Note of Public Finance

Iskender Bektenov Note of Public Finance
Assistant Professor Tuğçe AKDEMİR

Ankara University Faculty of Law takdemir@ankara.edu.tr
Week – 1 – PUBLIC EXPENDITURE

Public expenditure is the expenditure incurred by the public authorities to satisfy those
collective needs which the people in their individual capacity are unable to satisfy efficiently.
PUBLIC EXPENDITURE
1. Activities to secure a reallocation of resources,
2. Re-distributive activities,
3. Stabilization activities, and
4. Commercial activities.
The major theories of public expenditure are:

 1. Wagner’s law, and
 2. Peacock-Wiseman hypothesis
1. According to Wagner, the basis for the theory consists of three distinct components:
 Social progress,
 New functions of the state, and
 Public goods.
2. Peocock-Wiseman hypothesis involves three related elements:
 Displacement effect,
 Inspection effect, and
 Concentration effect.
- According to Colin Clark, inflation in an economy occurs when the share of the government
sector, as measured in terms of taxes and other receipts, exceeds 25 percent of the aggregate
economic activity in the country.
Similarities Between the Public and Private Expenditures

 The aim of both finances is to obtain maximum benefits or returns with the minimum
possible spending.
 An element of flexibility is prevalent in both finances, though it is seen more in the case of
public expenditure.
 A number of ways are available for both finances to raise to meet expenditure. But the
public authorities possess the powers to raise resources for meeting their requirements
which an individual lacks.
Dissimilarities Between the Public and Private Expenditures
 Motive of Expenditure
 Elasticity
 Future Considerations
 Measurement of Benefits
 Extravagant
 Factors Determining Expenditure
Public Expenditure
Public Expenditure in a Narrow Sense: Expenditures for services performed by the central
administration.
Public Expenditure in a Broad Sense: Central government expenditures, local government
expenditures, expenditures for central and local government institutions' services.
AIMS AND OBJECTIVES OF PUBLIC EXPENDITURE

 The traditional economists had confined the functions of the state mainly to providing
protection to the people from internal rebellion and foreign aggression, administration of
justice, and provision of public works.
 Modern economists conceive that public expenditure has a positive role to achieve the
goal of maximum social welfare. Public expenditure is much essential in correcting market
failure and providing public goods.
Public expenditure has a vital role to play in the following aspects:

 For the provision of collective wants,
 Balanced regional development,
 Stabilization of market economy,
 Creation of infrastructure,
 Better distribution of income,
 Development of industrial and potential resources,
 Power generation.
The major objects of public expenditure:

 Administration of law and order and justice.
 Maintenance of police force.
 Maintenance of the army and provision of defense goods.
 Maintenance of diplomats in foreign countries.
 Public administration.
 Development of industries.
 Development of transport and communication.
 Provision for public health.
 Creation of social goods.
REASONS FOR THE INCREASE IN PUBLIC EXPENDITURES
 The new concept of the welfare state
 Requirements of modern war
 Urbanization
 Economic planning
 Technological change
 Rural development
 Functional finance
 Public debt
 Rise in the price level
 Income elasticity of demand
 Evolution of democracy
Reasons for the Seemingly Increase in Public Expenditures
 Decrease in the Purchasing Power of Money,
 Changes in the Budget Method and Technique,
 Growth of Population and Area for Political Reasons,
 Performing Public Services with Money.
Reasons for the Real Increase in Public Expenditures
 Wars- Military Reasons,
 Population Growth-Social Reasons,
 Changes in the Understanding of the State – Political Reasons,
 Economic Causes,
 Technological Reasons.
The canons of public expenditure
 Canon of benefit,  Canon of elasticity,
 Canon of economy,  Canon of surplus,
 Canon of sanction,  Canon of productivity,
 Canon of scrutiny,  Canon of coordination.
The canons of public expenditure
1. Canon of Benefit – This canon suggests that every public expenditure must ultimately be
utilized for the maximum benefit of the people as a whole.
2. Canon of Economy – Public expenditure should be free from waste and extravagance. The
economy does not mean miserliness or niggardliness.
3. Canon of Sanction – All public expenditures should be authorized by proper authority and
money sanctioned for one purpose should not be spent for another purpose.
4. Canon of Scrutiny – The entire system of expenditure should be under rigorous audit and
treasury control.
5. Canon of Elasticity – Expenditure must be capable of adjustment according to the
changes in the tax revenue. Expansion or the contraction of public expenditure should be
gradual.
6. Canon of Surplus – This canon insists on a balanced surplus budget as in the case of
private finance. Neither continual surplus nor deficit budgeting is desirable. The canons of
public expenditure
7. Canon of Productivity – Public expenditure should be used to encourage production so as
to drive the economy towards full employment and on the road to stable growth.
8. Canon of Coordination – In a federal setup, several layers of government such as central,
state, district, and local panchayats are functioning. All have their own budget and incur
expenditures according to their means.
CLASSIFICATION OF PUBLIC EXPENDITURE

 The systematic arrangement of different items of state expenditure on some scientific and
economic basis which enables us to distinguish between the nature and effects of
different kinds of public expenditure.
1. Administrative Classification
Organic Classification Functional Classification
 It is the classification according to the  It is based on the activities of

location and existence of the legal administrative units aimed at realizing
status of administrative units. the benefit of public services.
 The aim is to determine the cost of the

services performed through the
 It is used in budgeting, in the use of administrative units.
appropriations, in the methods applied  In other words, if our purpose is to
to expenditures, in auditing comprehend what kind of public
expenditures, and in accounting for services are carried out by the
expenditures. government and what amount of
public funds are allocated to these
services, we need a functional
classification of public expenditure.
2. Scientific Classification (A. Real Expenditures and Transfer Expenditures)

I. Real Expenditures
Current Expenditures Investment Expenditures
They are repeated every year and included in They increase the accumulation of capital
the budget every year. goods.
Their benefits are consumed within the year They are mostly made for durable goods.
they are used.
The benefits they provide are for periods of
It needs to be done constantly
more than one year.
They are intended for consumption. They increase productivity.
They are associated with the savings-
investment balance.
II. Transfer Expenditures

 Transfer expenditures are made without the purchase of any goods and services from the
economy. These are:
 Direct and Indirect Transfers,
 Income and Capital Transfers,
 Productive and Non-Productive Transfers,
 In-kind, Cash, and Social Transfers.
B. Productive Expenditures – Non-Productive Expenditures
 Productive expenditures: All expenses that increase the overall production power of the
economy.
 Non-productive expenditures: They do not have an effect that increases national income.
Examples include expenditures for internal and external interest payments.
C. Ordinary and Extraordinary Expenditures
 The expenditures foreseen during the preparation of the budget are ordinary
expenditures, while the unforeseen ones are extraordinary expenditures.
 The expenditures that recur every year in the state budget are ordinary expenditures, and
those that do not are extraordinary expenditures.
 Expenditures whose benefits are not continuous are ordinary expenditures, and those
that are continuous are extraordinary expenditures.
D. Mandatory Expenditures- Non-Mandatory Expenditures
 Personnel, repair-maintenance, and similar expenses are compulsory expenditures that
must be repeated every year concerning both the central and local administrations.
 Although there is an obligation to include the allowance in the budget for the provision of
education, health, and public works services, it is a non-mandatory expenditure since it is
freely acted in selecting and determining their volume, size, and prevalence as the
amount or volume of the allowance is not determined in advance.
E. Classification by Benefit Criterion
 Expenditures that benefit the whole of society
 Expenditures that benefit only a part of the society but ultimately benefit the whole
society.
 Expenditures that are beneficial to the whole society but provide special
 benefits to some individuals
 Expenditures that provide special benefits to individuals
Week – 2 – EFFECTS OF PUBLIC EXPENDITURE

1. Effects on Production
 Ability to work, save and invest,
 Desire to work, save and invest, and
 Diversion of resources between different employments and localities.
EFFECTS OF PUBLIC EXPENDITURE – 1. Effects on Production

A. Ability to Work, Save and Invest
 Public expenditure may increase the efficiency of a person if it is directed to socially
desirable channels.
 Public expenditure may directly or indirectly increase a person’s or
 the nation’s margin of saving.
 Public expenditure can promote production and employment.
B. Desire to Work, Save, and Invest
 Pensions, unemployment allowance, provident funds, and other government payments
provide security to persons and, therefore, reduce their desire to work, save and invest.
 But conditional grant, e.g. sickness benefits do not diminish the desire to work and save
rather, they may increase the desire to work.
C. Division of Economic Resources
 The optimum allocation of resources leads to the maximization of national income and
welfare.
 Expenditure for the construction of public parks and public libraries deprives the people
of more free air and recreation and an atmosphere for intellectual upliftment.
 Public expenditure can bring about a better allocation of economic resources as between
the present and the future.
EFFECTS OF PUBLIC EXPENDITURE
2. Effect on Distribution
 Public expenditure should be used to reduce inequalities in income distribution.
 Dalton has stated that like taxes, public spending too can be made progressive.
 Public expenditure on education, health, medical care, subsidized housing, etc., is
directed to help the poor and lower-income groups.
 Public expenditure, if planned carefully and executed sincerely will help in achieving the
redistribution of income in favor of the poor, of course, taxation is used to reduce the
income and wealth of the higher income groups.
3. Effect on Employment
 Classical economists believed that there is no possibility of overproduction and
unemployment, and the capitalist system was self-adjusting.
 Keynesian diagnosis of the basic cause of the ills of a developed market economy was the
deficiency of effective demand which was caused on account of a low marginal propensity
to consume coupled with a low marginal propensity to investment.
 Public expenditure will lead to an increase in effective demand and also employment
opportunities.
4. Effect on Economic Stability
 According to Samuelson economic stability implies:
 Absence of large ups and downs in full employment,
 Absence of large-scale involuntary or disguised unemployment; and,
 Absence of price inflation due to the lack of excess effective demand.
 Economic stability refers to a situation when the economy follows the line of full potential
national output.
 Economic instability is a common feature of all capitalist economies.
 According to Keynes, instability is caused by the deficiency of aggregate demand.
5. Effect on Economic Development
 Economic development in two ways:
 By providing an economic base in the form of economic and social overheads,
 By increasing economic productivity directly through assistance for the establishment of
new industries and the introduction of advanced agricultural practices.
SOURCES OF PUBLIC EXPENDITURE LAW
 The source of law is the organ that creates the law.
 These are the legislature that makes the laws, the executive branch that implements the
laws, and the judiciary that resolves disputes.
 The sources of positive law can be divided into two as primary-auxiliary sources in terms
of their imperative and binding qualities.
SOURCES OF PUBLIC EXPENDITURE LAW

