Chapter Three

Public expenditures

Question : Compare

Public expenditures can be classified into 1. Exhaustive expenditures :expenditures that exhaust the purchasing power of the money spent example purchases of inputs as labor and fixed assets investments

2. Transfer payment expenditures : expenditures made by government when it transfers money from tax payers to others in form of subsidies (da3m)

Another classification can be

1. Self-liquidating: Direct charges are collected from direct beneficiaries (mostafeden) who receive services ,they are willing to pay for these services example electricity 2. Reproductive :expenditures that produce economic advantages to community and increases national income and tax base in the future example education 3. Productive :expenditures in productive outlays but not self-liquidating and not reproductive .They are useful and they increase joy of life example parks

4. Nonproductive (wasteful ): expenditures for excessive defense (defa3) and more than needed Question: Discuss Wagner's Law

Wagner has stated that the growth in public expenditures was due to social progress ,the reasons for the growth of social activities are

1. As life become more complex with economic development and high division of labor ,an efficient economy needs more police and legal services

2. New technology needs large capital which can only be provided by large joint stock companies (sharekat FL borsa) or by public corporations (sharekat 7komeya) ,according to Wagner the public companies are better than joint stock companies 3. The increase in governmental activity in health and education services with high social benefits

Wagner stated that the growth is due to 3 main functions of the government 1. Law and order

2. Public production of material goods with economies of scale and large capital requirements

3. Other economic and social activities such as education and banking

Question: Discuss the Social overhead Capital hypothesis

Social overhead capital in the form of education ,communication ,stable banking are subsidized or provided by the government ,social overhead capital enable fast industrialization and development Social refers to implicit externalities (benefits)

Overhead refers to the fixed cost necessary for development

Capital refers to the investment nature of activities

The public sector is required to pay a role in providing social overhead capital not only generate income for reinvestment

The social overhead capital hypothesis can be expressed in 3 ways

1. The industrial change needs technology ,and this needs that public sector must adapt to this change

2. The public sector should be used to encourage industrialization and economic growth

3. The interaction between social ,economic and political needs and the changing organizational patterns Question: Discuss the displacement effect Peacock and Wiseman tries to explain the outside factors example wars and money crisis that resulted in changing the balance between private sector and public sector

Social disturbances example wars changed the way resources are used Government expenditures can increase without increasing taxes if the income is growing but when income isnt growing higher taxes are the solution ,but acceptance of people to new tax is different from idea of desirable expenditures ,but the difference decreases in cases of social disturbances example wars creating displacement effects of 2 dimensions 1. It affects level of acceptance, as crisis lead to acceptance of higher tax rates which will continue even after war2. It causes inspection effect as wars force higher attention to governmental problems ,wars results in more expenses example interest and war pensions (ma3ashat)

Questions: Discuss the reasons for growth in public expenditures1. Technical factors

The relative price effect means that when government buy labor services ,and prices of labor services increase ,this will result in higher public expenditures while productivity of labor doesnt increase parallel with increase in prices compared to private sector

Public services are immune (mo7assana)from technological improvement when compared to private sector

The community must spend an increasing share of resources on education to keep absolute level of output

2. Wars

Wars especially world war 1 and world war 2 were major causes

After war there is high interest and allowances(m3ashat) for veterans (mo7areben )

3. Urbanization

Urbanization increased the need for water supply ,police and traffic control

There is a correlation (3elaka) between size of the cities and per capita cost4. Changes in nature of publicly provided goods Public good separate cost and benefit ,and has 2 benefits

-Indivisibility (kolo mostafed) example police and defense

-personal and identifiable example education ,health ,pensions and social security

Education and health became largely provided by government and they are income elastic and this means that when income of the government increases the amount spent on them also increases greatly 5. Growth of public sector employment Large percentage of population directly and indirectly work for public sector

6. The inherent characteristics of politicians and bureaucrats Officials believe they make their reputation by new systems that needs higher expenses

Officials if asked for cut in expenditures might lead to unemployment which would result in losing the votes or the support of their supporters Pensions and social security can's be cut due to political reasons 7. Development of democracy and state Democracy is interested in liberal spending

When people who are taxpayers and they are the ones who give politicians their votes asks for more spending on infrastructure and housing ,public expenditure increases

Chapter 4

What is a state Budget? The State Budget provides projections of Government revenue and expenditure for the following year, and outlines services to be delivered. The state Budget Procedures

There exists 4 stages for preparing the state budget

1. Formulation

Made by the government as each ministry prepares an estimation for its revenues and expenditures for the coming year

The ministry of finance is responsible for reviewing all estimates provided by the different ministries and he is also responsible for preparing the final budget before its submitted for review and enactment

2. Reviewing and enactment

The prime minister submits the final budget proposal to the parliament for review and approval

Its the responsibility of the parliament which represent the legislative authority who will decide whether this budget will be passed or not

The budget is divided into parts ,each part is being reviewed by a subcommittee which is reporting to the final committee

The final committee present the final appropriation bill to the parliament for voting, approval of the budget proposal means it has to be returned back to the executive authority for execution.

