Download developments in budget deficit and its financing before and after the

DEVELOPMENTS IN BUDGET DEFICIT AND ITS FINANCING
BEFORE AND AFTER THE EMERGENCE OF THE CRISIS IN
EU MEMBER STATES
Student: Roxana SOLOMON
„Alexandru Ioan Cuza” University of Iasi
Iasi, Romania
[email protected]
Student: Roxana UNGUREANU
„Alexandru Ioan Cuza” University of Iasi
Iasi, Romania
[email protected]
Abstract
In the current economic conditions, in which the need of financial resources is usually
higher than the existing funds, the elaborations of budgets at any level is one of the
primary issues, particularly as regards the principle of budgetary balance. Insufficient
current income to cover expenditure causes budget deficit which requires finding ways
of financing it, out of which the most common are (inflationary) money issue and loans.
They involve a series of implications giving rise to detrimental effects such as inflation,
in the case of excessive monetary issuance and debt as regards financing through public
borrowing.
Keywords: budget deficit, public borrowing, public debt, crisis
JEL Classification: H62, H73, H74
1. INTRODUCTION
In July 2007, a crisis emerged on the United States mortgage market that
has been felt then, in other countries too. After one year, what has been defined
as "financial turbulence" has become a real global economic crisis. It was
considered to be the biggest economic crisis in history after that recorded eight
decades ago.
The financial crisis has turned into an economic crisis, on the one
hand because of the lack of liquidity and financing more and more difficult for
the business environment and, on the other hand, due to the fact that in the
Member in which there have been economic problems of a structural
nature they have occurred very harsh even from the beginning of the crisis.
Structural problems are for example: unsustainable growth without being
covered by an increase of labor productivity; use of speculative financial
instruments (so called “toxic assets”); oversized budget expenditures which
causes excessive deficits.
Big bankruptcies and stock’s fall have created a wave of type “tzunami”.
Financial institutions have tightened credit conditions, reducing their exposure,
investors have become more and more skeptical and more restrained in
investing in new business, a low consumption which has given a new blow
business at the beginning of 2008. Injecting liquidity both by FED (Federal
Reserve - the US Central Bank) as well as by the ECB and the European actors
has been a momentarily solution but which has not been such as to resolve
system problems. So that in 2010, due to excessive debt burden of the states to
finance very large budget deficits we are witnessing not only to the financial
and economic crisis but also to sovereign debt a crisis of the EU members.
2. GOVERNMENT DEFICIT DEVELOPMENTS AND THEIR
DETERMINANTS IN THE EU MEMBER STATES
In the current economic conditions, in which the need of financial
resources is usually higher than the existing funds, the elaborations of budgets
at any level is one of the primary issues, particularly as regards the principle of
budgetary balance.
As provided by economic theory, the budget balance varies depending on
the evolution of economic cycle, as a result of the automatic stabilizers. In
recession, revenues tend to be smaller, and the social assistance payments are
higher than when economy is not operating at full capacity and, so, budget
deficits are growing.
The budget deficit’s formation is determined, in principle, by the increase
in expenditures, as compared to a smaller volume of current budget revenues,
which can be deployed to this budget, within the framework of a budget year.
In this respect, it is admitted that the determinants of the existence and size of
public budget deficits appear to be, in the foreground, the dimensions of
expenditure and of budgetary revenues, which in turn are subject to other
specific factors, and one of the most important result would be GDP,
representing the fundamental source for revenue.
Also, the budget deficit is due to other causes such as: the fall in
production of goods and services in the economy, the increase in expenditure
for the purpose of carrying out certain social programs; the growing of the
invisible business sector of the economy; the issue of banknotes in excess not
accompanied by economic growth. On the other hand, the levels of budget
revenues and expenditure are affected by the stage of the business cycle. When
the economy is shrinking, the budget deficit is growing, as a result of reduction
of revenue collected.
