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Introduction to Public Finance Lecture 1: Public sector in an economy Stiglitz J., Economics of public sector, 2000 1 dr Grzegorz Kula, [email protected]
Introduction to Public Finance
Lecture 1: Public sector in an economy
Stiglitz J., Economics of public sector, 2000
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dr Grzegorz Kula, [email protected]
Outline
• Why do we need a public sector?
• Basic concepts of a public sector.
• Models of a public sector and the welfare state.
• Public sector in Poland and other countries.
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dr Grzegorz Kula, [email protected]
Definitions
Public sector – those parts of economy, which are not controlled by individuals, voluntary organizations, or privately owned companies.
Welfare state – a state committed to ensuring for all citizens at least some minimum standard of living, including housing, education and medical services.
Oxford Dictionary of Economics, 1997
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dr Grzegorz Kula, [email protected]
Why do we need a public sector?
Suppose you have EUR 1000 and out of this you have to buy everything you need. You can choose out of the following possibilities:
- food,
- cloths,
- place to live,
- entertainment,
- education,
- health care,
- safety.
How would you spend your money?
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dr Grzegorz Kula, [email protected]
Why do we need a public sector?
Basic functions of the public sector:
• Allocation – of resources in the economy and the provision
of public goods (when private provision does not work).
• Distribution – of income and wealth to ensure
conformance with what society considers as a „fair” state
of distribution (choice between equity and efficiency).
• Stabilization – of prices and employment, the use of
budget policy to maintain appropriate rate of economic
growth .
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dr Grzegorz Kula, [email protected]
Why do we need a public sector?
What are the functions of the state?
1. Creation of the legal framework,
2. Production of goods and services,
3. Regulations of and subsidies to private production,
4. Purchases of goods and services produced by the private sector,
5. Redistribution of incomes.
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dr Grzegorz Kula, [email protected]
Why do we need a public sector?
In general there are four questions we have to answer: 1. What should be produced by the state? - How to share resources between public and private
sector? 2. How it should be produced? - Should the state produce public goods itself or
should it make private sectors to do them? 3. How it should be allocated? - Who will benefit from a particular good? 4. How to decide? - Decisions are taken by the society collectively. Are
they efficient? 7
dr Grzegorz Kula, [email protected]
Basic concepts
Public goods: • Non-rival consumption- one person’s
consumption does not detract from or prevent another person’s consumption,
• Problems with exclusion- it is hard or expensive to exclude any individual from the benefits of the public good,
→ Free rider problem.
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dr Grzegorz Kula, [email protected]
Basic concepts
Tax: a compulsory levy made by public authorities
for which nothing is received directly in return. 1. Direct tax - assessed and collected from
individuals, who are intended to bear it. 2. Indirect tax – not collected from individuals,
who are intended to bear it. We can also classify taxes by the object of
taxation, the tax base, the relationship of the amount of the tax to the size of the tax base, etc.
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dr Grzegorz Kula, [email protected]
Basic concepts
Budget deficit:
the excess of a government’s total expenditure over its income. This has to be met by borrowing, which increases government debt.
Public debt:
debt owed by the government at any level (excluding any debt owed by one level of government to another).
Problem: how to finance the public debt? (Ricardian equivalence)
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dr Grzegorz Kula, [email protected]
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Goals of the welfare state
1. Reduction of poverty,
2. Reduction of economic uncertainty and insecurity,
3. Reduction of inequalities by race, gender, health status and income,
4. Reduction of differences in life chances
dr Grzegorz Kula, [email protected]
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Models of the welfare state
Models of the welfare state differ by:
1. the scale of provision – the level of benefits and the range of needs covered,
2. the way in which welfare provision is delivered – such as the conditions for entitlement,
3. the intensity of redistribution,
4. the level of universality of solidarity.
First two factors describe the degree of decommodification, second two of stratification.
dr Grzegorz Kula, [email protected]
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Models of the welfare state
Liberal model:
- selective social transfers, means tested benefits,
- small scale of provisions, the state guarantees only the minimum level of income,
- social insurance system not well developed, minimal role of the state,
- labor as the alternative to receiving benefits,
- the state tries to build social safety through market mechanisms.
Main beneficiary: the poor and the old.
dr Grzegorz Kula, [email protected]
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Models of the welfare state
Corporatist (conservative) model:
- preservation of social status (employment),
- income-related transfers with low minimum standards,
- contribution-based social insurance system for health, pensions, unemployment,
- focus on family and tradition.