1. Primary (Binding- Primary) Resources
2. Auxiliary (Secondary-Subsidiary) Resources
SOURCES OF PUBLIC EXPENDITURE LAW – 1. Primary (Binding- Primary) Resources – A.
Constitution
A. Constitution
 The highest norm in the hierarchy of norms is the Constitution.
 The provisions of the Constitution are the basic norms.
 The Constitution constitutes the source of the provisions on public expenditures and the
laws on public expenditures must be in accordance with the Constitution.
 Budget and expenditure principles are included in detail in our Constitution. Therefore,
expenditure law takes its source from the existence of the state.
B. Law
 The laws that are the source of the expenditure law consist of procedural laws, budget
laws, personnel laws, laws on public purchases and sales, social security laws, other
laws, and organizational laws.
 The Public Finance Management and Control Law No. 5018 is one of the basic laws of
expenditure law. This law is also bound by the principle of the rule of law.
 Budget law is among the main sources of expenditure law. The expenditures of public
administrations and public legal entities other than public economic enterprises are made
through annual budgets.
There are many laws and regulations regulating the procedures and principles of public
personnel employment. The main ones are:
 Civil Servants Law,
 Turkish Armed Forces Personnel Law,
 Law on Judges and Prosecutors,
 Higher Education Personnel Law,
 Specialized Sergeant Law,
 Specialist Gendarme Law.
SOURCES OF PUBLIC EXPENDITURE LAW – 1. Primary (Binding- Primary) Resources – B. Law
Travel Expense Law: It is one of the least amended laws. It regulates the money paid to civil
servants in cases where they are temporarily assigned at home and abroad or when their place
of duty is changed.
Social Security Laws: It is the law that regulates the procedures and principles regarding the
functioning of social insurance and general health insurance, which assures individuals in terms
of social insurance and general health insurance, determines the persons who will benefit from
this insurance and the rights to be provided, the conditions for benefiting from these rights, the
financing and coverage methods.
Income and Expenditure Laws: Both the expense laws that form the basis for the expenditures,
the income laws that allow the collection of revenues such as taxes and the regulations showing
their implementation,
Presidential Decrees, circulars, communiqués, instructions, and rulings are important legal
regulations in public financial management.
Labor Laws: The purpose of these laws is to regulate the rights and responsibilities of employers
and workers employed on the basis of an employment contract regarding working conditions
and working environments.
Law of Expropriation: It is the process of buying an immovable property within the scope of
private property of real or legal persons by paying for it and using it for a project that can be
realized for the public benefit when the public interest requires it.
Organic Laws: There are also provisions authorizing and authorizing some public expenditures in
the organization laws of institutions in the public sector. These provisions must comply with the
rule of law.
Public Procurement Law: Construction works, and public procurement of goods and services are
the subjects of the Public Procurement Law.
Public Procurement Contracts Law numbered 4735: The purpose of this law is to determine the
principles and procedures regarding the issuance and implementation of contracts for tenders
made in accordance with the Public Procurement Law.
SOURCES OF PUBLIC EXPENDITURE LAW – 1. Primary (Binding- Primary) Resources – c.
International Agreements
C. International Agreements
 In terms of expenditure law, both being an international party and being a member of
supranational organizations impose a number of financial obligations.
 These are membership expenditures, expenditures made due to being a member of an
organization, sending soldiers to another country, and public expenditures such as
compensation paid to the government due to international relations.
D. Presidential Decree
I. Ordinary Presidential Decree
 When Article 161 of the 1982 Constitution is examined, it will be seen that the Ordinary
Presidency Decree cannot be the source of the budget.
 The article is stipulated as follows: "The allowance given with the central government
budget shows the limit of the amount that can be spent. Budget law stating that the
amount that can be spent can be exceeded by the Presidential decree cannot be
stipulated."
II. Presidential Decrees in State of Emergency
 What is meant by the existence of the state of emergency is the existence of a state of
emergency declared according to the conditions stipulated in the Constitution.
 Thus, if regulations are made on public expenditures or new regulations are introduced in
the specified periods, the state of emergency will be a compulsory resource to comply
with the Presidential decree.
E. Presidential Decision
 The Presidential Decision is one of the sources of public expenditure law arising from the
executive body.
 With the decision of the President, just like the ordinary period presidential decree,
according to Article 161 of the Constitution, no changes can be made in the budget in
terms of expenditure.
F. Regulation
 Regulations cannot be contrary to the Constitution, laws, Presidential Decrees, and
Presidential Decisions according to the hierarchy of norms.
 Regulations can also regulate formal obligations in public expenditures.
 The regulations issued in accordance with the State Procurement Law are the general
regulation on the production, allocation, lease, and sale of land, housing, and workplace
of municipalities, sales of state-owned immovable property, bartering, leasing, the
establishment of non-material rights of property, regulation on wages and eviction, and
regulations on the allocation and transfer of immovable properties of public
administrations.
G. Communiques
 The government may issue a general communiqué to carry out its practices.
 A general communique is an explanatory and interpretative text of the procedures of the
administration.
 In the application, both binding and non-binding communique can be issued.
H. Constitutional Court Decision

 One of the duties of the Constitutional Court is to audit the compliance of the laws with
the Constitution.
 The constitutional court cannot take direct action on this issue, and a lawsuit must be
filed. Not everyone can apply to the Constitutional Court with the claim of
unconstitutionality.
 The jurisdiction of the Constitutional Court is limited to two issues. These are:
 The Constitutional Court cannot be applied against the interstate agreements duly
entered into force.
 No lawsuit can be filed in the Constitutional Court with the claim that the Presidential
decrees issued in the state of emergency and war situations are contrary to the
Constitution in terms of form and substance.
I. Decision on Board of the Unification Of Case-Law
 Due to the binding nature of all judicial bodies, until it is changed, decisions to unify case
law constitute the main source in public expenditure law.
 Decisions to merge jurisprudence provide unity of practice, eliminating hesitations that
arise in practice due to separate jurisprudence.
J. Decisions of the Court of Accounts
 Decisions of the General Assembly of the Court of Accounts, that is, decisions of the
General Assembly, decisions of the Board of Appeal, and decisions of the chambers, are
one of the most important resources in terms of public expenditure law in terms of the
aspects that direct public expenditures and lead to expenditures.
 Because the Court of Accounts is a Constitutional institution.
 The Court of Accounts is the body that audits expenditures.
2. Auxiliary (Secondary-Subsidiary) Resources

a. Scientific Opinions
 The opinions expressed by people who operate at the theoretical or practical level in the
field of law about legal issues and problems are called scientific opinions.
 Scientific opinions, on the one hand, explain what the applicable legal rules called law are
and how they should be interpreted, on the other hand, they shed light on the legislative
body by showing the deficiencies of these rules and the ideal ones.
b. Traditions
 As a rule, traditions are not among the written sources.
 In Turkish law, traditions become the source of law provided that the law refers to it.
 As the source of the law, traditions are rules that are constantly applied in society and
supported by the power of the state, which is believed to be obliged to comply.
THE RELATIONSHIP BETWEEN PUBLIC EXPENDITURE LAW AND OTHER DISCIPLINES

1. Relationship with Constitutional Law
 In the relationship between the expenditure law and the constitutional law, how, where
and within which limits the government will spend should be regulated in democratic
regimes and constitutions.
2. Relationship with Administrative Law
 Considering the organizations where expenditures are made, all administrations in central
management, budgets are spending organizations.
 Although the problems of the spending organizations regarding the organization and
personnel are administrative problems, the expenditure transactions are also
administrative actions.
 Therefore, the elements of reason, subject, authority, form, and purpose to which
administrative procedures are subject are also valid for expenditures.
3. Relationship with Criminal and Judicial Law
 Whether public expenditures are carried out in accordance with the law is closely related
to the law of expenditure and criminal and judicial law due to the fact that they are
subject to the supervision of the law and execution as well as the supervision of the
judiciary.
 Public officials who are authorized and responsible for the expenditure are inspected and
punished according to procedural law. This relationship usually arises as a result of
unlawful acts of those who use public money.
4. Relationship with Private Law
 Private law has given many principles and concepts to the law of expenditure.
 If the government is going to contract at a certain stage of the expenditure process, if it is
going to purchase or lease goods, it is considered as a private law contract because the
parties to that contract are equal.
5. Relationship Between Economy and Finance
 As a tool of fiscal policy, the government can have various effects on the economic
structure through public expenditures.
 It is seen that the economic and financial decisions of the government and their
applications in this direction have multifaceted effects on economic structure and
transactions.
 Expenditure law is also closely related to public finance. Events that occur during the
provision of public service by financial means to meet social needs are financial events.
One of the tools required to meet public needs is public expenditures, which is directly
related to the law of expenditures.
6. Relationship with Accounting and Business
 The activities of the government such as investing through public expenditures, training
qualified personnel, and providing justice and security services have also indirectly
affected business policies. In addition, the state is effective in the preferences and
decisions of businesses through incentives or similar tax expenditures that are accepted
as public expenditures.
7. Relationship Between Political Science and Public Administration
 The rules on expenditure law affect political science, and the perspective on political
science affects expenditure law. Expenditure law also has aspects that prevent political
decisions in accordance with the feature of spending according to certain legal rules.
 It is closely related to public administration and expenditure law in terms of determining,
authorizing, coordinating, authority, and supervising officials and duties. Because public
expenditures are made by public officials.
8. Relationship Between Sociology and Social Psychology
 Expenditure law makes a great contribution to the realization of social life with a high
standard of living through the use of public funds and financial instruments.
 If the rules on spending law are not transparent, fair, reliable, and competitive, they will
adversely affect the trust and belief of citizens, taxpayers, and firms in the government.
 The regulation of the rules related to spending law in a way to realize these principles in
terms of social psychology means that taxpayers' confidence in the state will increase in
giving taxes for the financing of public expenditures.
9. Relationship with Statistics and Planning
 Statistical science is of great importance in terms of all financial events from making
public expenditure predictions according to political decisions and preferences in the
political process to the effective and successful execution of economic and financial
policies to be implemented.
 In this respect, in order to plan public expenditures and to spend more effectively and
efficiently, expenditure law should deal with statistics.
 In Law No. 5018, which is one of the main sources of expenditure law, financial planning,
strategic plan, statistics, and reporting are considered necessary.
10. Relationship with International Law
 The financial obligations of states to international organizations and various
 financial aids are important in terms of public expenditures.
 Considering these developments, it is clear that it has a connection with international law
regarding expenditure law and international financial relations.
Week – 3 – PUBLIC FINANCE MANAGEMENT AND CONTROL LAW NO. 5018

