Health of Public Finance

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Presented by: Dr. Peter Larose

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歡迎蒞臨今天的簡報！ SIt Back, Relax & Enjoy, the Presentation

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◆ Definition of National Budget Position ◆ Who is Right or Wrong? ◆ Economic Consequences of a Chronic Deficit ◆ Is a Chronic Budget Deficit a Problem for Developing Countries? ◆ State of US Public Finance & Debts ◆ Reaction to the US Budget Deficit ◆ Is It Common for Government to Hide the Exact Position of their Public Finance? ◆ What Is The Major Issue Contributing to the Public Finance Problem Today? ◆ Challenges of Reversing the Budget Deficits in the Emerging Markets

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Gross National Receipts Gross National Payments = Budget Surplus Gross National Payments Gross National Receipts = Budget Deficit Gross National Receipts Gross National Payments =Balanced Budget Different National Budget Scenario

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Many economic and financial analysts believe that the size of a Govt budget surplus or deficit is a reflection of the political and economic policy of the Govt in power. A forward-looking Govt with new ideas and initiatives will try their best to achieve a budget surplus or in the worse case scenario manage to “balance the budget” or a “slight deficit”. It is all about being a responsible Govt towards the voters and to the international community. There are always proponents and opponents commenting on the ideal state of health of a country’s public finance. Fiscal conservatives always denounce deficit spending and advocate balanced budgets. Keynesians argue that under some circumstances, deficit spending is justified

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No country can indefinitely have a “budget surplus” or a “budget deficit” Surplus or Deficit is usually tied to the business cycle (e.g. growth or recession?). A Govt deficit is usually thought to have 2 critical elements: structural, and Cyclical A structural deficit is the deficit that remains across the business cycle, because general tax levels are too low for the general level of government spending. At different point in time in the life of a political party, a country would experience either a prolonged or short spell of surplus or deficit. This is in spite of the all forecasting tools used in the prediction of the future outcome. This is due mainly to “uncertainty” in the world market.

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Economic Consequences of a Chronic Deficit Again, some economic analysts believe that some Govt deficits is not inflationary. Large government deficits have resulted in large and prolonged periods of inflation due to the monetization of government debt (monetary creation). Deficits can lead to inflation if governments choose to finance deficits through monetary creation rather than borrowing. This often occurrs because the large taxes necessary to finance spending are politically infeasible, and there is insufficient demand for government debt, (i.e. investors refuse to buy government bonds). In other words, no one will lend the government money.

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Is A Chronic Budget Deficit A Problem for the Developing Countries? This is often the case with developing countries whose economies are too small to tax effectively, but whose governments are considered too risky to attract investors willing to lend out of fear of default. Thus, monetary creation is often the only alternative available to finance spending. In the end, the country creates a mountain of “debts” which can become unsustainable in the long-term. Budget deficit is not ONLY an issue of the developing nations, but also an issue for the developed nation. For example, USA has now a budget deficit of US$500 billion, which must be financed.

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Source of Data: US Public Debt Position (Treasury Dept)

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State of USA Public Finance & Debts In 2005 the public debt was 64.7% of GDP. According to the CIA's World Fact book, this meant that the U.S. public debt was the 35th largest in the world by percentage of GDP. In absolute value, it is easily the largest. It is important to differentiate between public debt and external debt. The former is the amount owed by the government to its creditors, whether they are nationals or foreigners. The latter is the debt of all sectors of the economy (public and private), owed to foreigners. In the U.S., foreign ownership of the public debt is a significant part of the nation's external debt (see also below).

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Source: US Treasury Department

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Reaction to the US Budget Deficit The deficit cannot continue to remain unresolved by the Americans. White House Budget Director (Portman) said “We need to come together and solve this problem, because otherwise the unsustainable growth rates will lead to huge tax increases or huge benefit cuts, neither of which is acceptable.” "We could make relatively small changes to those programs now to avoid the otherwise dire consequences."

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Is It Common for Government to Hide the Exact Position of their Public Finance? It is becoming almost a “norm” for the Government Authority to hide the true position of their public finance status. This is due that their citizen and the international community will identify their weaknesses to administer economically and politically. According to Andreas Stephan & Tim Bruck – these two researchers studied the Euzo Zone countries and came with the following conclusion” “ We estimate the political economy determinants of budget deficit forecast errors. Since the adoption of the Stability Pact, Eurozone governments have manipulated forecasts before elections”. (see; Brk, Tilman and Stephan, Andreas, "Do Eurozone Countries Cheat with their Budget Deficit Forecasts?" . Kyklos, Vol. 59, No. 1, pp. 3-15, February 2006)

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Top Ten National Budgets (2004) National Government Budgets for 2004 (In Billions of US$)

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What is the Major Issue Contributing to Public Finance Problem? Besides the lack of the implementation of an efficient tax system and the mis-management of public funds, most countries (which are oil-import dependent) have to deal with the mounting fuel prices. This is a major problem not ONLY to developing countries but also to developed countries. This is especially the case whereby the Government is unable to “pass on” the increase in fuel prices to the consumers. In fact, the oil price has now become an international currency in its own right.

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Higher oil prices are creating major problems for Asian countries which subsidize fuel costs, threatening economic growth if the subsidies are kept in place. The consumers would be outrage if they are not. This means that the public finance of these countries will become under severe stress for some times, until the oil price starts to decline. As for the oil producing countries, they will enjoy a moment of increase in their national earnings, but only to spend on new capital investments or take the opportunity to reduce their bulging debts. For example: Thailand began subsidizing fuel in January 2004, but the scheme quickly became a budget-buster as world oil prices kept rising. Petrol subsidies were scrapped after nine months, and the government in March 2006 reduced its diesel subsidy, sending prices at the pump jumping by 20 percent.

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Due to the changes in the global weather conditions, many countries are under a lot of stress, whenever, there is an unforeseen natural disaster. The Government is obliged to make emergency funds available, which may exceed the provision made in the national budget. Not so many countries would made the necessary provision in their fiscal budget to deal with the “cost of natural disaster”. A typical example, which is still vivid in our minds was “ the hurricane Katrina hitting The New Orleans – USA”. The cost of natural disaster all over the world has reached an unprecedented amount of Billions of Dollars. Such cost must be financed from the public finance or fiscal source. Some times no matter, how well prepared in terms of making the necessary provision for natural disaster, one event can possible “wipe out” all our budget for one year. This is one of the major threats to our state of public finance.

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Fiscal Discipline (e.g. lower budget deficit) Transparency from the Provincial, District, and Central Government Clear cut responsibilities and efficiency drive required from all Ministries & Local Authorities Efficient management of the Debt Profile & Interest Rates Sound Regional Balance & Co-operation Financial Donors Participation Development of Public-Private Partnership Initiatives in National Projects The Challenges of Reversing the Budget Deficits in Emerging Markets

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感謝各位專心聆聽及參予！ 祝福大家，也願你們學業一切順心！！ I Wish You All, Good Luck In Your Studies Thank You For Your Participation & Attendance