FINANCE AND FINANCIAL SYSTEM

PUBLIC FINANCE

We estimate the wisdom of nations by seeing what they did with their surplus capital.

Paul Cook, Business executive

TEXT A

FINANCE AND FINANCIAL SYSTEM

Finance is the provision of money at the time when it is needed. It is a system of monetary relations leading to formation, distribution and use of money in the process of its turnover between economic entities.

The financial system is the network of institutions through which firms, households and units of government get the funds they need and put surplus funds to work. Savers and borrowers are connected by financial intermediaries including banks, thrift institutions, insurance companies, pension funds, mutual funds, and finance companies.

Finance in an economic system comprises two parts: public finance and finance of economic entities.

Public finance is the study of the role of the government in the economy.

The purview of public finance is considered to be threefold governmental effects on:

(1) Efficient allocation of resources. In theory, under certain circumstances, private markets will allocate goods and services among individuals efficiently, which is hardly ever the case in real life. If private markets were able to provide efficient outcomes and if the distribution of income were socially acceptable, then there would be little or no scope for government. In many cases, however, conditions for private market efficiency are violated. For example, if many people can enjoy the same good at the same time, then private markets may supply too little of that good.

The existence of market failure which occurs when private markets do not allocate goods or services efficiently provides a necessity for governmental provision of goods and services;

(2) Distribution of income. Some forms of government expenditure are specifically intended to transfer income from some groups to others. For example, governments sometimes transfer income to people that have suffered a loss due to natural disaster. Likewise, public pension programs transfer wealth from the young to the old. Other forms of government expenditure which represent purchases of goods and services also have the effect on changing the income distribution. For example, engaging in a war may transfer wealth to certain sectors of society. Public education transfers wealth to families with children in these schools. Public road construction transfers wealth from people that do not use the roads to those people that do (and to those that build the roads);

(3) Macroeconomic stabilization. It is a category which describes the effects of monetary and fiscal policy on the economy. Fiscal policy relates to government spending, taxation and borrowing. It affects businesses in a variety of ways: companies might try to minimize their tax liabilities, possibly by transferring business operations to low-tax countries, the investment decisions by companies could be effected by tax. For example, the government might offer some tax relief for new investments, and companies will expect to receive tax allowances for capital investment, customers’ spending decisions could be effected by the rate of sales tax or value-added tax. If the government increases the level of value-added tax, the volume of customer demand for the goods and services of companies will probably fall.

Thus, we can figure out that public finance has the following four functions: a) the provision of essential services; b) the encouragement or control of particular sectors of the economy; c) the implementation of social policy in respect of social services, and d) the encouragement of the growth of economy as a whole.

The major instrument of any financial system is the budget. In a market-oriented economy, the budget is the most important tool for achieving national priorities and goals through the allocation and distribution of resources, and the maintenance of a stable macroeconomic environment.

The budget is an estimate of national revenue and expenditure for the ensuing fiscal year. When expenditure exceeds the revenue the budget has a deficit.

Revenue and expenditure forecasting is the most fundamental step in the process of budget preparation. Adequate planning of recurrent and capital expenditure depends critically on an accurate forecast of revenue availability. The determination of the expected overall deficit in the public sector and therefore the macroeconomic impact of fiscal policy requires accurate forecast of tax collection and expenditures.

Public finance is a sum of budgets of all levels of subjects, extrabudgetary and reserve funds.

An accurate revenue forecast is most critical at government levels but it is also important for all subnational governments because over the last several years they have worked with increasingly autonomous budgets.

Budget preparation at the state level involves a number of institutions. The Ministry of Finance (MoF) is the central coordinating institution in charge of compiling and presenting the budget. It has major inputs from ministries in various sectors of the economy and the state tax bodies.

DIALOGUE B

BUDGET ORGANIZATION AND BUDGET PROCESS

Foreigner: Could you give me a general idea of budget organization and budget process in Someland?

Somelandian: Certainly. First of all, by the budget organization we mean the structure of our budget system and its major components.

F.: I suppose there is a close link between the budget organization and your state system, isn’t there?

S.: Yes, there is. We have the state budget, regional budgets and local budgets.

F.: I see. I know that in the past you used to have a single budget including the government and local budgets, didn’t you?

