Understanding State Budgets: Revenues, Expenditures, and Balance

Posted on Aug 24, 2024 in Economy

State Budget

A state budget is a set of documents that outline the planned expenses and revenues of the public sector for a fiscal year. These documents cover several key areas:

  • Economic objectives to be achieved during the fiscal year
  • Expenditure and income details of the agencies, institutions, and companies within the public sector
  • Instruments of macroeconomic and microeconomic policies and the technical means used to ensure budget compliance

Elaboration: 4 Stages

  1. Preparation: The government, particularly the Ministry of Economy and Finance, is responsible for collecting reports from other ministries and national institutions.
  2. Discussion and Approval: The government submits the budget to the General Courts for review, amendment, and approval.
  3. Execution: The budget is implemented.
  4. Intervention and Control: The administration monitors expenditure and income to ensure alignment with the initial objectives.

Principles Underlying the Estimates

  • Principle of Competition: The government prepares the budget, and the courts have jurisdiction over its approval.
  • Principle of Universality: Budgets include all revenues and expenditures of all state agencies.
  • Principle of Unity: All budget documents are consolidated into a single budget.
  • Principle of Specialty: Budgeted amounts can only be spent on their initially assigned purpose.
  • Principle of Temporality: The budget pertains to a specific, defined period.
  • Principle of Publicity: Budgets are public and accessible to the people.

Public Expenditure

Public expenditure encompasses all payment obligations incurred by the public sector due to its intervention as an economic agent. These expenses can be categorized as follows:

  • Running Costs: These costs aim to provide public services such as education, healthcare, justice administration, and national defense. They can be further divided into:
    • Acquisition or lease of goods and services produced by companies
    • Remuneration of officials and personnel working in public sector enterprises, agencies, and institutions
  • Investment Costs: These costs are allocated to maintain and expand the country’s productive capital.
  • Other Expenses: These expenses are incurred by the public sector without a specific designated purpose. They can be further categorized into:
    • Transfers: Intended for individuals (e.g., unemployment benefits, scholarships)
    • Grants: Intended for companies to reduce production costs of certain goods

Budget Law Classification

  • Organic Classification: This classification details personnel spending.
  • Functional Classification: This classification outlines expenses incurred by specific programs based on objectives.
  • Economic Classification: This classification distinguishes between financial and non-financial costs.

Public Revenues

Public revenues are the funds received by the public sector to enable it to meet its objectives and cover expenses. They are classified into two groups:

  • Ordinary Revenue: These revenues are obtained regularly throughout a fiscal year and originate from:
    • Direct Taxation: Taxes levied on the taxpayer’s income at the time of its receipt or generation
    • Indirect Taxation: Taxes levied on the taxpayer’s income at the time of its use
    • Activity of Public Enterprises: Profits generated from the difference between income earned from the sale of goods and services and the costs of production
  • Extraordinary Income: These revenues are obtained on an ad-hoc basis when the public sector requires funds to meet specific needs. They originate from:
    • Public Debt: Loans from households and businesses to the public sector
    • Sale of Public Assets: Divestment of publicly owned property or enterprises
    • Special Tax on Private Wealth: Applied when public sector intervention increases the value of private property
    • Rates: Payments made by citizens for specific services requested from the state
    • Income Generated by State Assets: (e.g., interest, capital gains from investments)
    • Transfers and Income without a Specific Counterpart: Revenues that do not involve a service (e.g., lottery, betting)

Balance, Budget Surplus, and Deficit

  • Budget Balance: The ideal scenario for all governments, achieved when income equals expenditure.
  • Budget Surplus: Occurs when revenues exceed expenditures, allowing for increased spending or debt reduction in the following year.
  • Budget Deficit: Occurs when expenditures exceed revenues, leading to:
    • Increased borrowing requirements from private creditors
    • The need to issue public debt
    • Crowding out of private sector initiative

Types of Budget Deficits

  • Structural Deficit: Persists regardless of the economic cycle.
  • Cyclical Deficit: Typically experienced by governments during specific economic phases:
    • During recessions, economic activity decreases, leading to deficits.
    • During expansionary phases, deficits tend to decrease and may even turn into surpluses.