Theory of public finance

1. Theory of public finance Introduction to the financial law Introduction to the financial law

2. Legal relations within the financial system • Subjects of financial law • Public subjects • State Treasury • General Government • Central bank • Private subjects • Natural person • Legal capacity • Capacity for legal acts • Legal person • Legal capacity • Capacity for legal acts Introduction to the financial law

3. Scientific and legal approach to public finance • „It is the art of taxing and spending money by government” (H. Rosen) • „There are three basic issues of public finance: (1) separation of taxing and spending and its implications for the socially efficient use of resources; (2) determination of redistribution through the fiscal system; (3) the necessity for non-market or collective choice mechanisms to allocate public sector burdens and benefits” ( W. Hettich, S. Winer) • "Public Finance is nothing else than a sophisticated discussion of the relationship between the individual and the state” (Vaclav Klaus) • Welfare should be built of more taxpayers. Not by higher taxes. (Andreas Borg) • When a government taxes you, it takes something you own without your consent. That’s exactly what a thief does. The main difference is that the thief is breaking the law, whereas the government is (usually) taking your money legally(David Henderson) (PL) Public Finance Act, article 3 Public finances include the processes associated with the collection of public funds and their distribution, in particular: • collecting incomes and revenues, • spendingpublic funds, • financingof state budget’s borrowingneeds, • incurring obligations involving publicfunds, • management of public funds, • management of public debt, • financialsettlements with the European Union. Introduction to the financial law

4. Public finance versus private finance Introduction to the financial law

5. Functions of public finances Introduction to the financial law

6. Structure of public revenue and expenditure(source: IBS Policy Paper, 2016 / Eurostat 2017) Income sources (as % of GDP) Expenditure destination (as % of GDP) Introduction to the financial law

7. Limits of fiscalism (1) (Eurostat; as of 31 December 2018) Introduction to the financial law

8. Limits of fiscalism (2) Laffer curve Edinburgh rule Introduction to the financial law

9. Limits of fiscalism (3) Tax justice Canons of taxation (by Adam Smith) • All taxpayers in the same conditions must be treated by one measure (horizontal equity) • The amount of the tax burden should remain within a reasonable relation to the taxpayer's ability to pay (verticaljustice) • Public purposes, to which the state allocates tax revenues must be generally accepted (social justice) Introduction to the financial law

10. Limits of fiscalism (4)( source: Centrum im. Adama Smitha) Introduction to the financial law

11. Stimulation in public finances Introduction to the financial law

12. Sources of financial law Introduction to the financial law

13. Legal acts of the EU • To exercise the Union's competences, the institutions shall adopt regulations, directives, decisions, recommendations and opinions. • A regulation shall have general application. It shall be binding in its entirety and directly applicable in all Member States. • A directive shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods. • A decision shall be binding in its entirety. A decision which specifies those to whom it is addressed shall be binding only on them. • Recommendations and opinions shall have no binding force. ARTICLE 2 (Treaty on the EU functioning) • 1. When the Treaties confer on the Union exclusivecompetence in a specific area, only the Union may legislate and adopt legally binding acts, the Member States being able to do so themselves only if so empowered by the Union or for the implementation of Union acts. • 2. When the Treaties confer on the Union a competenceshared with the Member States in a specific area, the Union and the Member States may legislate and adopt legally binding acts in that area. The Member States shall exercise their competence to the extent that the Union has not exercised its competence. The Member States shall again exercise their competence to the extent that the Union has decided to cease exercising its competence. Introduction to the financial law

14. The treaty on the functioning of the EUEconomic policy ARTICLE 3 The Union shall have exclusive competence in the following areas: • customs union • the establishing of the competition rules necessary for the functioning of the internal market • monetary policy for the Member States whose currency is the euro • the conservation of marine biological resources under the common fisheries policy • common commercial policy. ARTICLE 119 • For the purposes set out in Article 3 of the Treaty, the activities of the Member States and the Union shall include (…) the adoption of an economic policy which is based on the close coordination of Member States' economic policies, on the internal market and on the definition of common objectives, and conductedin accordance with the principle of an open market economy with free competition • Theseactivitiesshallinclude: a single currency(the euro) and the definition and conduct of a single monetary policy and exchange-rate policy the primary objective of both of which shall be to maintain price stability and, without prejudice to this objective, to support the general economic policies in the Union (…) • Theseactivitiesshallentail compliance with the following guiding principles: stable prices, sound public financesand monetary conditions and a sustainable balance of payments. Introduction to the financial law