S.: Yes, that’s true. But now the situation has changed. Our system of governance is moving from a centralized one to a more decentralized. Our regional and local authorities have been given considerable budget autonomy now.

F.: Do you mean to say that some of expenditure responsibilities have been handed down from the central government to the subnational governments?

S.: Exactly. I would also like to stress that our consolidated budget is not subject to approval any longer. It is used only for analysis and calculation.

F.: If I got you right, now the budget system of Someland represents a sort of a compendium of the state, regional and local budgets.

S.: Correct, but it is a unified budget system based on the principles of integrality, independence and balance of all budgets.

F.: How do these contradictory principles work in practice? For instance, independence and integrality?

S.: Well, these principles do not contradict each other because each has its own sphere of influence on the budget system.

F.: Could you be more specific, please?

S.: Yes, the principle of integrality means the integrality of the legal base, use of the unified budget classification and budget documentation, submission of statistical data from one level to another for the preparation of the consolidated budget.

F.: In what way does budget independence manifest itself?

S.: Over the transition years a number of laws have been passed that grant local governments more autonomy in budgetary matters. Thus governments at different levels have their own revenue-raising sources now and use them at their discretion.

F.: I’m clear now. And how is the budget process arranged?

S.: The budget process includes all activities of government bodies on formulation, consideration, approval and execution of the budget.

F. What governing bodies are involved in this process?

S.: As elsewhere, different governing bodies are involved in the process. The executive branch is responsible for the preparation and execution of the budget; budget consideration and approval is the responsibility of the legislative branch.

F.: Are there any bodies controlling the execution of the budget?

S.: Of course. First of all, it’s the Chamber of Accounts, then Treasury System.

F.: It seems the Government has done a lot to create a new budget system and to elaborate a new budget policy and methods of budget planning.

S.: You are absolutely right.

F.: I’m also interested in how budget revenues are formed and distributed at different levels. What revenue sharing arrangements are practised?

S.: It is done in accordance with the tax law. Budget revenues include tax and non-tax revenues. To distribute revenue sources between budgets of different levels we divide revenues into assigned, regulating and additional.

F.: If I’m not mistaken you’ve worked out more uniform rules for revenue sharing and expenditure assignments for all subjects of the state.

S.: Yes, that’s right, but so far we haven’t eliminated the contradiction between the need for greater subnational autonomy and measures to increase central control.

F.: All federal countries face tax sharing problems. In my country the big defect is that local government hasn’t got enough resources.

S.: We also work to relieve subnational administrations of the burden of unfunded mandates.

F: As far as I know, there are 27 subjects in Someland. Public authorities at all levels need revenue to meet the cost of social and municipal services. What if the revenue is not sufficient?

S.: Deficits, if they arise, are covered at the expense of budget funds transferred from the budget of a higher level of authority. Besides, subsidies, subventions and other forms of financial assistance can be granted.

F.: I see. It’s obvious that different regions of Someland have unequal possibilities for raising revenue and different requirements for financial resources due to natural and climatic conditions, demographic situation, geographical position, social and economic development. How do you solve this problem?

S.: The “equalization” is done through transfers which are the key element of the new mechanism of the interbudgetary relations. Government assistance is granted to regions where the per capita budget revenues are lower than the average for Someland.

F.: Now I understand that you are really engaged in improving your budget process.

VOCABULARY LIST

public finance(s) державні фінанси

turnover n (of money/capital) оборот, обертання (капіталу)

network of institutions мережа установ (організацій)

purview зміст закону, норма закону, норми закону, сфера дії закону, сфера компетенції

threefold adj потрійний

efficient outcomes гарні результати

violate v порушувати

scope of government сфера держави

market failure збій ринкового механізму

deter v утримувати, віднаджувати

tax relief знижка з податку

thrift institution ощадна установа

community n спільнота

government authorities органи державної влади

encouragement n підтримка, заохочення

maintenance of a stable macroeconomic environment підтримка стабільної макроекономічної ситуації

estimate n оцінка, кошторис

ensuing adj наступний

planning of recurrent and capital expenditure планування поточних та капітальних витрат