 The first financial organization in the Ottoman Empire was established between 1359 and
1389 in the time of Murat I, and it was developed during the reign of Mehmet the
Conqueror.
 The General Accounting Law No. 1050, which entered into force in 1927, could not fully
meet today's needs due to some deficiencies, and as a result, the Public Finance
Management and Control Law No. 5018, which is more appropriate to today's conditions,
entered into force.
 Public Finance Management and Control Law No. 5018, which is one of the main sources
of expenditure law arising from the legislation, was published in the Official Gazette on
24.12.2003 and entered into force in 2006 to use public resources effectively,
economically, and efficiently.
The purpose of this Law is to regulate.
 the structure and functioning of public financial management,
 the preparation and implementation of the public budgets,
 the accounting and reporting of all financial transactions, and
 financial control in line with the politics and objectives covered in
 the development plans and programs,
in order to ensure accountability, transparency, and the effective, economic, and efficient
collection and utilization of public resources.
PUBLIC FINANCE MANAGEMENT AND CONTROL LAW NO. 5018

 This Law covers the financial management and control of public administrations within
the scope of the general government, encompassing public administrations within the
scope of the central government, social security institutions, and local administrations.
 Without prejudice to the provisions of international agreements, the utilization and
control of European Union funds and domestic and foreign resources allocated to public
administrations shall be subject to the provisions of this Law.
Fiscal Transparency
 Fiscal Transparency is knowing how public resources are used by whom and for what
purpose.
 Thanks to a transparent system, it is ensured that the necessary information about how
and for what purposes the managers use the public resources reaches the citizens and
prevents the managers from using the public resources in line with their own interests,
and thanks to transparency, the efficiency and efficacy in the use of public resources and
the trust in public administration is increased.
Fiscal Transparency
1. The first dimension implies that the functioning and structure of the state and the fiscal
policies to be implemented are open to the public.
2. The second dimension, more specifically, enables the public to access timely, reliable,
comprehensive, and internationally comparable information about the obligations
entered into and the activities carried out on behalf of the government, whether
undertaken within or outside the central government.
3. The third dimension is related to organizational behaviors. Determining the boundaries of
the relations between appointed bureaucrats and elected deputies and ministers,
freedom of information and linking it to systematic rules in terms of public officials,
preparing the ethical rules and framework of the relationship between the politician-
press-bureaucrat-business world, public procurement processes, recruitment of public
personnel, and transparency of the principles of employment.
Advantages of Fiscal Transparency:

 Fiscal transparency plays an important role in the successful realization of a
management's medium-term fiscal policies.
 Transparency, as one of the most important means of ensuring accountability, leads to the
removal of unsustainable policies from power in countries where democracy is dominant.
 A transparent financial system facilitates the distribution of responsibilities in the public
sector by allowing full, accurate, and timely access to information and knowing who does
what in the hierarchy.
 Fiscal transparency increases the efficiency of public expenditures.
 Fiscal transparency increases trust in the government and creates an economic and social
impact.
 Transparency allows the public to monitor how resources are used.
Disadvantages of Fiscal Transparency:

 Fiscal transparency has an impact on costs. Fiscal transparency requires technical
equipment to make information accessible.
 The accounting and reporting system should be constructed in such a way as to enable
the evaluation of financial activities. This requires an upfront cost.
 Transparency carries risks as a result of the behavior of a particular group in policies that
may be contrary to the general welfare.
Fiscal Discipline
 Public financial management shall ensure fiscal discipline.
 It is defined as the balance that may occur between public expenditures and public
revenues that does not lead to negative effects on basic economic indicators.
 The concept of 'financial rule‘ which imposes limits on public expenditure and borrowing,
binds expenditure and borrowing to rules, and fulfills all these within the framework of
laws, is extremely important in ensuring Fiscal Discipline.
 Financial rules, which must be absolutely necessary to ensure Fiscal Discipline, must be
established on a legal basis with different legal regulations and policy rules such as laws,
constitutions, international treaties, and budget plans.
 Determining the budget methods in the medium and long term in order to realize fiscal
discipline, scrutinizing and criticizing the existing budget methods, and establishing a new
budget system,
 Ensuring Fiscal Discipline through functional classification in expenditures and effective
auditing of public expenditures in the financial structure,
 Issues such as institutional reform discussions come to the fore in order to ensure
effective supervision.
 While ensuring Fiscal Discipline, the balance between revenues and expenditures should
be achieved without causing macroeconomic problems for the public sector.
The Role of Fiscal Discipline in the Budget

 It should be ensured that public revenues and expenditures are included in the budget as
much as possible.
 Expanding the scope of the budget the point of ensuring Fiscal Discipline stems from the
government's idea of supervising and controlling expenditures by providing more Fiscal
Transparency.
 Fiscal Discipline must be ensured in solving the economic problems related to the budget
deficit. Therefore, there is a direct relationship between budget deficits and Fiscal
Discipline.
 Public expenditures must be brought under control. In order to keep expenditures under
control, it must be determined by laws and the constitution that public expenditures will
not exceed a certain percentage of GNP every year.
 Public revenues should be disciplined. Exceeding a certain rate of tax rates should be
prevented by law and the constitution. In particular, regulations regarding tax exemption,
tax exemption, tax reduction, and rates are required.
Accountability
 Accountability is a concept that questions whether a given job or task is actually done
properly.
 Accountability has functions such as providing democratic control, increasing the
reliability of public administration, and improving performance.
 Those who are assigned duties and vested with authorities for the acquisition and
utilization of public resources of all kinds are accountable vis-à- vis the authorized bodies
and responsible for the effective, economic, and efficient acquisition, utilization,
accounting, and reporting of the resources on the basis of law, as well as for taking
necessary measures to prevent the abuse of such resources.
The indicators of effective accountability are as follows;

 Clarity of roles and responsibilities: The roles and responsibilities of the parties involved in
accountability relationships should be well understood and agreed upon.
 Clear performance expectations: The objectives pursued, the expected achievements, and
the constraints considered should be clear, understandable and agreed upon.
 Balancing capacities and expectations: Performance expectations should be clearly
correlated and balanced with each party's capacity. Effective accountability is
strengthened through clarity in relationships and a balance between resources and
expected results.
 Reliability of reports: Information should be reported reliably and in a timely manner to
demonstrate performance achieved and what has been learned. Reports must be
believable, timely, and useful in terms of the information they contain.
 The rationality of review and correction mechanisms: Identifying successes and difficulties
related to the performance achieved by those who will be held accountable and making
necessary adjustments.
PUBLIC SECTOR
 Definition: – The fulfillment and direction of the duties of the state and other public
institutions are mainly carried out by the public sector within public finance.
 The public sector can be addressed in a narrow or broad sense:
 The public sector in a narrow sense: includes central government organizations,
 The public sector in a broad sense: includes central and local government organizations,
parafiscal organizations, and public enterprises.
Classification of the Public Sector in the Public Finance Management and Control Law
General Administration
The functions that define general administration are as follows:
 The production of goods and services that cannot be marketed and priced for social
consumption,
 Redistribution of income in various ways,
 Fulfillment of various public purposes other than commercial ones.
Tasks assigned to general administration can be listed as follows:
 Protection of national security,
 Law enforcement activities,
 Utilities,
 Encouragement and support activities,
 Internal order activities,
 Planning activities.
The budgets of the general government:
 central government budgets,
 social security institution’s budgets and,
 local administration budgets are prepared and implemented.
Classification of the Public Sector in the Public Finance Management and Control Law – 1.
General Government
A. Public Administrations within the Scope of the Central Government
 Legislative, executive, and judicial organs, ministries within the scope of these, and
related organizations affiliated to ministries but do not have a separate legal entity other
than the general budget are included in the central government.
 Public administrations within the scope of central government: refer to public
administrations in charts I, II, and III of the Public Finance Management and Control Law.
General Government – a. Public Administrations within the Scope of Central Government
I. Administrations with General Budget
 The general budget refers to the budgets of public administrations, which are included in
Chart I of this Law and which are under the legal entity of the government.
 General budget administrations are administrations within the scope of the same cash
administration within a single legal entity, without their own assets and income, and
within the scope of the principle of Unity of Treasury.
 The number of public administrations under the general budget is 41.
II. Administrations with Special Budget
Special budget refers to the budget of each public administration, which is included in chart II of
this Law and established as affiliated or related to a ministry for the performance of a defined
public service, to which revenues are allocated, and which is authorized to spend from such
revenues, with the establishment and operation principles arranged through law or Presidential
decree.
 Organizations with Special Budgets;
 They have a separate legal entity.
 With the legislation, they can be assigned in areas such as social, scientific,
 technical, and cultural.
 They have a certain degree of autonomy.
 They have their own property.
 They have their own source of income.
 They carry out their own cash management.
iii. Regulatory and Supervisory Agencies
The regulatory and supervisory agency budget is the budget of each regulatory and supervisory
agency, which is included in chart III of this Law and established in the form of a board, agency or
supreme board by-laws, or the Presidential decree. These institutions are:
 Radio and Television High Council
 Information and Communication Technologies Authority
 Capital Market Board
 Banking Regulation and Supervision Agency
 Energy Market Regulation Board
 Public Procurement Agency
 Competition Authority
 Public Oversight, Accounting, and Auditing Standards Authority
 Personal Data Protection Authority
 Nuclear Regulatory Authority
 Insurance and Private Pension Regulation and Supervision Agency
General Government
B. Social Security Institution
 The Social security institution budget refers to the budget of each public administration,
which is included in Chart IV and established by law or Presidential decree to provide
social security services.
 According to Law No. 5018, social security institutions in Turkey are as follows:
 Social Security Institution
 Turkish Employment Agency
C. Local Administration
 Article 127 of the 1982 Constitution: «Local administrations are public corporate bodies
established to meet the common local needs of the inhabitants of provinces, municipal
districts, and villages, whose principles of the constitution and decision-making organs
elected by the electorate are determined by law. »
 Article 12 of Law No. 5018: «Local administration budget refers to the budgets of public
administrations within the scope of the local administration. »
 According to Law No. 5018, local administrations are as follows:
 municipalities,
 Special provincial administrations and
 To associations and administrations related to or established by them, or where they are a
member which performs public activities with authorities limited to specific geographic
regions and services.
Public Sector Excluded from Public Financial Management and Control Law No. 5018
A. Public Enterprises
 Public enterprises or state-owned enterprises are established for commercial, economic,
social, and financial reasons such as operating in the economy like a private sector
organization through some institutions of the state, providing basic inputs, contributing to
social and regional development, eliminating urbanization and employment problems,
and increasing the income level.
 Public enterprises are institutions carried out by the government in accordance with the
rules of private law in the field of the market economy.
Public Economic Enterprises is the common name of Economic Governmental Organizations
and Public Economic Organization. Accordingly:
 Public Economic Enterprises: The enterprises that belong to general budget
administrations and operate according to commercial principles in the economic field.
(Halk Bank)
 State-owned Enterprises: The enterprises that are established to produce and market
monopoly goods and basic goods and services and have a dominant public service nature.
 Subsidiaries: Incorporated companies consisting of an enterprise or a group of enterprises
that belong to more than 50% of the capital of a public economic enterprise or a state-
owned enterprise.
 Affiliates: Joint stock companies in which state-owned enterprises or their subsidiaries
own at least 15% and at most 50% of the capital. Affiliates continue their activities entirely
subject to the provisions of private law.
B. Revolving Funds
 Revolving fund enterprises carry out their activities separately from the general budget
outside the general financial management and in accordance with the provisions of
private law.
 No separate budget is made by the state for these enterprises.
The general objectives of the establishment of circulating capital enterprises can be considered
as follows:
 Evaluation of the spare capacity in the economy,
 Meeting a certain demand for goods and services,
 Eliminating the negative consequences of strict implementation of budget principles,
 Providing additional employment areas.
They also have a special purpose. These are:
 Greater financial autonomy,
 More administrative autonomy,
 Freedom in expenses,
 to provide special opportunities and privileges.
C. Funds
 Funds are money obtained from resources allocated to achieve a specific purpose and
kept available in a special account to be spent when necessary.
 Budgetary Funds: Funds that receive their resources from the budget. The revenues of
these funds are covered by transfers from budgets.
 Non-Budgetary Funds: These are funds that provide their income from outside the
budget as per their own special laws. The Turkey Promotion Fund is an example of this.
 Hidden Funds: Although it seems to be a compulsory saving, aid, or contribution in line
with its purposes, it has functions such as closing the public sector financing deficits at
low costs, spreading the domestic debt maturity to the long term, and taking resources
out of the budget.
The reasons for the failure of the fund system are as follows:
 Variety,
 Deviations from the principle of benefit,
 Establishment of fund tradition,
 Being unsystematic,
 Lack of Supervision,
 Repetitions,
 The emergence of resource problems over time,
 Replacing the general budget.
Budgetary fund in force: Support and Price Stability Fund.
Non-budgetary funds in force: Promotion Fund, Savings Deposit Insurance Fund, Privatization
Fund, Defense Industry Support Fund, Social Assistance and Solidarity Promotion Fund.
Week – 4 – PAYMENT AND RECORDING OF PUBLIC EXPENDITURES