15. EU MemberStates’ Constitutions(1) Financial background of the State (POLAND) Article 84 Everyoneshallcomply with hisresponsibilities and public duties, including the payment of taxes, as specified by statute. (ITALY) Article 53 Every person shall contribute to public expenditure in accordance with their capability. (ROMANIA) Article 56 • Citizens are under the obligation to contribute to public expenditure, by taxes and duties. • The legal taxation system must ensure a fair distribution of the tax burden. • Any other dues shall be prohibited, except those determined by law, under exceptional circumstances. (POLAND) Article 216 It shall be neitherpermissible to contractloans nor provideguarantees and financialsuretieswhichwouldengender a national public debtexceedingthree-fifths of the value of the annualgrossdomesticproduct. (FINLAND) Article 82 The incurrenceof State debt shall be based on the consent of the Parliament, which indicates the maximum level ofnew debt or the total level of State debt. (SPAIN) Article 135 The Government must be authorised by law to issue Treasury bonds or to contract loans Introduction to the financial law

16. EU MemberStates’ Constitutions(2) Taxpayer’srights (POLAND) Article 217 The imposition of taxes, as well as other public imposts, the specification of thosesubject to the tax and the rates of taxation, as well as the principles for grantingtaxreliefs and remissions, along with categories of taxpayersexempt from taxation, shall be by means of statute. (GREECE) Article 78 • No tax shall be levied without a statuteenacted by Parliament, specifying the subject oftaxation and the income, the type of property,the expenses and the transactions or categoriesthereof to which the tax pertains • The object of taxation, the tax rate, thetax abatements and exemptions and the granting of pensions may not be subject to legislativedelegation. (FINLAND) Article 88 Regardless of the budget, everyone has the right to collect his or her legitimatereceivables from the State. (PORTUGAL) Article 107 • The tax on personal income seeks to reduce inequality. It is a single progressive tax having regard to family needs and income and tries to limit incomes to a national maximum fixed by law each year. • Consumer taxes seek to adapt the structure of consumption to the evolution of the needs of economic development and social justice, and the said taxes shall bear heavily on luxury Articles. Introduction to the financial law

17. EU MemberStates’ Constitutions(3) Localfinances (FRANCE) Article 72 • Territorial communities shall enjoy revenue of which they may dispose freely in the conditions determined by statute. • They may receive all or part of the proceeds of taxes of all kinds. They may be authorized by statute to determine the basis of assessment and the rates thereof, within the limits set by such statutes. (ITALY) Article 119 State legislation shall provide for an equalisation fund - with no allocation constraints - for the territories having lower per-capita taxable capacity. (POLAND) Article 167 • Units of localgovernmentshall be assured public fundsadequate for the performance of the dutiesassigned to them. • The revenues of units of localgovernmentshallconsist of theirownrevenues as well as generalsubsidies and specificgrants from the State Budget. (POLAND) Article 168 To the extentestablished by statute, units of localgovernmentshallhave the right to set the level of localtaxes and charges. (FINLAND) Article 121 The municipalities have the right to levy municipal tax. Provisions on the general principles governing tax liability andthe grounds for the tax as well as on the legal remedies available to the persons or entities liableto taxation are laid down by an Act. Introduction to the financial law