Until the outbreak of the global financial crisis in 2008, countries such as
France or Germany have repeatedly broken the rule that deficit budget should
be below 3% of GDP without ever be penalized, Spain, has not broken it ever.
Belgium and the Netherlands have reduced deficit and have maintained sound
budgetary positions, in accordance with the SGP. The situation of Greece, the
country that is faced with the greatest economic difficulties at present, is
different: this occurred in the course of time "creative accounting", by reporting
Brussels fictitious budgetary data to access the euro area, a situation found in
three years. As we can see, the members with constant budget deficits are those
with the highest current government debt: Greece, Italy, Ireland, Portugal, and
Hungary.
Table 1. Government deficit developments in EU member states during the
period 2006-2011 (% of GDP)
Country/Period
Belgium
Bulgaria
Czech Republic
Germany
Estonia
Ireland
Greece
Spain
Italy
Latvia
Lithuania
Luxembourg
Hungary
Netherlands
Poland
Portugal
Romania
Finland
Great Britain
2006
2007
2008
2009
0,4
-0,1
- 1,0
-5,6
1,9
1,2
1,7
-4,3
-2,4
-0,7
-2,2
-5,8
-1,6
0,2
-0,1
-3,1
2,5
2,4
-2,9
-2,0
2,9
0,2
-7,4
-13,7
-5,7
-6,5
-9,8
-15,7
2,4
2,0
-4,5
-11,1
-3,4
-1,6
-2,7
-5,5
-0,5
-0,4
-4,2
-9,8
-0,4
- 1,0
-3,3
-9,4
1,4
3,7
3,2
-0,7
-9,4
-5,1
-3,7
-4,6
0,5
0,2
0,5
-5,6
-3,6
-1,9
-3,7
-7,5
-4,6
-3,1
-3,6
-10,2
-2,2
-2,9
-5,7
-9,0
4,2
5,3
4,4
-2,5
-2,8
-2,8
-5,0
-11,4
(Source: European Commission, 2014)
2010
-3,7
-3,1
-4,7
-4,2
0,2
-30,6
-10,7
-9,6
-4,5
-8,1
-7,2
-0,8
-4,3
-5,1
-7,9
-9,8
-6,8
-2,5
-10,1
2011
-3,7
-2,0
-3,2
-0,8
1,1
-13,1
-9,5
-9,6
-3,8
-3,6
-5,5
0,1
4,3
-4,3
-5,0
-4,3
-5,6
-0,7
-7,7
With regard to the proportions of the budget deficit in GDP in table no. 1,
we notice the general trend of the budget deficit, by touching a maximum value
of -30,6% of GDP in Ireland in 2010 as the first state which went into a public
finance crisis, increase due, mainly to carrying out expenditures over the level
of income.
In 2009, Greece, Poland, Romania, Belgium, Germany, Italy, France,
Spain, Ireland, Austria and Portugal have entered into the excessive deficit
procedure, while Hungary and Great Britain has received the first
recommendations. In 2010, the Council of Europe has requested Greece to take
steps to correct budget deficit by 2012. In most of the member of the EU, the
deficit registered in 2009 has exceeded the reference value of 3% of the GDP.
Of the new Member States , the only exception was Luxembourg , with a
budget deficit of only -0.7% of GDP in 2009, between the Member States of
the euro area , the countries with a deficit of below or equal to 3% of the
GDP are Finland ( -2,5 %), Germany (-3,1 %) and Estonia (-2%). No country
has had surplus for this year. A very powerful negative impact was also
felt outside the euro area, with serious damage to general government deficit (as
a percentage of GDP), in Latvia (-9,8 % ), Lithuania (-9,4 % ), Romania (-9 %)
and Poland ( -7,5 % ). Smaller deficits have been observed in Hungary, Bulgaria
and the Czech Republic, with deficits of -4,6 %, -4,3% and -5.8 %, respectively.