3. Implementation

Its the responsibility of the government to execute the expenditures and revenues proposed in the budget that has been approved by the legislative authority

4. Control and Auditing

Its the responsibility of the legislative authority again to review and audit whether the government has implemented the budget according to the approved appropriation bill or not

The legislative authority audit the revenues collected and the expenditures made according to the approved budget

Its the responsibility of the parliament to detect any errors or frauds within the implementation of the appropriation bill

Different Forms of budgets

Traditional Form

Made only for one year

Its called the itemized budget as its divided into items example: salaries, subsidies, etc.

Its based on departments or agencies and doesnt consider the interrelations between different departments

It doesnt help is expecting the real benefits

It focuses on the inputs purchased and draws no relation between these inputs and output. It is easy to prepare and is therefore quick. As well as being easy to prepare, it is easy to understand.

Less preparation time leads to lower preparation costs.

It assumes that all current activities and costs are still needed, without examining them in detail By its very nature, incremental budgeting looks backwards rather than forwards

There is no incentive for departmental managers to try and reduce costs and in fact, they may end up spending money just for the sake of it, knowing that if they don't spend it this year; they won't be allocated the cash next year, since they will be deemed not to need it.

Performance targets are often unchallenging, since they are largely based on past performance

Program Budgeting

Focus on the final product .It is divided into programs ,that are put to achieve the policy objectives

The work of each department is divided into programs and the programs are divided in categories that are needed to get the program done

Focus on the relationship between output of the programs and needed inputs to produce them

It gives better base for evaluating the budget requested by the MOF and the parliament because it focuses on the end product not only inputs

Characteristics :

1. Budget is expressed in terms of goals which are the performance criteria

2. Performance criteria help evaluators to compare present and past performance

3. Both are outline :outputs produced and input required over the whole program life not only for 1 or 2 years ,it considers both short term and long term effects

Planning Programming Budgeting system (PPBS)

It makes cost benefit analysis for the whole program of the government expenditures

Focuses on the cost of resources needed to achieve objectives

Makes integration between long term planning and annual budgeting pf gov. programs

Gives different alternatives to achieve the desired objectives ,each alternative has a cost benefit analysis made ,then the one with the best analysis is chosen to achieve the objectives

Zero Based Budgeting (ZBB)

Its a refinement of program budgeting

Zero-based budgeting tries to achieve an optimal allocation of resources to the parts of the business where they are most needed

Managers has to justify every activity in their department as they know that, until they do this, the budget for their department is zero. If they are unable to do this, they aren't allocated any resources and their work therefore stops. Advantages

1. Improves the efficiency of operations in government by considering alternatives

2. Improves efficiency because its output oriented

3. Creates competition between agencies to justify their programs and get funds

4. Eliminate waste of money as some programs are rejected if not justified

Disadvantages

1. Time consuming

2. Large effort

3. Large paper work

4. Large cost

Chapter 5 Questions :Adam smiths canons of taxation :

1. People should contribute to the expenses of the state in proportion to their revenues

2. Taxes should be certain not arbitrary (judgmental)

3. Convenient(monasba) :time of collection is suitable to tax payer

4. Efficient :administrative costs are minimized Question :Criteria(mowasaffat) of fair tax :

1. Simple, certain and convenient

Simply understood

People are aware of their payment

Convenient method of payment

2. Flexible The tax structure can be changed

3. Administrative efficiency Costs of administration shouldnt be too high compared to the tax revenues collected

Two types of costs exist : administration costs and collection(compliance ) costs

4. Neutral

Doesnt distort(lakhbatta) economic choices

Doesnt have an excess burden

Benefit of taxes should be equal the cost of taxes (loss of satisfaction and leisure time)

5. Equitable (mosawah) Two types of equity

-Horizontal: people in similar position pay taxes equally

-Vertical: people in different positions pay taxes differently

Question: Compare

Direct Vs Indirect

1. Direct Tax : Tax is imposed based on income acquired example income tax and deducted from wages or salaries

2. Indirect Tax :Tax is imposed on spending income example sales tax

According to Tax Base According to tax base taxes are divided into

1. Tax imposed on the stock of something example capital taxes

2. Tax imposed on the flow of something like income tax and inheritance tax (darebet tarekat)

Specific Vs Advalorem Tax Based on the relationship of the amount of tax to the size of tax base into

1. Specific tax :fixed amount per head or per unit

2. Advalorem tax : % of value example custom duties(gamarek) ,income tax and value

3. added tax According to rate structure

According to average tax rate (ATR) and marginal tax rate(MTR) Average Tax Rate : Total Tax Paid /Income

Marginal Tax Rate : Change in tax paid/Change in Income

1. Proportional :tax rate doesnt vary as the tax base varies,ATR is constant

2. Progressive Tax :as the tax base increases the tax rate increases.ATR is increasing

3. Regressive Tax : as the tax base increases the tax rate decreases .ATR is decreasing Income Tax 2 definitions 1. The flow or product concept: income is the flow of services from a capital asset (human capital or physical ),

2. Accretion of wealth concept(addition to size ) :the net accretion to capital if no consumption or the maximum amount of goods and services that may be consumed over time

The realization of income requires

1. Change in the form of the tax payer property

2. Involvement of a 2nd party

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