18. EU MemberStates’ Constitutions(4) Legislativestandards (POLAND) Article 89 Ratification of aninternationalagreement by the Republic of Poland, as well as renunciationthereof, shallrequirepriorconsentgranted by statute -ifsuchagreementconcerns: • 4) considerablefinancialresponsibilitiesimposed on the State; (BULGARIA) Article 5 International treaties which have been ratified in accordance with the constitutional procedure, promulgated and having come into force with respect to the Republic of Bulgaria, shall be part of the legislation of the State. They shall have primacy over any conflicting provision of the domestic legislation. (ROMANIA) Article 20 • Constitutional provisions concerning the citizens' rights and liberties shall be interpreted and enforced in conformity with the Universal Declaration of Human Rights, with the convenants and other treaties Romania is a party to. • Where any inconsistencies exist between the covenants and treaties on the fundamental human rights Romania is a party to, and the national laws, the international regulations shall take precedence, unless the Constitution or national laws comprise more favourable provisions. . Introduction to the financial law

19. Budgetary equilibrium Introduction to the financial law Introduction to the financial law

20. Budgetary balance An ideal variant Convergence criteria Introduction to the financial law

21. Division of public funds Introduction to the financial law

22. General Government deficit (as % of GDP)( taken from: http://ec.europa.eu/eurostat) Introduction to the financial law

23. Adolf Wagner’s Rule (1892 r.)„ increase in public spending has a permanent nature in every country” Introduction to the financial law

24. Dangerous conversion: from deficit to debt • Interest = remuneration for usingsomebodyelse’scapital • Commission = remuneration for enteringintoagreement ( for drawingup a contract) Introduction to the financial law

25. Public debt Introduction to the financial law

26. Public debt in Europe(in relation to GDP)( taken from: http://ec.europa.eu/eurostat) Introduction to the financial law

27. EU reaction to extensive deficit and debt Introduction to the financial law

28. Fiscal rules According to the most widespread definition, fiscal rules set permanent constrains on fiscal policy, typically defined in terms of a summary indicator of fiscal performance often expressed as a numerical ceiling or target in proportion to GDP. Thus, three main features characterize a well-defined fiscal rule, namely • a permanent character, meaning that the constraint must be perceived to be binding for a sufficiently long period of time; • specification in terms of an overall fiscal performance indicator (such as the government budget deficit, debt, expenditure, revenue, etc.); • the provision of a numerical ceiling or target. While the first primary objective of fiscal rules is to enhance budgetary discipline, they can also foster policy coordination between different levels of government depending on their institutional coverage. Additionally, fiscal rules may further contribute to the reduction of uncertainty about future fiscal policy developments. However, fiscal rules can only yield these benefits if appropriate institutions for monitoring and enforcement mechanisms are in place, or if they are supported by strong political commitment /by Kopits G., and Symansky S., 1998, "Fiscal policy rules", IMF, Occasional Paper Nr. 162, www.ec.europa.eu/. Introduction to the financial law

29. Fiscal rules in theory Introduction to the financial law

30. Fiscal rules – legislative examples • (PL) The increase in spendingor the reduction in revenues from thoseplanned by the Council of Ministersmay not lead to the adoption by Parliament of a budgetdeficitexceeding the levelprovided in the draft Budget. • (HU) As long as the public debt exceeds half of the Gross Domestic Product, the National Assembly may only adopt a Central Budget Act which contains public debt reduction in proportion to the Gross Domestic Product. • (AUT) Portion of public debt exceeding 60% of GDP shall be reduced by 1/20 each year on average • (ROM) Local governments cannot contract or guarantee loans if their annual public debt service (principal payment, interest, commissions) including the loan they want to contract, is higher than 30% of their own revenue. • (UK) GG borrowing only allowed for investment, not to fund current spending. Performance against the rule is measured by the average surplus on the current budget as % of GDP over the economic cycle. • (NL) Any setbacks against the expenditure ceilings must be compensated within the sector; windfalls can only be used to compensate for setbacks within that sector. Windfalls cannot be used to finance new expenditures. Introduction to the financial law

31. Public debt titles Introduction to the financial law

32. Government bonds (treasury bills, T-bills, treasury securities): Introduction to the financial law

33. Credit contract Bilateralduties Freedom of contracting „ Partiesexecuting a contractmayarrangetheirlegalrelationshipattheirdiscretion as long as the contentorpurpose of thiscontractis not contrary to the nature of the relationship, the law and the principles of community life” Introduction to the financial law