Size of budget deficits for all European Union member states exceeded the 3%,
limit stipulated in the Maastricht Treaty.
Increasing budget deficits may be the outcome of the discretionary
budgetary policy measures adopted by the national authorities, in order to
stimulate economic recovery. During the crisis, some of these measures were:
new public infrastructure projects, increases in government final consumption
expenses, cuts in direct taxes, measures that helped to boost or bring forward
private demand through car scrappage incentive schemes, direct lump-sum
income payments to households and temporary reductions in indirect taxes and
housing tax credits. Unless these actions are designed on a temporary basis, this
factor influences the budget deficit and, therefore, with respect to the public
debt, is permanent and will continue in the absence of specific policy
adjustments. Another factor could also be taken into consideration, even if it has
a relative smaller importance for most countries, including the contraction of
budget revenues resulting from lower asset prices, financial sector profits or
commodity prices (Bilan, 2011, p. 73).
At international level, in order to reduce its budget deficits and restore the
situation, governments have recourse to a series of methods for the reduction of
public expenditure among which we can lists: freezing budgetary expenditures,
reducing employment, reducing transfers, restricting the eligibility conditions
for beneficiaries various programs, the imposition of new methods of analysis
of the programs. With a view to fiscal consolidation, in 2010, most countries
have driven by an increase in the income tax rates and increase in taxation, but
most often by increasing the tax base. In addition, VAT and excise duties have
been increased, most often as growth rates. Greece and Ireland, as countries
with large budget deficits, increased taxation on both income (income tax and/or
social security contributions), as well as profits. As regards the Greek situation,
the beginning of 2010 represented the intensification of economic difficulties
(budget deficit raised, in conjunction with a huge public debt), despite the
austerity measures adopted by the government: increase in VAT from 19% to
23 %, increase in 10% of the excise duty on alcohol, tobacco and petrol,
reducing salaries in the public sector by 8 %, as well as the removal of 13nd and
14rd salary in the state sector. The offset between the expenditure very large
and low income is influenced by the size of the gross domestic product, as
fundamental source of income.
Presently, the concern for the reduction are still of major importance for
Romania, especially that our country faces with the greatest difficulties in the
economic development. On the other hand, as a member of the European Union,
Romania has to comply to the conditions imposed by the Treaty on European
Community, that budget deficit should be under 3% of the gross domestic
product (GDP) and the public debt below 60% of the GDP by 2010. With
regard to the measures aimed at the reduction of public expenditures adopted by
Romania at the end of the year 2009, we mention reducing public salaries in the
public domain, reduction of personnel in the public institutions, the reduction of
posts.
Table 2. Trends in expenditure and revenue in EU member states during
the period 2006-2011 (% of GDP)
Country
2006
48,5
Italy
38,4
Spain
45,4
Greece
35,5
Romania
48,5
Belgium
34,4
Bulgaria
51,6
Denmark
45,3
Germany
53,0
France
Luxembourg 38,6
52,2
Hungary
45,2
Portugal
Expenditure trends
Revenue trends
2007 2008 2009 2010 2011 2006 2007 2008 2009 2010
47,6 48,6 51,9 50,4 49,8 45,0 46,0 45,9 46,5 46,1
39,2 41,4 46,2 46,3 45,7 40,7 41,1 36,9 35,1 36,7
47,5 50,6 54,0 51,4 52,0 39,2 40,7 40,7 38,4 40,6
38,2 39,3 41,1 40,1 39,5 33,3 35,3 33,6 32,1 33,3
48,2 49,8 53,7 52,6 53,5 48,8 48,1 48,7 48,1 48,7
39,2 38,4 41,4 37,4 35,6 362 40,4 40,1 37,1 26,2
50,8 51,5 58,1 57,7 57,7 56,6 55,6 54,8 55,3 55,0
43,5 44,1 48,3 47,9 45,2 56,6 55,6 54,8 55,3 55,0
52,6 53,3 56,8 56,6 55,9 50,6 49,9 49,9 49,2 49,5
36,3 39,1 45,2 43,5 42,6 39,9 39,9 42,3 44,5 42,7
50,7 49,2 51,4 50,0 50,0 42,7 45,6 45,5 46,9 45,6
44,4 44,8 49,8 51,5 49,3 40,6 41,1 41,1 39,6 41,6
(Source: European Commission, 2014)
2011
46,1
36,2
42,4
33,9
49,6
33,6
55,7
55,7
50,6
42,7
54,3
45,0
Therefore, budget deficits have become, in modern society, a usual
phenomenon. Due to growing public expenditure, as results from the data
presented in table 2, the financial situation of many states, more or less
developed, deteriorated.