Payment Process of Public Expenditures
1. Legal Basis,
2. Release of Allowance,
3. Issuance of Allowance Submission Document,
4. The commitment of Expenses,
5. Accrual of Expenses,
6. Connection to Payment Order,
7. Conducting Preliminary Financial Control,
8. Payment of Expenses.
1. Legal Basis
 Public expenditures must be permitted by law.
 In the law, those responsible for the expenditure process are listed as
 Expenditure Authority
 Execution Officers
 Accounting Officers in administrative and financial terms in the expenditure process, as
well as the top managers in administrative terms.
2. Finding and Releasing the Allowance

 The public administrations within the scope of the general budget prepare detailed
expenditure programs and send them to the Presidency.
 Special budget administrations and social security institutions prepare detailed financing
programs and make their expenditures in accordance with these programs.
 The procedures and principles for the preparation, implementation, and monitoring of
 detailed expenditure and financing programs are determined by the Presidency.
 Public administrations cannot spend more than the appropriations in their budgets.
 Unused allowances in the current year are canceled at the end of the year.
 In the state of emergencies such as general or partial mobilization, or declaration of war,
the appropriations in the budgets of the Ministry of National Defense, Gendarmerie
General Command, Coast Guard Command can be combined by not exceeding the totals
of the appropriations of these administrations.
3. Issuance of Allowance Submission Document
 According to Law No. 5018, the expenditure authorities of the central organization of
public administrations can send funds to the units outside the center by issuing an
Allowance Submission Certificate for use in their needs.
 Information such as the amount of the budget appropriations in the organization, the
amount of the free appropriations in the detailed expenditure and financing program, the
needs and demands of the units, the previous year's accruals, the appropriations sending
documents previously issued from the same arrangement and the amounts accrued and
not accrued from these documents are taken into account in the distribution of the
budget appropriations with the appropriations sending the document.
4. Commitment of Expenses
 It is the decision to purchase goods and services that require an expense.
 It can be carried out within the framework of the procedures specified in the Public
Procurement Law numbered 4734 and in accordance with the Public Procurement
Contracts Law numbered 4735.
 Expenditure authorities may spend as much as the appropriations stipulated in the
budget; and expenditure authorities to whom an allowance is given with an allowance
transfer document may spend in the amount of the allocated allowance. In case of
delegation of expenditure authority, financial responsibility is transferred from the
delegant to delegated.
 Undertaking is the obligation to make a work based on the duly regulated contract
principles or the provision of the law or the Presidential decree and to make a payment
for the future in return for the purchase of goods or services. Undertaking cannot be
attempted for jobs that do not have sufficient allowance in the budget. The undertaking
period is limited to the fiscal year.
5. Accrual of Expenses
 It is to determine that the conditions formed due to undertaking are fulfilled.
 Assessment officers investigate and examine the documents of the work and service
performed or purchased goods, date and contract text, if any, whether the work and
service has been performed or the goods have been received, compliance with the terms
of the contract, the price determined with the approximate cost and the price to be paid
for the goods or services, whether the expenditure has been made in accordance with the
budget law, whether the expenditure is within the current allowance limit, and whether
the debt has been expired or not.
6. Connection of Expense to Payment Order

 It is the process of issuing a written order to the accounting authorities so that the
payment order document approved by the expenditure authority can be paid to the
ration holders.
 This order is given by the spending authorities.
7. Subjecting Expense to Pre-Financial Control

 It covers the controls carried out by the public administrations and specified in the
procedures and principles regarding the preliminary financial control, internal control and
preliminary control carried out by the expenditure units and financial services unit within
the framework of the management responsibility of the administrations.
 Whether or not an appropriate opinion is given as a result of the preliminary financial
control is advisory and preventive and is not binding in the implementation of financial
decisions and transactions by the expenditure authority.
 If there is a commitment document that is not subject to preliminary financial control, it
affects the validity condition of the payment and has significant legal consequences.
 The officer issuing the payment order document is responsible for the correct transfer of
the fulfillment documents to the payment order document, as well as the accuracy and
compliance with the legislation of the other documents in the spending process.
 In the expenditure units, the preliminary financial control duty on the payment order
document and the annexed documents is carried out by the realization officer assigned to
issue the payment order document.
8. Payment of Expenses
 It is the process of paying the accrued public expenditure to the ration holders by the
accounting officer based on the payment order document.
 Accounting service is the process of collecting revenues and receivables, paying expenses
to right holders, receiving, storing, giving to those concerned, sending and recording, and
reporting all other financial transactions with money and values that can be expressed in
money.
 The accounting officer is responsible for the performance of these services and the
keeping of accounting records in a duly, transparent, and accessible manner.
PAYMENT AND RECORDING OF PUBLIC EXPENDITURES

Payment Process of Public Expenditures
Providing Advance (Prepayment) or Loan
Depending on whether it is related to the budget of the relevant period, the prepayment is made
in two ways: budgetary and non-budgetary.
Budgetary prepayment;
Work Advances and Credits given to the trustees of the expenditure authority for the purchase
of goods and services
Payments called Personnel Advances consisting of salaries and wage advances that are
determined to be paid before the payment date for various reasons and travel advances given to
the personnel according to the allowance legislation.
PAYMENT AND RECORDING OF PUBLIC EXPENDITURES

Payment Process of Public Expenditures Providing Advance (Prepayment) or Loan Non-budgetary
prepayment refers to
advances given to the contractors regardless of their tangible fixed asset accounts, including the
purchase of goods and services by the Institutions
personnel advances given to be covered from the next year's budget
amounts paid as advances to those concerned from the amounts received to the escrow
account.
2. Special Circumstances in Realization of Public Expenditures

a. Additional Budget
 Additional budget applications are made for insufficient appropriations in the budgets of
the public administrations within the scope of the central government or for the
fulfillment of unforeseen services.
 Additional budget implementation is subject to the condition that it is made by law, and it
is obligatory to specify the source of income for the expense by showing where the
additional allowance request will be met in the budget proposal.
b. Reserve Appropriation
 It is applied for the fulfillment of the services and objectives specified in the central
government budget law, to eliminate the insufficiency of appropriations or for services
not foreseen in the budgets.
c. Covert Appropriation
 It is the appropriation included in the Presidency's budget to be used for State and
Government necessities related to closed intelligence and closed defense services, the
national security and high interests of the State, the requirements of the State's
reputation, political, social and cultural purposes and extraordinary services.
3. Recording of Public Expenditures

 The accounting system is established and executed in such a way as to ensure the
effective operation of the decision, control, and accountability processes and to be the
basis for the preparation of financial reports and the issuance of the final account.
 Government accounting fulfills its duty to provide accurate and consistent
 information to the relevant persons and institutions.
 Budget revenues are recognized in the year they are collected, and budget expenditures
are recognized in the year they are paid.
 Public accounts are kept on a fiscal yearly basis. For those who have not been deducted
from the payments made until the end of the fiscal year, the deduction can be made
within one month following the end of the fiscal year.
Expenditures Made by Direct Payment

 According to this method, the prerequisite for a public expenditure to be made is that the
appropriation is foreseen in the budget and that this appropriation, and its corresponding
cash are provided in terms of place and time.
 If these conditions exist, the duly accrued amounts are debited to the budget
expenditures account and paid from the cash desk or the bank.
Expenditures Made by Payment on Account

 Amounts that are exactly the same as in the budget expenditures made by making direct
payments are paid as a deduction for the debt of the beneficiary recorded in another
account, not by being paid from the cash desk or the bank.
 For example, the payment of budget expenditures by offsetting the tax debt.
Expenditures Made by Recording as Receivable in the Budget

 Although the appropriation is foreseen in the budget and the appropriation is provided as
of the place and time, in case cash is insufficient or the beneficiary does not apply to
collect his/her receivables, the duly accrued amounts are debited to the budget
expenditures account and credited to the budget trusts account.
Expenditures Made by Spending Exceeding Appropriations
 In cases permitted by the legislation or although not foreseen in the legislation, some
expenditures are paid by debiting the budget expenditures account, whether
appropriation is foreseen in the budget or not, but in any case and condition, although
there is no appropriation at the time and place where the expenditure is accrued.
LIABILITY IN PUBLIC EXPENDITURES

