Professorship in Faculty 07

Federal and Regional Financial Relations Prof. Dr. André W. Heinemann Business Studies & Economics

Public Sector Economics

Chapter 1
An Introduction into Public Finance and
Public Sector Statistics
 1.1 The Public Sector in Germany
Share of State Expenditures in Germany

* Excluding debt assumption (Treuhandanstalt; Wohnungswirtschaft der DDR).

** Excludung the proceeds from the auction of UMTS licences. In National Accounts, proceeds are expenditure-reducing.
*** State expenditure compiled on a National Accounts basis. Since 1991 in compliance with the European System of Account (ESA 2010).

Source: Federal Ministry of Finance (2018), Monthly report, February 2018; Own illustration.

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1.1 The Public Sector in Germany
Government Expenditure Ratios of EU Member States - 2016

Source: Eurostat (2017); Own diagram.

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 1.1 The Public Sector in Germany
Tax Ratios1) in Germany

1) Compiled on a financial statistics basis; Until 2012: Accounting results; 2013 to 2017: partly cash results.
* Tax ratio from 2018: Result of tax forecasts May 2018.

Source: Federal Ministry of Finance (2018), Monatsbericht des BMF, April 2018; Tax revenue estimates of the „Working Party on Tax Revenue
Forecasting“, 153rd Meeting from May 7 to May 9, 2018 in Mainz (Rhineland-Palatinate); Own diagram.

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1.1 The Public Sector in Germany
Total Tax Revenue and Tax Estimates and Forecasts in Germany

Source: Federal Statistical Office (2018), Fachserie 14, Reihe 4; Tax revenue estimates of the „Working Party on Tax Revenue Forecasting“, 153rd
Meeting from May 7 to May 9, 2018 in Mainz (Rhineland-Palatinate); Own diagram.

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1.1 The Public Sector in Germany
Assignment of Tax Revenue (excl. SSC) after Equalization - Germany
Actual Actual Estimate
in €bn 2016 2017 2018 2019 2020 2021 2022
GDP (at market prices) 3,144.1 3,263.4 3,402 3,539 3,655 3,775 3,899
Year-on-year change in % + 3.3 + 3.8 + 4.2 + 4.1 + 3.3 + 3.3 + 3.3
Federal 289.0 309.3 321.3 334.8 341.4 354.7 367.6
Year-on-year change in % + 2.3 + 7.0 + 3.9 + 4.2 + 2.0 + 3.9 + 3.6
Laender 288.6 298.4 310.2 320.6 337.0 351.2 365.0
Year-on-year change in % + 7.6 + 3.4 + 4.0 + 3.3 + 5.1 + 4.2 + 3.9
Local 98.8 105.0 110.1 114.8 123.5 128.7 133.5
Year-on-year change in % + 7.1 + 6.3 + 4.9 + 4.3 + 7.6 + 4.1 + 3.7
EU 29.2 21.6 30.3 36.5 36.8 38.4 39.6
Year-on-year change in % - 5.4 - 25.9 + 39.8 + 20.5 + 0.9 + 4.1 + 3.2
Totat tax revenue 705.7 734.5 772.0 806.9 838.9 873.1 905.9
Year-on-year change in % + 4.8 + 4.1 + 5.1 + 4.5 + 4.0 + 4.1 + 3.8

Federal (share in %) 40.9 42.1 41.6 41.5 40.7 40.6 40.6

Laender + Local (share in %) 54.9 54.9 54.5 54.0 54.9 55.0 55.0

Source: Federal Statistical Office (2018), Fachserie 14, Reihe 4; Tax revenue estimates of the „Working Party on Tax Revenue Forecasting“, 153rd
Meeting from May 7 to May 9, 2018 in Mainz (Rhineland-Palatinate); Own diagram.

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1.2 Basics of Economic Policy
Economic Policy

 Economic policy is part of general politics.

 Economic policy means government interventions of institutions with

legitimacy into the economy.

 Institutions with legitimacy:

• State authorities
• Institutions which are acting on state commission

 Economic policy is used to accomplish particular economic objectives.

