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Public Sector and it’s Functions PhD Anto Bajo, Faculty of Economics and Business, University of Zagreb The framework ● What is the public sector? ● Roles of the public sector, and its main functions ● Distribution of functions Why we need public sector? The market mechanism cannot perform all economic functions and will not ensure full employment Public sector policy is necessary to direct, adjust and supplement the workings of the private sector The size of the public sector is a technical and not an ideological issue 1 Government and functions • The government of a country consists of the public authorities and their agencies - entities established through political processes that exercise legislative, judicial, and executive authority within a territorial area. • The principal economic functions of a government are: • to assume responsibility for the provision of goods and services to the community on a non market basis, either for collective or individual consumption • to redistribute income and wealth by means of transfer payments. • these activities must be financed primarily by taxation or other compulsory transfers. • A government may, of course, also finance a portion of its activities in a specific period by borrowing or by acquiring funds from sources other than compulsory transfers, such as interest revenue, sales of goods and services, or the rent of assets. Allocation of Resources Resources are allocated between government and private use: • For government use: - Roads - Schooling - Fire Protection • For private use: - Food - Clothing • Units of private goods and services are forgone by individuals so that government can provide goods and services. Production Possibility Curve 2 The Mixed Economy Characteristics of a mixed economy: • Government supplies many goods and services • Government regulates private economic activity • Government expenditures equal ¼ to ½ of GDP • Government participates in markets as a buyer of goods and services Total government expenditure as % of GDP, 2015 Circular Flow 3 Public sector - Analytical framework • IMF (2001, 2014), Manual on Government Financial Statistics, Washington DC. • United Nation (1993, 2008), System of National Accounts, Washington DC. • Eurostat (1995, 2010), European System of Accounts What is the public sector? PUBLIC SECTOR Central government (Ministries and agencies) Extrabudgatary funds State government Local government (municipalities, cities) Public corporations Financial public corporations Non financial public corporation (e.g. Public enterprises) Monetary public corporations (including Central bank) Non monetary financial corporations Public sector • It consists of all institutional units primarily engaged in non market operations. • the public sector is defined to capture the impact on fiscal policy of the activities of public corporations. It includes all units of the general government sector plus all public corporations. • In addition, a number of sub sectors of the general government and public sectors are defined because of their likely analytic usefulness. 4 General government expenditure in 2013. UK Sweden Finland Slovakia Slovenia Romania Portugal Poland Austria Netherlands Malta Hungary Luxembourg Lithuania Latvia Cyprus Italy Croatia France Spain Greece Ireland Estonia Germany Denmark Czech R Bulgaria Belgium central state local social security 0% 20% 40% 60% 80% 100% Central government • The political authority of a country’s central government extends over the entire territory of the country. The central government can impose taxes on all resident institutional units and on non resident units engaged in economic activities within the country. • The central government typically is responsible for providing collective services for the benefit of the community as a whole, such as national defence, relations with other countries, public order and safety, and the efficient operation of the social and economic system of the country. • In addition, it may incur expenses on the provision of services, such as education or health, primarily for the benefit of individual households, and it may make transfers to other institutional units, including other levels of government Central government • The central government sub sector is a large and complex sub sector in most countries. • It is generally composed of a central group of departments or ministries that make up a single institutional unit. • In many countries, other units operating under the authority of the central government with a separate legal identity and enough autonomy to form additional government units. 5 Local public sector LEGISLATIVE SYSTEM PARLIAMENT JUDICIAL SYSTEM Central Public Sector (Ministries, state bureaucracy) COURTS PROVINCE THE LOCAL PUBLIC SECTOR Local authori es Local administra on Deconcentarted services and oversight TTthhhhhhh Parastatals bodies Localized Front-Line Service Delivery to Residents, Civil Society and the Private Sector A state, province, or region • A state, province, or region is the largest geographical area into which the country as a whole may be divided for political or administrative purposes. • These areas may be described by other terms, such as provinces, cantons, republics, prefectures, or administrative regions. • The legislative, judicial, and executive authority of a state government extends over the entire area of an individual state, which usually includes numerous localities, but does not extend over other states. • In some countries, individual states and state governments may not exist. In other countries, especially those with federal constitutions, considerable powers and responsibilities may be assigned to state governments. State government • A state government usually has the fiscal authority to levy taxes on institutional units that are resident in or engage in economic activities in its area of competence. • To be recognized as a government unit the entity must be able to own assets, raise revenue, and incur liabilities on its own account, and it must also be entitled to spend or allocate at least some of the taxes or other income that it receives according to its own policies. • The entity may, however, receive transfers from the central government that are tied to certain specified purposes. • A state government should also be able to appoint its own officers independently of external administrative control. 