Main beneficiary: middle-class families.
dr Grzegorz Kula, [email protected]
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Models of the welfare state
Social-democratic model:
- universal access (citizenship) to high benefits,
- the poor have the same social rights as the rich,
- redistribution – benefits depend on income and taxes are progressive,
- public provision of services,
- full employment,
- gender egalitarian policies.
Main beneficiary: poor citizens, working women.
dr Grzegorz Kula, [email protected]
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Models of the public sector
• The same as the models of the welfare state.
• The difference is that the models of public sector concern the size of public sector (the share of general government in the economy), not the level of benefits.
The general government sector consists of the totality of institutional units, which, in addition to fulfilling their political responsibilities (A) and their role of economic regulation (B), produce principally non-market services (C) (possibly goods) for individual or collective consumption and redistribute income and wealth (D).
System of National Accounts (SNA) 1993, par.2.20; CODED, The Eurostat Concepts and Definition Detabase
dr Grzegorz Kula, [email protected]
Public sector in Poland and other countries
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0%
5%
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30%
35%
40%
45%
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Share of public sector employment
UK USA Sweden Poland Germany
dr Grzegorz Kula, [email protected]
www.ilo.org
20
08
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Public sector in Poland and other countries
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Government employment in US
Source: Stiglitz (2000)
dr Grzegorz Kula, [email protected]
Public sector in Poland and other countries
19 Source: Cusack, Fuchs, 2002
dr Grzegorz Kula, [email protected]
Public sector in Poland and other countries
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dr Grzegorz Kula, [email protected]
Total general government expenditure (% of GDP)
2000 2005 2010 2012 2014 2016 2017 2018
Belgium 49,1 51,6 53,3 55,9 55,3 53,1 52,1 52,4
Bulgaria 41,1 37,0 36,2 34,5 43,2 35,1 35,0 34,8
Czechia 41,0 42,3 43,5 44,5 42,4 39,5 38,9 40,6
Denmark 52,7 51,2 56,7 58,0 55,2 52,7 51,2 51,5
Germany 44,7 46,2 47,3 44,3 44,0 43,9 43,9 43,9
Estonia 36,4 34,0 40,5 39,3 37,8 39,5 39,3 39,5
Ireland 30,9 33,4 65,1 42,1 37,5 27,6 26,3 25,7
Greece 46,4 45,6 52,5 55,7 50,2 48,9 47,3 46,7
Spain 39,2 38,3 45,6 48,1 44,8 42,2 41,0 41,3
France 51,7 53,3 56,9 57,1 57,2 56,6 56,4 56,0
Italy 46,6 47,1 49,9 50,8 50,9 49,0 48,9 48,6
Cyprus 34,4 39,3 42,0 41,9 48,8 38,0 37,4 44,7
Latvia 37,3 34,2 45,4 38,0 38,1 37,0 37,8 38,5
Lithuania 39,4 34,1 42,3 36,1 34,6 34,1 33,1 34,0
Hungary 47,1 49,3 49,3 48,5 49,5 46,8 46,9 46,5
Netherlands 42,2 42,2 47,9 46,8 45,7 43,6 42,5 42,2
Austria 51,0 51,2 52,8 51,2 52,4 50,3 49,2 48,5
Poland 42,1 44,4 45,8 42,9 42,4 41,1 41,2 41,5
Portugal 42,6 46,7 51,8 48,5 51,8 44,8 45,7 44,0
Romania 38,5 33,5 40,0 37,3 35,3 34,5 33,6 35,0
Slovenia 46,1 44,9 49,3 48,5 49,9 45,3 43,2 42,4
Slovakia 52,0 39,8 42,1 40,6 42,0 41,5 40,2 40,6
Finland 48,0 49,3 54,8 56,2 58,1 55,9 54,2 53,6
Sweden 53,3 52,3 50,8 51,3 51,1 49,8 49,4 49,9
UK 35,4 41,3 47,6 45,7 43,0 41,4 41,0 40,8
Norway 42,0 42,1 44,9 42,9 45,8 50,8 49,9 48,7
Source: Eurostat
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dr Grzegorz Kula, [email protected]
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Germany Estonia Ireland Greece France
Italy Poland Sweden UK
Government deficit/surplus (% of GDP)
Source: Eurostat
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dr Grzegorz Kula, [email protected]
Government debt (% of GDP)
Source: Eurostat
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Germany Estonia Ireland Greece France
Italy Poland Sweden UK