Liability
 It refers to the undertaking of the consequences of any event included within the scope of
authority.
 It enables the questioning of whether the work is carried out in accordance with its given
purpose.
 The task cannot be fulfilled without the use of authority; and authority cannot be used
without having liability.
Scope of Liability
 Public revenues and public expenditures are the main factors in the execution of the
executive branch's responsibilities to the parliament; The executive body has the
responsibility to use the authority it uses during the realization of public expenditures in
accordance with the procedures and principles drawn in the Constitution and the relevant
legislation.
 Article 2 of the 1982 Constitution: The Republic of Turkey is a social law state.
 Article 125 of the 1982 Constitution: «The administration shall be liable to compensate
for damages resulting from its actions and acts.»
 Article 65 of the 1982 Constitution: «The State shall fulfil its duties as laid down in the
Constitution in the social and economic fields within the capacity of its financial
resources, taking into consideration the priorities appropriate with the aims of these
duties.»
Source of Liability
 The responsibility of the administration may originate from public law as well as from
private law. However, when considering the use of public spending authority, the
responsibility is a responsibility originating from public law.
 With the Law No. 5018, there is a liability based on defect in the use of public
expenditures authority applied in our financial system.
 Liability Based on Defect = Service Defect
 Article 129 of the 1982 Constitution: «Compensation suits concerning damages arising
from faults committed by public servants and other public officials in the exercise of their
duties shall be filed only against the administration in accordance with the procedure and
conditions prescribed by law, as long as the compensation is recoursed to them.»
Relation of Causality
 Liability occurs in the use of public spending authority when an allowance is used illegally,
it is not used properly, the person or persons acting on behalf of the administration made
the relevant damage, and there is a cause-and-effect relationship between the damage
and behavior.
Types of Liabilities and Financial Liabilities
 Classification of responsibility by taking these criteria into account reveals political,
administrative and economic accountability.
 These are;
 Political liability specific to the elected involved in the spending process,
 Criminal liability included in the Turkish Penal Code,
 Administrative liability arising from administrative law,
 Disciplinary liabilities arising from personnel legislation and
 The financial liability in the public spending process.
Legal Basis of Liability
 1982 Constitution, and in particular Article 104, Article 125, Article 161 of the
Constitution
 Basic legal basis: Public Finance Management and Control Law No. 5018
 Court of Accounts Law
 Presidential Decrees
Financial Liabilities
 Liability of Administrations to Make Necessary Regulations to Provide
 Fiscal Transparency,
 Accountability,
 President,
 Ministers,
 Top executives,
 Expenditure Authorities,
 Assessment Officers,
 Accounting Officers.
Accounting Officers – In terms of signature control duty and liability:
a) At the payment stage, the signatures of the spending authority and the assessment officer are
on the payment order document, but if there is any missing signature on the documents
attached to the payment order document, the accounting officer, together with the spending
officer and assessment officer who have their signatures on the payment order document,
b) If only one of the spending officers or assessment officers has a signature on the payment
order document, the accounting officer together with the undersigned officer,
c) If there are no signatures of the expenditure officer and the assessment officer on the
payment order document, the accounting officer must be held solely responsible.
 Regarding the completeness of the documents constituting the basis of payment;
a) Holding the assessment officer responsible for the deficiencies in the documents constituting
the basis of payment,
b) The accounting officer must be held responsible together with the spending officer and the
assessment officer for the obvious and easily visible material errors that do not require
interpretation in the documents that belong to the commitment and accrual stages of the public
loss and expense arising from a document that is the basis for payment but is not included in the
expense document.
Fulfillment of Liability
In the fulfillment of the responsibility in our country, the financial responsibility of the spending
units is determined by the Accountability Reports; The President and the ministers fulfill their
political responsibility through the law of final accounts.
Fulfillment of Liability through Accountability Reports

Fulfillment of Liability through the Final Account Law
The accountability report of the administration shall be prepared so as to include, along with the
general information on the related administration, the resources used, and the reasons of the
deviation arising regarding the budget targets and realizations, financial information comprising
the information regarding the activities of associations, institutions and organizations aided
through assets and liabilities;
and information on activities and performance information
performed as per strategic plans and performance program.
Within the framework of accountability, the heads of public administrations and authorizing
officers to whom appropriations are allocated in the budget shall issue accountability reports
each year.
It is ensured that the Law No. 5018 fulfills their responsibilities regarding the authority before
and during the expenditure, which is transferred to the spending units with the activity reports,
and by collecting these, the top manager fulfills the responsibility of accountability.
The article also includes the provision that these reports will be made public, and this rule
functions as a continuation of the fiscal transparency principle that dominates the entire Law
and as a condition for accountability.
In the responsibility mechanism carried out over the activity reports, the spending officials
responsible for preparing the unit activity report are against the top manager; top managers are
held accountable to the relevant Minister, and to their assemblies in local administrations.
Except for the reports of local administrations, the administration accountability reports, the
general accountability report on local administrations and the general accountability report shall
be submitted to the Turkish Grand National Assembly by the Court of Accounts by presenting its
own opinions considering external audit results.
Within the framework of these reports and evaluations, the Turkish Grand National Assembly
deliberates the public administrations’ management and accountability with regard to the
acquisition and utilization of public resources. It is compulsory for the heads of public
administrations or deputies to be appointed by the heads to join these deliberations together
with the related ministers.
The subjects to be included in these reports, the preparation of the reports, their delivery to
pertaining administrations, the publication and the terms and other procedures and principles
concerning these transactions shall be determined by a regulation to be prepared by the
president of the republic by obtaining the opinions of the Court of Accounts.
Article 42 of the Law No. 5018 regulates the Final Account Law. According to related article that
The Turkish Grand National Assembly exercises its power of approving the implementation
results of the Central Government Budget Law through the Final Account Law.
2.Fulfillment of Liability through the Final Account Law Followings shall be attached to the Draft
Final Account Law;
General Trial Balance,
Budget revenues final account schedule and explanations thereon,
Budget expenditures final account schedules and explanations thereon,
Budget revenue and expenditure distribution in terms of provinces and administrations,
Schedules of state debts and treasury warranties,
Schedule of public receivables written-off during the same year,
Asset management account summary charts
Other documentation required by the Ministry of Finance
The principles and procedures concerning the preparation of final accounts of public
administrations within the scope of central government shall be determined by the Ministry of
Finance.
Administration accountability reports, general accountability report, external audit general
evaluation report and Draft Final Account Law shall be deliberated by the commissions of Turkish
Grand National Assembly together with the Central Government Budget Law. However, priority is
given to the discussion of these reports and general conformity statement.
The implementation results of budgets of local administrations and social security
institutions shall be entered into the final account in accordance with the provisions in the
relevant laws.
Week – 5
AUDIT IN PUBLIC EXPENDITURES
Audit can be provided directly by the public or can be carried out by the parliament through
representatives.
These expenditures may be subject to audit by the administration itself before, during or after
the realization.
Other audit means are judicial audit carried out by the courts and account judging carried out by
the Court of Accounts.
There are also audit methods such as international or supranational audit or audit by private
legal entities.
Legislative Audit on Public Expenditures
It is a political audit.
It refers to the auditing of how the authority to collect income and spend given to the executive
body by approving the law is used.
The legislative body can carry out this supervisory authority through the reports, during the
amendments of the law through the final accounting law, through traditional means and through
commissions.
a. Final Accounting Law
It is the method of laundering whether the executive body realizes the public income and
expenses for the relevant year in accordance with the budget estimates and the legislation.
In Article 161 of the 1982 Constitution, the principles of presentation of the Final Accounts Law
to the parliament, negotiation in the parliament and decision- making are regulated.
Article 42 of the Law No. 5018: "The Grand National Assembly of Turkey shall use its authority to
approve the implementation results of the central government budget law with the final account
law."
b. Audit Performed on Reports
One of the most effective tools of the Parliament's control over public expenditures is the
reports prepared and submitted to the Grand National Assembly of Turkey on the audits and
examinations carried out by the Court of Accounts.
These reports are;
Article 42 of the Law No. 5018: “Administration accountability reports, general accountability
report, external audit general evaluation report and Proposal Final Account Law shall be
deliberated by the commissions of Turkish Grand National Assembly together with the Central
Government Budget Law.
However, priority is given to the discussion of these reports and general
conformity statement.”
Audit Performed through Changes in Law
81 to 89 of the House Regulations’ articles, the procedures for discussing law amendments and
amendment proposals in the General Assembly were regulated; For the discussion of these
amendments and proposals, a more detailed process is envisaged than the way of negotiating
the budget proposal in Article 161 of the Constitution.
In the event that the law amendment or amendment proposals include public expenditures, the
parliament performs a more effective audit during the law amendment and amendment
proposals compared to the budget proposal.
d. Traditional Parliamentary Audit Instruments
The parliamentary inquiry consists of an investigation and provides information on a
certain subject.
The general meeting is held by discussing a certain issue concerning the society and state
activities in the General Assembly of the Turkish Grand National Assembly.
A written question is delivered by MPs to the Vice Presidents and ministers. The question is
to be answered no later than 15 days after submission.
With the parliamentary inquiry, a referral decision can be taken to the Supreme Court about the
Vice President and ministers.
Budget Rejection: The rejection of the budget has consequences according to the political
system being implemented in the country. In parliamentary systems, it is accepted that the
rejection of a government's budget leads to the political responsibility of the government and
that this government should resign.
e. Audit Performed Through Commissions
Commissions can create the assurance of effective and efficient use of public resources,
especially by fulfilling important duties in the examination of external audit reports.
These are;
Plan and Budget Commission
Committee on Public Enterprises
Petition Commission
Committee on Human Rights Inquiry
The legislature can also inspect the public expenditures of the administration during the
functioning of the commissions within it. At the beginning of these commissions is the Plan and
Budget Commission. Most of the parliamentary control of the budget takes place at the
Commission stage; The Commission undertakes a very important function in approving the
budget.
One of the instruments of the legislature to control public expenditures is the Committee on
Public Enterprises. This audit is carried out by considering the rules of the economy and
economic requirements, taking into account the principles of efficiency and profitability. The
audit is carried out by focusing on ensuring that these audited undertakings achieve their
founding objectives; Its scope is limited to the compliance of its activities with the legislation, the
long-term development plan and the implementation programs of the plan.
The Petition Commission can be cited as another example of the control of public expenditures
by the legislature through commissions.
The Petition Commission stated in Article 74 of the Constitution that Citizens and foreigners
resident in Türkiye, with the condition of observing the principle of reciprocity, have the right to
apply in writing to the competent authorities and to the Grand National Assembly of Turkey with
regard to the requests and complaints concerning themselves or the public.
The result of the application concerning himself/herself shall be made known to the petitioner in
writing without delay.
Although the purpose of its establishment is not the control of public expenditures, another
commission that can provide control, albeit indirectly, is the Committee on Human Rights
Inquiry.
Although there is no application to the Committee due to a violation arising directly from public
expenditures, the law proposals or the reports prepared by the Committee may lead to
organizational expenditures with the request for the establishment of a new formation, or when
the applications made for the protection of the rights of certain groups are examined, it can be
seen that public expenditures are used contrary to the principle of equality.
Administrative Audit on Public Expenditures

a. Internal Control
It is the administration's supervision by means of persons to be appointed from itself,
about whether public resources are used in accordance with the principles and
procedures regulated in the legislation.
Audit is a written or oral audit to measure and observe the structure, functionality
and efforts of a person, institution or management unit within the framework of
predetermined criteria (law, regulation, decision, rule, etc.) and to determine
whether it contains any inaccuracies, inconsistencies, contradictions or deficiencies
according to these criteria.
Financial audit is the act of investigating the compliance of a business or effort in the
public sector with the principles of financial science and the rules of financial laws
over time.