6 Local government • The legislative, judicial, and executive authority of local government units is restricted to the smallest geographic areas distinguished for administrative and political purposes. • The scope of a local government’s authority is generally much less than that of the central or state governments, and such governments may or may not be entitled to levy taxes on institutional units or economic activities taking place in their areas. • They are often heavily dependent on grants from higher levels of government, and they may also act as agents of central or state governments to some extent. Local government functions • Functions assigned to local government are usually: fire protection primary and secondary education primary health care • local road maintenance and public infrastructure Minimum national standards should be established to guarantee minimum level of provision for certain service at the local level. Extrabudgetary funds • A social security fund is a particular form of government unit that is devoted to the operation of one or more social security schemes. • It must be separately organized from the other activities of government units, hold its assets and liabilities separately, and engage in financial transactions on its own account. PUBLIC SECTOR Central government (Ministries and agencies) Public corporations Extrabudgatary funds Financial public corporations State government Monetary public corporations (including Central bank) Local government (municipalities, cities) Non monetary financial Non financial public corporation (e.g. Public enterprises) corporations • Other forms of extrabudgatary funds: roads maintenance and construction, environmental protection etc. 7 General government in Croatia 1995 2000 2005 2015 State budget - Ministries Extrabudgetary funds Local government 17 20 13 20 6 5 7 7 520 567 570 576 Financial public corporations • financial corporations sector, consists of entities engaged in providing financial services for the market; • The financial corporations sector consists of all corporations, quasi-corporations, and market NPIs principally engaged in financial intermediation or in auxiliary financial activities closely related to financial intermediation. • Public financial institutions are often founded in order to provide certain quasi fiscal services. Thus, usually, government development banks will make loans to certain selected sectors or firms on noncommercial basis (for example, interest rates lower than on market). Monetary public corporations • Monetary public corporations other than the central bank—all resident depository corporations other than the central bank that are controlled by general government units. accounting: Web address: 1. Croatian National bank Bank http://www.hnb.hr 2. Croatia bank Bank http://www.croatiabanka.hr 3. Croatian postal bank Bank http://www.hpb.hr 4. Croatian bank for reconstruction and development Bank http://www.hbor.hr 8 Monetary non financial public corporations • All resident financial corporations controlled by general government units except the central bank and other public depository corporations. • Depository corporations are financial corporations, quasicorporations, or market NPIs whose principal activity is financial intermediation and who have liabilities in the form of deposits or financial instruments that are close substitutes for deposits. accounting: Web address 1. State Agency for deposit Insurance and bank rehabilitation 2. Capital market regulatory and supervisory consultative agency Nonprofit http://www.dab.hr Nonprofit http://www.hanfa.hr 3. Money market Zagreb d.d. Corporate 4. Zagreb stock exchange d.d. Corporate http://www.trzistenovca.h r http://www.zse.hr Non financial public corporations • Non financial corporations sector, consists of entities created for the purpose of producing goods and nonfinancial services for the market. • In many countries non-financial public corporations provide services on a non-commercial basis, usually in the form of prices lower than those needed to cover costs (for example, charging for electricity below market price for rural households). • These non commercial activities can be financed via cross-subsidizing among various consumer groups (some consumers pay a higher and some a lower price for the same service) or perhaps the losses of the non-financial public corporations will be covered from the budget. • Such activities ruin transparency in the relationship between non-financial public corporations and general government and should be taken into account when consideration of the fiscal position of a country. The need for a public sector? • Market mechanisms do not carry out efficient allocation of resources • Inefficiency of competition • Protection and legal coercion of government • Problems of externalities • Income distribution • Stabilisation 9 Main public sector functions • Allocation – the best combination of public and private goods • Distribution of income and wealth for the provision of socially acceptable distribution • Stabilisation – budgetary functions 10