3. WAYS OF FINANCING THE BUDGET DEFICIT AND THEIR
IMPLICATIONS
Approaches with regard to budget deficits sizing, their means of financing
and, in particular, to public debt sizing are in some way specific to each type of
economy. Existing concrete conditions from the economic, financial, economic,
social, administrative point of view raise a number of problems that require a
very serious approach on the potential impact of the unfavorable dimensions of
budget deficits and public debt over real possibilities of an inflationary
financing.
For the purpose of financing budget deficit, modern society has recalled,
as a general rule, either at the unjustified monetary issue, having an inflationary
effects, either at contracting of public loans.
As a matter of principle, there is more than one way of procuring
extraordinary financial resources , but the most employed ways of financing
the public budget deficits are known under the name of monetary financing and
non-monetary financing . The latter is focused on state debts toward its
residents or non-residents creditors, assuming contracting of loans by the state.
Monetary financing , although presently deemed to be unacceptable, it
represents a technical way of financing of budget deficits meaning a socalled "monetary creation", which results in the issue of currency-sign to
finance expenditures that constitute the budget deficit. Member States of the
European Union have prohibited by law this method, as putting on the market a
quantity of currency exceeding the real demand of money lead to inflation .
(Filip, 2010, p. 331)
Foreign financing of the budget deficit means attracting financial resources
from the outside, as a result of economic and financial relations, on the external
markets, with various private individuals, non-resident, either by direct
contracting by the State to take of loans with international financial and
banking institutions and bodies non-resident private or other states. Other forms
of procurement of external resources may be pecuniary aid, grants , etc. granted
by the other Member, bodies or persons non-resident of that State, aimed, as a
general rule, at achieving certain social, cultural, economic objectives, etc.
(Filip, 2010, p. 332).
Creating public debt implies achieving the objectives or actions
entailing public expenditures, which do not have coverage in regular financial
resources, which implies, most often, their financing of public
loans, transformation into public debt.
Within the member states, the public debt has recorded fluctuations as it
can be observed in table 3.
Table 3. Changes in public debt in EU member states during the period
2006-2011 (% of GDP)
Country/Period
Belgium
Germany
Estonia
Greece
Spain
Italy
Hungary
Austria
2006
87,9
68,0
4,4
106,1
39,7
106,3
65,9
62,3
2007
84,0
65,2
3,7
107,4
36,3
103,3
67,0
60,2
2008
89,2
66,8
4,5
112,9
40,2
106,1
73,0
63,8
2009
95,7
74,5
7,1
129,7
54,0
116,4
79,8
69,2
2010
95,7
82,5
6,7
148,3
61,7
119,3
82,2
72,3
2011
98,0
80,0
6,1
170,3
70,5
120,7
82,1
72,8
Poland
Romania
Sweden
Great Britain
47,7
45,0
47,1
50,9
12,4
12,8
13,4
23,6
45,3
40,2
38,8
42,6
42,7
43,7
51,9
67,1
(Source: European Commission, 2014)
54,9
30,5
39,4
78,4
56,2
34,7
38 ,6
84,3
The current public debt crisis in EU began in Greece, when the Greek
prime minister announced in November 2009 that the budget deficit of the
country would be -15.7 percent of GDP, almost twice as high as in previous
period, and that he will try to save Greece from bankruptcy. In reality, public
debt of the country has reached a maximum of 300 billion € (approximately 440
billion US dollars).