determination of the overall deficit розрахунок загального дефіциту

extrabudgetary and reserve funds позабюджетні та резервні фонди

subnational governments органи влади суб’єктів держави

increasingly adv в більшій мірі

autonomous budget автономний бюджет

to compile and present the budget скласти і представити бюджет

budget organization бюджетний устрій

expenditure responsibilities зобов’язання по витратам

to hand down from... to передавати від... до

consolidated budget консолідований бюджет

unified budget system/classification єдина бюджетна система/класифікація

principles of integrality independence and balance of all budgets принципи єдності, незалежності та збалансованості всіх бюджетів

contradictory adj такий, що суперечить

contradict v суперечити

submission of data подання даних

manifest v виявитися

grant v надавати

revenue raising sources джерела отримання доходів

at smb’s discretion, at the discretion of на чий-небудь розсуд

execution n виконання

elsewhere adv повсюди

executive/legislative branch виконавча/законодавча гілка влади

Chamber of Accounts Рахункова палата

Treasury System система казначейства

elaborate v розробляти

revenue sharing arrangements порядок розподілу державних доходів

in accordance with, according to prep у відповідностідо; згідно

assigned, regulating and additional revenues закріплені, регулюючі та додаткові доходи

uniform rules єдині правила

expenditure assignments розподіл зобов'язань на витрачання коштів

contradiction n протиріччя

tax sharing розподіл податкових надходжень

relieve v звільняти, полегшувати

unfunded mandates зобов'язання, щонефінансуються

sufficient adj достатній

subvention n субвенція

due to prep завдяки, внаслідок

equalization n вирівнювання

interbudgetary relations міжбюджетні відносини

per capita budget revenues доходи бюджету в розрахунку на душу населення

EXERCISES

Ex. 1. Answer these questions:

A

1. What is finance and financial system?

2. What parts does finance comprise?

3. What functions does public finance perform?

4. What is a country’s budget?

5. What does the process of budget preparation include?

B

6. What is the budget organization of Someland? Is it similar to the budget organization in Ukraine?

7. How is the system of governance in Someland changing? Has it changed in our country?

8. What principles underlie the unified budget system of Someland (Ukraine)?

9. How are revenues classified?

10. What taxes are mentioned in the dialogue?

11. What measures can be taken if subjects of the state have deficit budgets?

12. Why do different regions of Someland have unequal possibilities for raising revenue? Is the same situation typical for Ukraine?

13. What mechanism of budget revenue “equalization” is used in Someland?

14. What bodies control the execution of the budget?

Ex. 2. Give derivatives of the following nouns:

Provision, distribution, finance, benefit, encouragement, growth, budget, estimate, determination, funds, governance, practice, classification, independence, transfer, equalization, consideration, execution, submission, contradiction, expenditure, implementation, maintenance, provision.

Ex.3. Find in the main text and dialogue English equivalents for the following Ukrainian phrases:

A)

Надання коштів, система грошових відносин, розподіл та використання грошових коштів, оборот грошових коштів між суб’єктами економіки, мережа установ; примусити надлишкові кошти працювати; пов'язані фінансовими посередниками; включати дві складові частини; мати потрійний вплив, ефективне розміщення ресурсів; гарні результати; соціально сприятливі умови; сфера впливу держави; збій ринкового механізму; знижка з податку; грошово-бюджетна політика; впливати на темпи зростання; впливати на вартість запозичень; призводити до зменшення капітальних витрат; знецінення валюти; здійснення соціальної политики; основний інструмент финансової системи; розрахунок доходів та витрат; підготовка бюджету; планування поточних та капітальних витрат; макроекономічний вплив на бюджетно-податкову політику; працювати в умовах постійно зростаючої автономії бюджетів; в подготовку бюджету задіяно ряд організацій; відповідати за укладання та представлення бюджету.

B)

Бюджетний устрій; бюджетний процес; існує міцний зв'язок; ставати все більше децентралізованою; консолідований бюджет не підлягає ухвалі; грунтуватися на принципах...; принципи не суперечать один одному; єдність законодавчої бази; єдина бюджетна класифікація; використовувати джерела надходження доходів на свій розсуд; формування, розгляд, прийняття та виконання бюджету; виконавча/законодавча гілка влади; розробити бюджетну політику; порядок розподілу державних доходів; закріплені, регулюючі та додаткові доходи; розробити єдині правила для...; “вирівнювання” здійснюється з допомогою трансфертів; новий механізм міжбюджетних відносин..

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