a. Internal Control
Preliminary financial control covers all control activities carried out before the financial
transactions are completed. This control is carried out by the financial services unit of the
expenditure institution. As listed in Article 60 of the Law No.5018, the unit plays a role in the
entire process of the expenditure institutions, from the design of public expenditures to their
realization and monitoring of their results.
Internal audit, on the other hand, aims to carry out the activities of the public administration
effectively, efficiently and economically, and to increase its performance by adding value to its
work.
Top managers are responsible for the establishment and supervision of the system in the internal
audit process;
Expenditure authorities are responsible for the operation of internal control through
administrative and financial decisions.

a. Internal Control
Internal control is the whole of the financial and other controls comprising organization,
methodology, procedure and internal audit established by the administration in order to provide
that the activities are performed in an effective, economic and efficient way in accordance with
the aims, defined policies of the administration and with legislation, the assets and resources are
protected, the accounting records are held correctly and completely, the financial information
and management information are produced in time and securely.
The standards and procedures related to the financial management and internal control
processes shall be defined, developed and harmonized by the Ministry of Treasury and Finance
and those related to the internal audit by the Internal Audit Coordination Board, within the
framework of their duties and authorizations. These bodies shall at the same time ensure the
coordination of the systems,and provide guidance to public administrations.
b. Audit Performed Through Boards
Accordingly, the administration can directly audit the realization of public expenditures through
the internal control mechanism, as well as through the boards it has established within itself.
These boards are:
The State Supervisory Council
Right to Information Assessment Board

b. Audit Performed Through Boards
The State Supervisory Council:
The State Supervisory Council which was established under the Office of the Presidency of the
Republic, with the purpose of ensuring the lawfulness, regular and efficient functioning and
improvement of administration, conduct all administrative investigations, inquiries,
investigations and inspections of all public bodies and organizations, all enterprises in which
those public bodies and organizations share more than half of the capital, public professional
organizations, employers’ associations and labour unions at all levels, and public welfare
associations and foundations, upon the request of the President of the Republic.
Judicial organs are outside the jurisdiction of the State Supervisory Council.
The Chairperson and the members of the State Supervisory Council shall be appointed by the
President of the Republic.
The functioning of the State Supervisory Council, the term of office of its members, and other
personnel matters relating to their status shall be regulated by presidential decree.

b. Audit Performed Through Boards Right to Information Assessment Board:
Another formation that can be considered in terms of the supervision of public expenditures
through the boards of the administration is the Right to Information Assessment Board. It has
been established to examine the decisions made on objections to the application for information
and to make decisions regarding the use of the right to information for institutions and
organizations.
In addition to these, we can say that there are many boards within the administrative
organization and tasked with auditing.
Administrative Audit on Public Expenditures Results of Audit

Spending more than appropriation, causing public loss, unauthorized collection or payment,
untrue transactions are subject to administrative, financial, or penal sanctions.
These sanctions are in the form of fines or compensation for public damage, in case of
unauthorized collection and payment, the sanctions stipulated in the relevant law, criminal
sanctions in case of an act or transaction that is considered a crime.
Jurisdictional Control over Public Expenditures
It is carried out by the Constitutional Court in terms of judicial review of budget laws and
expenditure laws and their constitutionality,
By administrative jurisdictions in terms of supervision of the legality of administrative acts,
By judicial authorities in terms of criminal cases in the context of criminal
law.
The reporting, audit and account judgment activities carried out by the Court of Accounts also
have a very important place in the audit of public expenditures.
Jurisdictional Control over Public Expenditures a.Audit Performed by the Courts
Subjecting public expenditures to administrative judicial review is initiated when the
administration establishes an executive action that has an impact on individuals; Persons whose
rights have been violated resort to litigation in response to this act of the administration, which
is considered to be unlawful, subject to the procedures and principles set forth in the provisions
of the Administrative Jurisdiction Procedures Law.
The Constitutional Court shall examine the constitutionality, in respect of both form and
substance, of laws, presidential decrees and the Rules of Procedure of the Grand National
Assembly of Turkey, and decide on individual applications. Constitutional amendments shall be
examined and verified only with regard to their form. However, presidential decrees issued
during a state of emergency or in time of war shall not be brought before the Constitutional
Court alleging their unconstitutionality as to form or substance.
Everyone may apply to the Constitutional Court on the grounds that one of the fundamental
rights and freedoms within the scope of the European Convention on Human Rights which are
guaranteed by the Constitution has been violated by public authorities.
Jurisdictional Control over Public Expenditures b.Audit Performed by the Court of Accounts
The Court of Accounts shall be charged with auditing, on behalf of the Grand National Assembly
of Turkey, revenues, expenditures, and assets of the public administrations financed by central
government budget and social security institutions, with taking final decisions on the accounts
and acts of the responsible officials, and with exercising the functions prescribed in laws in
matters of inquiry, auditing and judgment.
Auditing and final decision on the accounts and acts of local administrations shall be
conducted by the Court of Accounts.
Jurisdictional Control over Public Expenditures
b.Audit Performed by the Court of Accounts
It is possible to group the duties of the Court of Accounts as auditing, reporting and
adjudicating .
As a result of the trial, if the Court of Accounts considers that the accounts and
transactions comply with the legal regulations, it results in acquittal,
If it concludes that a public loss has been caused, it decrees that this damage be compensated
from those who are responsible.
In case the conditions arise as a result of the account trial, it is possible to perform to appeal,
retrial, and correction of the decision. Request for appeal, retrial and correction of
decision shall be made with a signed petition addressed to the Presidency of Turkish Court of
Accounts. Petitions shall be delivered, or posted to the Presidency of Turkish Court of Accounts.
Confirmation of the receipt of the petition may be given to the persons concerned if requested.
The judgments given by the judicial and administrative courts do not prevent the Court of
Accounts from auditing and adjudicating.
In case of conflict between the decisions of the Council of State and the Court of Accounts,
regarding taxes, similar financial obligations and duties, the decision of Council of State shall
prevail.
The audit carried out by the Court of Accounts is based on two laws. These
are:
Law No. 5018 and
Law No. 6085 On Turkish Court Of Accounts
Jurisdictional Control over Public Expenditures b.Audit Performed by the Court of Accounts Law
No. 6085 of the Court of Accounts
The purpose of this Law is to regulate the establishment of Turkish Court of Accounts, its
functioning, audit and judicial procedures, qualifications and appointments of its staff,
responsibilities and competences, rights and obligations and other matters pertaining to
personnel, the election and security of tenure of the President and members of Turkish
Court of Accounts in order to perform audit activities on behalf of the Turkish Grand
National Assembly, to take final decision on the accounts and transactions of those
responsible, to carry out the duties of examining, auditing and taking final decision
stemming from laws, in the framework of accountability and fiscal transparency in the
public sector, to ensure that public administrations function effectively, economically,
efficiently and in compliance with laws and that public resources are acquired, preserved
and utilized in accordance with foreseen purposes, targets, laws and other legal
arrangements.
Independent Nature of the Court of Auditors
The Court of Accounts carries out its audit activities on behalf of the Turkish Grand National
Assembly, and acts independently while performing its judicial function.
Conducting the Audit in Compliance with International Standards

In order to fulfill these requirements, the technical and professional competencies of the
members of the institution are improved to fulfill the audit task effectively.
In order to ensure quality assurance, every stage of the audit is constantly reviewed for
compliance with audit standards, strategic plans, audit programs and professional ethics.
External Audit
The purpose of the ex post external audit to be performed by the Court of Accounts is to audit,
within the framework of the accountability of public administrations within the scope of general
government, the financial activities, decisions and transactions of management in terms of their
compliance with the laws, institutional purposes, targets and plans, and to report their results to
the Turkish Grand National Assembly.
The external audit is performed in accordance with the generally accepted international audit
standards by carrying out the following:
On the basis of public administrations’ accounts and relevant documents, to perform financial
audit on the reliability and accuracy of financial statements, and to determine whether the
financial transactions related to revenues, expenditures and assets of public administrations
comply with the laws and other legal arrangements.
To determine whether the public resources are used in an effective, economic and efficient way,
to measure the activity results and to evaluate them as to their performance.
During the external audit, reports issued by the internal auditors of the public administrations
shall be submitted to the information of the Court of Account auditors, if required so.
External Audit
The Court of Accounts shall prepare the External Audit General Evaluation Report by taking into
account the audit reports and replies given thereto, and present it to the Turkish Grand National
Assembly.
The finalizations of accounts by the Court of Accounts means taking a decision on whether the
revenue, expenditure and asset accounts and related transactions of the public administrations
within the scope of general government are in compliance with the legal provisions.
Other issues on the finalization of external audit and accounts shall be stipulated in the relevant
law.
In the event of encountering an action involving guilt in the course of audits and examinations;
the evidence shall immediately be identified and the case shall be reported to the Presidency of
Turkish Court of Accounts by the auditor.
As a result of the investigation to be carried out within fifteen days by the chamber
assigned by the Presidency of Turkish Court of Accounts, if the
collected initial evidence is qualified as subject of public prosecution, the
file shall be sent to the Chief Prosecutor of Turkish Court of Accounts either
to be handed over to the responsible official's public administration for the necessary action to
be taken, or to be sent directly to the Public Prosecution Office for an investigation in accordance
with the nature of the offence.
Other Ways of Audit on Public Expenditures

