Fiscal policy

Question 1

3 main functions of fiscal policy by Richard Musgrave:

Answer 1

Allocation
-Collecting revenues to provide public goods and services

Redistribution
-Decreasing income inequalities through the tax and benefit system

Stabilization
-Smoothing economic cycles through active stabilization and automatic stabilizers

Question 2

What is budget?

Answer 2

Financial plan of the government:

-Planned revenues and expenditures for a given time period

Question 3

Structure of the budget:

Answer 3

• Central government
  
  • Central budget
  • Social security funds
  • Extrabudgetary funds

-Local and regional governments

Question 4

What are the methods to measure the size of the budget

Answer 4

• Revenues to GDP ratio. On average they are around 40%

- Expenditures to GDP ratio

Question 5

Classification of budget revenues

Answer 5

Sovereign(tax) revenues: such incomes that can be legally collected only by the government

• Taxes
• Contributions(it differs from tax, because by paying contribution you get entitlement for future service. Example: social contributions. )

Non-tax revenues: such incomes that are similar to those of any other economic agent(proprietary incomes)

• Fees
• Interest
• Capital gains
• Profits of public companies.

Question 6

Classification of budget expenditures

Answer 6

Administrative classification

• Hierarchical system based on the institutional structure
• Chapter, titles, subtitles, etc.

Economic classification

• Classifying expenditures in an accounting sense
• Salaries, capital accumulation, social transfers, etc.

Functional classification

• on what field is the money spent
• COFOG system(Classification of the Functions of the Government)
  
  • Expenditures related to the operation of state ex: general public services, defence
  • Economic expenditures ex: subsidies for public transport, infrastructure
  • Welfare expenditures. /health, education, social protection/~ 70% in EU

Question 7

Ways to measure Budget balance

Answer 7

Total balance: total rev-total exp

Primary balance: interest payment on public debt is not taken into account(inherited from past governments)~ it is omitted so that we can measure the performance of the current governments

Cyclically adjusted balance:
Shows what current total balance would be if current rate of economic growth were equal to its long run average(revenues depend highly on the economic cycle)

Structural balance
-Cyclically adjusted balance with the exclusion of extraordinary revenues and expenditures(such as earthquake). This one is better for economic analysis.

Question 8

Ways to finance to budget deficit

Answer 8

-Loan from central bank(forbidden in EU)
-Privatization
-Borrowing in domestic currency
-Borrowing in foreign currency. (the difference comes from who borrows from who. If Hungarian government takes loan in euro, Hungary takes the risk whereas if they borrow in forints then the threat goes to investors. That is why it is easier to borrow in euro, because the investors are likely to give since it is less risky for them.)
In the long run:
-borrowing in foreign currency is often cheaper
-volatility of exchange rates means a risk
Borrowing usually means emission of government bonds