes on production and imports ( ) 7 ,Wages ( ) ,7 taxes on income and wealth ( ) ,Interest payments ( ) social contributions ( ) ,ocial transfers 420 , property income ( 4) 2,2

Gross fixed capital formation ( ) 0, production receipts ( ) ,

Source INSEE, 2006

Expenditure Receipts


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Public expenditure at different levels (2006)

Comptabilit nationale

Md en %

penses APU 956,9

TAT 380,6 39,8%

OD AC 62,2 6,5%

APUL 199,3 20,8%

ASSO 4 37,0 4 5,7 %

otal sous-secteurs 1079,1 112,8%


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Financial/Patrimonialaccounts (2007)

Register all public assets and

liabilities.Public debt= sum of financialliabilitiesMaastricht debt=financial debtin nominal value, gross debt,and consolidated between all

sub-sectorsNet public debtNet value


total of assets (1) 2104,1

Non financial assets (3) 1462

Financial assets (4) 742,1Currency and deposits (AF2) 73,6Securities other than shares (AF3) 40,9

Loans (AF4) 49,9Shares and other equity (AF5) 392,4other accounts receivable/payable (AF7) 185,3

Financial liabilities (2) 1427,5Currency and deposits (AF2) 68,5Securities other than shares (AF3) 1028,2Loans (AF4) 182,2other accounts receivable/payable (AF7) 148,6

Net financial debt (2)-(4) 685,4

Net value (1)-(2) 676,6Source INSEE


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Advantages

Provides a complete view on public accounts (consolidation), on an accrued basisNo 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 securityMeasures to respect the State expenditure target

In theory clear distinction between operations above the line and under the line

L imitsLimits of accounting systems used as inputs grey zones , especially concerning the relationships between State andPublic corporations: dividends/patrimonial operations, injections of capital,State guarantees. Or securitization operations.

Documents

Good Ppt on PF s1-Cadrage-2009