At the beginning of these are the public opinion audit instruments Public control emerges in
many different ways and forms. In addition to public control, it is possible to say that it is
effective in the control of public expenditures indirectly due to international agreements or
formations to which it is a party.
The main method of public scrutiny is to make public the audit reports on public expenditures. In
addition, the ombudsman institution and the right to petition are also important public
inspection tools. Elections, social media, and areas where the participation principle is applied
are areas where people can have a directive effect on public expenditures in the form of
speaking, expressing opinions or reacting.
Week – 6
FISCAL POLICY
 Fiscal policy is the management of public finance by the government so as to influence
the economy in the desired direction.
 Though the ultimate aim of fiscal policy is the long-run stabilization of the economy, it can
only be achieved by moderating short-run economic fluctuations.
 Fiscal policy, the process of shaping taxation and public expenditure in
order
to help dampen the swings of the business cycle, and
to contribute towards the maintenance of a growing, high employement economy free from high
and volatile inflation.
FISCAL POLICY
The target variables of fiscal policy are:
Private disposable income,
Private consumption expenditure,
Private savings and investment,
Exports and imports, and
Level and structure of prices.
FISCAL POLICY
INSTRUMENTS OF FISCAL POLICY

Fiscal policy is implemented through fiscal instruments also called Fiscal Handles, Fiscal Tools,
and Fiscal Levers.
The instruments of fiscal policy are
contracyclical fiscal policy, and
compensatory fiscal policy.
FISCAL POLICY

Budgetary Policy—Contracyclical Fiscal Policy
The budget is the main instrument of fiscal policy.
Budgetary policy exercises control over size and relationship of government receipts and
expenditure.
The government can control inflationary and deflationary pressures in the economy by judicious
combinations of expenditure and taxation programme.
FISCAL POLICY

Compensatory Fiscal Policy
Compensatory fiscal policy is a permanent anti- cyclical weapon in the armoury of the state to
compensate for shortfalls in private spending.
The compensation fiscal policy has two approaches:
Built-in-stabilizers
Discretionary fiscal policy
FISCAL POLICY

Compensatory Fiscal Policy Built-in-stabilizers
The technique of built-in-flexibility or built-in-stabilizers involves the automatic adjustment of
the expenditures and taxes in relation to cyclical upswings and downswings within the economy
without deliberate action on the part of the government.
An automatic fiscal stabilizer is a built-in tax or expenditure that increases total planned
spending in times of recession and lowers it in times of economic expansion, without special
explicit action on the part of the administration and parliament.
Among the more important automatic fiscal stabilizers are income taxes, unemployment doles
and welfare benefits, and corporate dividend pay-outs.
Built-in-stabilizers have certain advantages as a fiscal device.
FISCAL POLICY

Compensatory Fiscal Policy Built-in-stabilizers
Advantages of built-in-stabilizers
It works without changes in tax rates, so that it does not require any elaborate and cumbersome
legislative procedure.
It does not need any forecasting before initiating the action and hence the chances of mistakes
are minimized.
The climate is free from uncertainties and is favourable to private investment.
It is the easiest method of coordinating short-run and long-run fiscal policies.
FISCAL POLICY
Discretionary Fiscal Policy
Discretionary (sometimes called "active") policies occur when policy makers carefully watch
trends, forecast further developments and change policies when the economy is not functioning
in a satisfactory manner.
In discretionary fiscal policy, the government makes deliberate changes
in
the level and pattern of taxation
the size and pattern of its expenditure, and
the size and composition of public debt.
FISCAL POLICY
Discretionary Fiscal Policy
The need for discretionary action arises because automatic stabilizers may not be sufficiently
strong in the face of a serious inflation or depression.
The expenditure aspect of fiscal policy lacks flexibility, particularly defence spending.
From the time when countercyclical fiscal policy was analyzed by J.M. Keynes in 1936 until the
late 1970s, many macroeconomists believed that fiscal policy could play a major role in
stabilizing the business cycle.
A deep skepticism arose in 1980s, partly because of shortcomings of the fiscal policy and partly
because of monetary policy which seemed to work much more quickly and effectively.
FISCAL POLICY
Compensatory Fiscal Policy Discretionary Fiscal Policy
Accurate forecasting is essential to judge the stage of cycle through which the economy is
passing.
There are delays in proper timing of public spending. In fact, the discretionary fiscal policy is
subject to 'decision lag' and 'execution lag'.
Certain government sponsored public works projects are so cumbersome that it is not possible
to accelerate or slow them down for the purpose of raising or reducing public expenditure on
them.
FISCAL POLICY
CROWDING OUT AND CROWDING IN CONTROVERSY

Crowding Out
Crowding out occurs when expansionary fiscal policy causes interest rates to rise, thereby
reducing private spending, particularly investment.
When the government takes recourse to deficit spending, it plans to spend more than its tax
revenue. The government then has to borrow from its Central Bank, or from the market through
the sale of its bonds. When government borrows, it becomes a competitor in the loanable funds
market, driving up real interest rates and crowding private borrowers out of the market. If the
government borrows funds that would otherwise be used elsewhere, critics charge. Any increase
in government spending may bepartially or totally offset by a decrease in private businessmen
ventures, or in state and local government spending.
FISCAL POLICY
CROWDING OUT AND CROWDING IN CONTROVERSY

Crowding In
Crowding in implies rise in the private investment due to deficit spending by the government.
This is contrary to the crowding out argument and holds only when there are unutilized
resources.
FISCAL POLICY
THE EFFECTS OF LAGS IN ECONOMIC ACTIVITY

Fiscal policies are subject to the following lags:
Recognition lag,
Action (administrative) lag,
Outside lag or Impact (operational) lag.
FISCAL POLICY
Recognition Lag
The recognition lag is the time elapsed between the initial occurrence of a problem and the
recognition of that problem.
This process may take several months, given the way some economic data are collected. In the
beginning of a recession, signals are likely to be mixed.
Some measures, like the number of housing units starts per month, may indicate a decline in
economic activity.
Fiscal policy has roughly the same recognition lag as monetary policy.
FISCAL POLICY
The Action (Administrative) Lag
The action (administrative) lag is the time elapsed between the general recognition of a problem
and the implementation of a policy to correct it.
Members of Parliament may bargain for special benefits for their home districts.
FISCAL POLICY
Impact (Operational) Lag
The impact (operational) lag is the time elapsed between the implementation of a corrective
policy and when the economic impact of that policy is felt.
A tax cut will take effect as soon as people's take-home pay increases.
In terms of the outside lag, the fiscal policy has a shorter one, because the government
expenditure and taxes affect the income directly while the money supply exerts influence on the
real income only through the interest rate.
There are two additional factors that aggravate the policy making which are as follows:
There is no unanimity among the economists about the source of business cycles.
Forecasting of future economic events could be very erroneous.
FISCAL POLICY
Objectives of Fiscal Policy in a Developed Economy
The basic objective of fiscal policy in a developed economy is one of full employment and
economic stability.
These two objectives can be realised through the adoption of a
policy of compensatory spending.
As is well known, the private expenditure invariably declines during depression.
This applies to both private consumption expenditure as well as private investment expenditure.
FISCAL POLICY
Objectives of Fiscal Policy in an Underdeveloped Economy
The level of aggregate saving should be maximised by applying a cut to the
actual and potential consumption of the public.
The country should be led to the path of rapid economic progress and growth which can be
accelerated through higher rate of capital formation in the economy.
There should be a diversion of capital resources from less productive to more
productive and from socially less desirable to socially more desirable uses.
The economy should be protected from the vices of inflation. The inflation will ruin the
underdeveloped country.
The next important objective of the fiscal policy in the underdeveloped country is to eliminate
sectoral imbalances arising in the economy from time to time.
The fiscal policy in underdeveloped country should be to provide incentives for encouraging
those industries, which have a high employment potential in the economy.
Another important objective of the fiscal policy in underdeveloped economy is to remove
economic inequalities from the economy as far as possible.
FISCAL POLICY
Fiscal Policy During Inflation (a)Government expenditure

During inflation, the increased private expenditure due to increase in effective demand forces
heavily against the limited supply of goods and services. To counteract this, the government
should reduce expenditure to limit the aggregate demand.
(b)Taxation
It is a very important weapon during inflation in underdeveloped countries. The problem during
inflation is to reduce the size of disposable income in the hands of the general public in view of
the limited supply of goods and services in the market.
FISCAL POLICY
Fiscal Policy During Inflation

(c)Public borrowing
The very object of public borrowing is to take away the excess purchasing power from the
hands of the public which would certainly exert an upward pressure on the price level in the
economy. Thus, the public borrowing is used as a weapon of anti- inflationary measure in the
economy.
(d) Debt management
The existing public debt should be managed in such a manner as to reduce the existing money
supply and prevent further credit expansion. At the time of inflation, despite its best efforts, the
government may not succeed in having a budgetary surplus.
FISCAL POLICY
FISCAL POLICY FOR UNEMPLOYMENT IN AN UNDERDEVELOPED ECONOMY
The main objectives of fiscal policy in an underdeveloped economy may be:
Raising the ratio of savings to national income by checking

consumption.
Increasing the rate of investment in the economy.
Encouraging the flow of investment into productive channels.
Reducing as far as possible large inequalities of income and wealth.
FISCAL POLICY
Fiscal policy and income inequalities
Taxation and public expenditure are the main instruments of fiscal policy. This will reduce income
inequalities and to bring about a more equal distribution of income and wealth in the economy.
There are certain direct taxes, which can help to bring about redistribution of income in the
society, e.g. progressive income taxation is the most effective instrument for transferring income
from rich to the poor. Wealth tax, gift tax and some other taxes like steep excise duties on
automobiles, T.V. sets, refrigerators, air conditioners, etc., will be helpful in bringing about this
redistribution.
The government can also devise its scheme of expenditure in such a manner as to help the poor
sections of society. The government may extend its help towards welfare measures such as
cheap food, free education, cloth, etc., at state expense.
FISCAL POLICY

Fiscal policy and economic growth (a)Taxation
It is a very vital instrument for raising economic development for which purpose, the
government may resort to both direct and indirect taxes such as income tax, wealth tax, gift tax,
capital gains tax, death duties, and excise duties, etc.
(b)Public debt
The government may also resort to public borrowing to add to its fund of investable resources.
There will not be any opposition from the public as the government pays the interest on public
loans. Since the amount raised through internal borrowing is inadequate, there is no harm, if it
resorts to the international money market for raising enough funds for the purpose of
development.
FISCAL POLICY
FISCAL POLICY FOR UNEMPLOYMENT IN AN