34. Credit agreement versus cash loan Introduction to the financial law

35. Terms of credit Introduction to the financial law

36. Credit agreement. The parties A lender A borrower 1. A natural person 2. A legal person 3. Anentity with no legalpersonality… …. all of themhavingcreditworthiness. PROBLEM OF CREDIT SCORING Ifsomeonefails to be deemedcreditworthy, a bank may grant a creditproviding : a specialcollateral a financialrecoveryprogramme • A bank („A bank shall constitute a legal person, established pursuant to the provisions of statute, operating on the basis of authorisations to perform banking operations that expose to risk funds which have been entrusted to the bank and which are in any way repayable”) • Creditunionsorotherentitieshavingstatutoryrights to perform banking activities In order to provide a joint creditbanksmayconclude a loanunderwritingagreement. Thesebanksshallbear the riskassociated with grantedcredit in proportion to the amount of fundscontributed to the loan. Introduction to the financial law

37. Rating Introduction to the financial law

38. Costs of credit Introduction to the financial law

39. Public guarantee A public guaranteeconstitutes a unilateralobligation of the guarantor, thataftergivenpaymentconditionshavebeen met by the authorisedentity ( the beneficiary of the guarantee), where the conditionsmay be confirmed by specificdocumentsthat the beneficiaryattaches to the payment order and where the order hasbeenprepared in the required form, …. the guarantorwillprovidemoneyconsideration to the guaranteebeneficiary – directlyorthrough the intermediation of a bank. Legallimitation of public guarantees: • Public guaranteesmayserve to public objectiveonly ( a cataloguestipulated by law) • Prior analysis of the risk of guarantee agreements • Annual guarantees ceilingstipulatedin the budgetarystatute Introduction to the financial law

40. Public guarantee - scheme Introduction to the financial law

41. General Government Introduction to the financial law Introduction to the financial law

42. Private sector or public sector?(„European System of Accounts 2010”) Introduction to the financial law

43. Institutional units of General Government(„European System of Accounts 2010”) Introduction to the financial law

44. Divisions of General Government.Similarities and differences within GG Introduction to the financial law

45. The State Treasury • Legal persons shall be the State Treasury and those organizational entities upon which special provisions of law confer legal personality. • The State Treasury shall be consideredthe subject of the rights and duties which pertain to the State property that does not belong to other State legal persons • The State Treasury shall not be liable for the obligations of State legal persons unless separate provisions state otherwise. State legal persons shall not be liable for obligations of the State Treasury. Introduction to the financial law

46. Links between General Government and budget Budgetary sphere (example: a budget unit) Non – budgetary sphere (examples: special purpose funds, central agencies) Introduction to the financial law

47. Budgetary units (budget units) Features Examples • Created by administrative decision at the central levelor by way of a resolution of a council at the local level • Lack of legal personality • Public propertyattheirdisposal (no ownershiprights) • The unit covers its expenditures directly from the budget and collectsincomes respectively on the account of the state budget or the localbudget • It operatesunder a statute defining a particular name, place and subject of the action, • Allplannedincomesand limitedexpendituresareincludedintothe financial plan of the budgetary unit. Introduction to the financial law

48. Universities Sources of incomes and revenues Principles of financial management Funds that haven’t been utilised in the given year remain at the disposal of the university. University runs an independent financial economy on the basis of a material and financial plan approved by the Senate of the university, in accordance with the regulations on public finance The material and financial plan shall be forwarded by the university to the minister who supervises it Introduction to the financial law

49. (Special) Purpose Fund (1) Special Purpose Fund (extrabudgetary fund) is a collection of public incomesand expenditures dedicated to a specific purpose • …..created by law • …. constitutesan organizational form (structure) of the budgetary type, • …..may be regarded as an alternative way to finance selected tasks by means of public funds Introduction to the financial law

50. (Special) Purpose Fund (2) Types of incomes / revenues earmarked by the fund Pros and cons Introduction to the financial law