• Monetary policy → Monetary goals
• Fiscal policy → Fiscal goals

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1.2 Basics of Economic Policy
Economic Policy and Fields of Action

𝑈2

𝐵
Redistribution policy

Allocation policy

Stabilization
𝐴 policy 𝐷

𝑈1

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1.2 Basics of Economic Policy
„Magic Square“ in Germany
Continuous and
Reasonable
Economic Growth

High
Price Stability
Employment Level

External Economic
Balance

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1.2 Basics of Economic Policy
Primary Goal, Intermediate Goals, and Instruments

Primary goal Free Market Competition

Restriction of Prevent possible

Free Market
Intermediate goals Market anti-competitive
Access
Concentration practices

Prohibition of
Anti-trust law, Cartel prohibition, discrimination of
Instruments merger control, prohibition of new competitiors,
legal unbundling concerted practices reduction of current
barries for imports

Source: Berg, Hartmut, Cassel, Dieter und Karl-Hans Hartwig (2012), Theorie der Wirtschaftspolitik, in Apolte, Th. et al. (Hrsg.), Vahlens Kompendium
der Wirtschaftstheorie und Wirtschaftspolitik. Bd. 2, 9., überarbeitete Aufl., 316.

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1.3 Basics of Fiscal Policy
Fiscal Policy

 Fiscal policy deals with the impacts of public expenditure and revenue. Subject
of analyses is public finance.

Public Finance

„Centuries has passed, mixed feeling about government remain, and much of the
controversy still centers around its financial behavior. This book is about the taxing and
spending activities of government, a subject usully called public finance.
This term is something of a misnomer because the fundamental issues are not financial
(that is, relating to money). Rather, the key problems relate to the use of real resources.
For this reason, some authors prefer the label public sector economics or simply public
economics.“

Source: Rosen, Harvey S. and Ted Gayer (2014), Public Finance. 10th Global Edition, McGraw-Hill, p. 2.

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1.3 Basics of Fiscal Policy
Decision Analysis and Impact Analysis

Impact Analysis

Politics Economy

Decision Analysis

Source: Blankart, Charles B. (2017), Öffentliche Finanzen in der Demokratie. 9., vollständig. überarb. Aufl., Vahlen, München, p. 11.

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1.3 Basics of Fiscal Policy
Functional Finance

 Fiscal poliy is part of economic policy.

 Abba P. Lerner (1943), Functional Finance and the Federal Debt, Social Research
10(1), 3851.

 Richard A. Musgrave (1959), The Theory of Public Finance.

 Three different „branches“ in public budgets.

 Aligned with:
• Allocation objective
• Redistribution objective
• Stability objective

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1.3 Basics of Fiscal Policy
Objectives of Fiscal Policy

 Derived objectives:
• Budget targets

• Internal efficiency (save money, provision of public gods and services on minimum costs)

 Given objectives:
• Regulatory framework

• Allocation objectives

• Redistribution objectives

• Stability objectives

• (Environment objectives)

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1.3 Basics of Fiscal Policy
Responsibilities for Fiscal Policy

 Territorial entities (e.g. Germany)

• European Union (EU)
• Federation („Bund“ in Germany)
• Federal states („Laender“ in Germany)
• Municipalities

 Public Sector in a broader sense

• Social security
- Statutory unemployment insurance, statutory pension insurance
- Statutory health insurance, statutory nursing care insurance
• Estate-based representations
- Chamber of Commerce, Chamber of Crafts, Chamber of Labor
- Bar Association, Medical Association
- Etc.
• Special funds
• Public enterprises

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1.4 Basics of the Public Sector
Definition of „Public Sector“

 Question: What is „Public Sector“?

 Provision of public goods vs. provision of private goods

 Typical functions of government

 Distinction of principles of action

 Excercise of sovereign authority

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1.4 Basics of the Public Sector
Elementary Characteristics of the Public Sector

 Sovereign Power
State is the one and only institution that can excercises economic coercion. Private
interactions are based on voluntariness.

 Responsibility
Coercion is limited by constitution and laws. Political-administrative decision-makers
gain legitimacy by democratic elections.

 Collective Decision-Making
State action is result of a collectice decision-making process (elections, parliaments,
budget process etc.).

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