Referring to the data in table 3, we can see that Romania has
recorded a slight increase in the first 3 years (12.4 %; 12.8 %; 13.4 %) of GDP
as well as it had in 2009 to reach values two times bigger than those of the
previous period (23.6 %; 30.5 %; 34.7 % ). Romania is a developing country,
with a gross domestic product relatively small, so public debt burden is much
more difficult to bear. If, at the levels of the years 2007-2008, government debt
level stood at around 13% of the GDP, an increase in public debt was recorded
in 2009, having as main cause the loan contracted by the Romanian authorities
from the International Monetary Fund and the European Commission. Despite
an increase in public debt in 2009 compared to 2008, Romania is still at a
comfortable level as a percentage of the gross domestic product, which does not
constitute a reason for concern , unlike in Italy, Greece and Belgium where
public debt is greater than 90 % of GDP, this having a negative impact on
economic growth. The values that we can observe in the case of Greece are
caused by growing budgetary expenditure, due to far too generous measures
social protection far too "generous" undertaken by the Greek Government, but
also by the ease with which Greek banks have lent the government at very high
interest rates, being aware that it will not have the possibility to repay loans.
Also, in the case of Spain we can notice significant increases of public debt, in
2011, to 70,5 % of GDP.
The negative impact of large public debts on economic growth is caused by
the increase in public expenditures with interests. Therefore, in order to ensure
the financing of expenditures, a substantial amount of budgetary resources must
be made available, either through reallocation of existing financial resources
between the various categories of budget expenses, either by an increase in
regular budget revenues, in particular by raising the income tax. If the first
solution is chosen, in practice, the most affected usually are productive public
expenditures, such as in infrastructure or education, with a negative impact on
economic growth. In the second situation, the increase in tax burden will tend to
reduce the interest to invest and save .
In the case in which the debt is not maintained at a low level when the
economy is in equilibrium, governments will not be able to support monetary
policy measures and to protect the economy when it is confronted with negative
cyclical fluctuations.
4. CONCLUSIONS
Crisis was characterized by an initial period of economic downturn
pressure put on the rise in the unemployment rate. The variable tax which felt
the most powerful these macroeconomic imbalances was that of public incomes
consolidated total, which was a very strong. Total consolidated public
expenditure could not be adjusted in the light of this drop in income. The result
has been an increase in deficit consolidated national public budgets, which have
generated in their turn significant increases of public debt of the countries
members of the EU.
In the current economic conditions, in which the need of financial
resources is usually higher than the existing funds, the elaborations of budgets
at any level is one of the primary issues, particularly as regards the principle of
budgetary balance.
Insufficient current income to cover expenditure cause budget deficit
which requires finding ways of its financing of which the most common are
issue of banknotes and loans . They involve a series of implications giving rise
to detrimental effects such as inflation, in the case of the issuance excessive
monetary, and debt as regards loans.
Government debt must be maintained at a low level, otherwise the
government will not be able to support monetary policy measures and to protect
economy, when there is confronted with negative cyclical fluctuations.
When the government's public debt increases, this could affect not only
macroeconomic stability of the country concerned, but also, and that of the
other EU member states.
References
[1] Filip, Gh., (2010). Finante publice. Iasi: Junimea.
[2] European Commission (2014). Eurostat. Available at http://appsso.eurostat.ec.
europa.eu/nui/submitViewTableAction.dom.
[3] Bilan, I., (2011). Public debt developments in EU member states: challenges and
solutions. The Scientific Annals of Alexandru Ioan Cuza University of Iasi, Economic
Sciences Series, Special Issue (pp. 71-84). Iasi: Alexandru Ioan Cuza University
Publishing House.