UNDERDEVELOPED ECONOMY
Fiscal policy and economic growth (c)Public expenditure
The government in an underdeveloped economy should devote a considerable portion of its
expenditure for necessary infrastructure facilities such as roads, railways, communications,
irrigation works, and power stations, coal mining, general and technical education. These
facilities will induce the rapid growth of the economy.
(d) Deficit financing
Yet another vital tool used by most of the underdeveloped countries is deficit financing. It has
proved to be a reliable tool of financing economic growth of an underdeveloped economy.
FISCAL POLICY
LIMITATIONS OF FISCAL POLICY
Fiscal policy as a countercyclical weapon has various limitations. Fiscal policy is considered to be
misleading when it is put into practice.
Forecasting of target variables such as GNP, consumption and investment is a real problem. In
this context it is true that "no one has yet discovered a foolproof method of economic
forecasting".
Timing poses a real problem. The time lag not only reduce the effectiveness of fiscal policy, but
also create distortions not desired.
Public investment may compete with and possibly lead to a decline of private investment which
may cancel or modify the leverage effects of the former. This is known as crowding out.
Fiscal policy cannot overcome business psychology. It is particularly ineffective in the face of
hyperinflation when speculation takes over. Even a high rate of taxation cannot restrain the
temptation to 'make a fast buck'.
FISCAL POLICY
LIMITATIONS OF FISCAL POLICY
the theory of fiscal policy assumes that public expenditure has a multiplier effect. All
expenditures do not have the same multiplier effect. For example, public investment expenditure
has a lower multiplier effect than transfer payments.
The working of fiscal policy in developing countries is restricted by
(i) low levels of income, (ii) small proportion of population in taxable income groups, (iii) the
existence of a large non- monetised sector, and (iv) all pervasive corruption and inefficiency in
administration especially in tax collection machinery.
A vigorous fiscal policy to combat depression may cause a vast increase in public debt, which
may make the public debt management extremely difficult.
Week – 7 – PUBLIC DEBT
 Public debt is actually a method used to find the money.
 It is a contract whose structure is based on the provisions of private law. These debt
contracts are considered as “adhesion contracts”.
 As in private law, there are two parties in public debt, as creditor and debtor.
 The debtor is the state party, and the interest, maturity, and payment of the debt are
specified in the terms of the contract.
Purpose of the Public Debt

 Balancing the budget revenues by place and time.
 Financing budget deficits.
 War, natural disaster, etc. Since all of the extraordinary expenditures arising from these
reasons cannot be financed with normal public revenues, these extraordinary
expenditures are financed by borrowing, which is also an extraordinary public income.
 The government can borrow again to pay its debts.
 It resorts to borrowing in order to finance large investment projects and investments that
can pay its own debts.
 The government can borrow as a fiscal policy tool by taking the money in the hands of
individuals and companies in order to dissolve the excess demand in the market during
inflation periods.
 It can be used to create efficient effects in resource allocation and use.
Differences Between Public Debt and Private Debt

1 – Compulsion: The government can compel people to lend money to it in case of extraordinary
circumstances such as war, economic crises, or natural calamities like tsunamis, earthquakes,
etc., but no private individual can compel another individual to lend him.
2 – Repudiation: The government can repudiate the repayment of public debt under exceptional
circumstances, but an individual under no circumstances refuses repayment of a loan without
inviting legal action.
3 – Durability: As the government is a permanent institution that people have faith in, it can
borrow from the public for a longer time period, while the private person can borrow only for a
shorter period of time.
4 – Productive: Public debt is generally spent for productive purposes, whereas private debt may
be spent both for production as well as for unproductive purposes.
5 – Sources: The government may borrow both from internal and external sources. Technically, it
can also borrow from itself when it resorts to deficit financing by printing new currency. But a
private person can borrow only from external sources.
6 – Interest Rate: The rate of interest paid by the government is very low as compared to
interest paid by a private borrower.
7 – Reduction in Interest Rate: The government can unilaterally reduce the interest rate on
public loans in times of financial crisis. But a private person cannot do so, because of his legal
contract with the borrower at a stipulated rate of interest for the amount borrowed.
8 – Welfare: Public debts are generally utilized to promote the welfare of the community as a
whole, so the lender will also get the benefit. It is, therefore, said that when a person lends to
the government, he lends to himself, at least partially. But the private debt is for personal gains
or profit motives only.
9 – Mode of Repayment: The government repays its loans by taxing the people. But a private
person has to repay his loan either out of his personal savings or out of his accumulated assets
by borrowing from other sources.
10 – Effect on the Economy: Public debt, being larger in size, makes an effect on the production
and distribution of income and wealth in the economy. But a loan taken by a private individual
makes no such effect, because of being a small amount.
Classification of Public Debt

 According to their duration (short-medium-long).
 According to the place where the debt is made, that is, according to its source (internal
debt-external debt).
 According to whether the will of the borrowed persons or institutions is applied or not
(voluntary- compulsory).
PUBLIC DEBT
A. Debts by Maturity
 Short-term debt is made from the Central Bank and other commercial banks. The
instruments used in short-term debts are treasury bills, budget and ordinary trusts,
advances, and bonds with treasury guarantees.
 Long-term debt is made in bonds. Long-term liabilities are also divided into amortized
liabilities and perpetual liabilities.
 Redeemable Debts: Redeemable debt refers to the debt principal amount of which is
repaid by the government after a pre-determined period of time. Public loans are mostly
redeemable.
 Perpetual (Irredeemable Debt) Loans: These refer to situations where the government is
not certain when it will pay a long-term debt, or the principal payment of the debt is not
made.
A. Debts by Maturity
According to the 2nd classification, the term debts are as follows:
 Short-Term Borrowing: Debt is repayable for a short period of less than a year.
 Long-Term Borrowing: Debt with a maturity of 1 year and more than a year.
According to the triple classification, the term debts are as follows:

 Short-Term Borrowing: Debt is repayable for a short period of less than a year.
 Medium-Term Borrowing: These are debts with a maturity of more than a year, 5, and
less than 5 years.
 Long-Term Borrowing: Debt with a maturity of more than 5 years.
Comparison of Short and Long-Term Debt

 While long-term debts are obtained from the capital markets; short-term debt is obtained
from money markets.
 Interest rates on long-term debt are higher than on short-term debt.
 The main source of long-term borrowing is savings waiting for long-term investment
opportunities in the market. Short-term debts, on the other hand, can be consolidated
and converted into long-term debts when due.
 While short-term borrowing is generally made with Treasury Bills; long-term borrowings
are made with Government Bonds.
 Short-term debts are not recorded in the ledger; however, long-term debts are recorded
in the general ledger.
B. Sources of Public Debt

 If the government borrows money from internal sources, it is called internal debt.
 The main internal sources from which government borrows funds are as follows:
 Borrowing from individuals
 Borrowing from commercial banks
 Borrowing from non-banking financial institutions
 Borrowings from the central bank
When the government borrows foreign currency from outside sources, it is called external debt.
The government may also borrow from foreign governments and financial institutions such as
IMF, IBRD, etc. These amounts can be used to finance war expenditures, or the import of capital
goods required for development projects.
C. Voluntary and Compulsory Debts

1. Voluntary Debts – A voluntary debt is that which is taken by the government without force or
coercion. There are two parties in a borrowing transaction, the borrower and the lender. It is
called so lender has the freedom to lend or not to lend to the government.
2. Compulsory Debts – In practice, borrowing may not always be optional. Sometimes the
government compels people to buy government bonds in the case of a war or national
emergency. In this case, the will of the lender is not important.
 Debts Taken with Full Enforcement
 Debts Taken with the Threat of Coercion
 Debts Obtained by Moral Force
 Debts Obtained by Creating Compulsory Savings
MANAGEMENT OF Public Debt

 The management of public debt is a set of operations that the treasury performs in
maintaining a national debt.
The purpose of debt management is to keep the interest cost to the minimum possible.
 Floating of the debt,
 Refunding of the debt,
 Retirement of the debt.
Principles of Public Debt Management
 Debt management must be capable of providing the necessary funds from the lending
market without undue coercion and at the lowest possible interest rate.
 Debt management, that is, refunding and flotation of debt, should serve and not frustrate
the economic objective of stable growth.
 The debt should be so placed as to minimize the need to enter the market when it is
inconvenient to do so. However, the principles of debt management are elaborated as
follows.
Principles of Public Debt Management

1. Minimum Cost of Servicing Public Debt
 The cost of creating debt and redeeming the debt should be at a minimum.
 The interest cost can be minimized if the Central Bank of the country is induced to keep
the interest rate low by means of its monetary policy, i.e., bank rate policy.
2. Minimizing Administrative Cost
 If the volume of public debt is given over a year, the government must take efforts to
minimize the administrative cost. The general wisdom is that the larger the number of
government securities, the greater would be the possibility of reducing the interest
burden.
 The higher the number of securities, the greater is bound to be the administrative cost.
3. Coordination of Public Debt with monetary and Fiscal Policies
This is very essential to achieve economic growth with stability. Hence, such economic instability
can only be avoided, if the public debt policy must be in coordination with the monetary policy.
4. Satisfaction of the Investors
 It should cater to the needs of the investors with regard to the types of government
securities and the terms of issues. Consider a typical case in which the existing situation is
inconvenient for the government to borrow, the best option available is to convert the
short-term securities into long-term securities by offering attractive rates of interest.
There can be no quarrel with any of these principles when considering singly. But in many
situations, it is impossible to serve all the principles of debt management at the same time.
REDEMPTION OF PUBLIC DEBT

 The traditional thinking on this problem prescribed a narrow view that, the sooner the
public debt is cleared the better for the government.
 Recent thinking, however, considers debt management in the context of overall debt and
fiscal policies of the government and favors repayment under normal circumstances.
 Redemption of public debt means repayment of principal along with interest by the
government.
 Different methods are used by the government to redeem its debt.
PUBLIC DEBT - REDEMPTION OF PUBLIC DEBT – Extraordinary Public Debt Management
Transactions
1. Repudiation of Debt
 Repudiation of debt is a refusal of the government to pay the interest as well as the
principal.
 Repudiation is not paying off a loan but destroying it.
 This is not a mere theoretical possibility.
 In modern times, repudiation of debt has lost its popularity as it has become an
anachronism.
2. Consolidation (Refunding) – Definition:
 A government may not be able to pay the debt on the due date and seeks an extension of
the date of repayment. Such an extension of a mature debt is called refunding.
 In the refunding process, usually, short-term securities are replaced by issuing long-term
securities.
PUBLIC DEBT – REDEMPTION OF PUBLIC DEBT – Extraordinary Public Debt Management
Transactions
2. Consolidation (Refunding) – Consolidation Types
a. Mandatory Consolidation – The state declares that it has turned short-term debts into long-
term debts with a unilateral decision, and citizens comply with this situation. Because there is
nothing that citizens who lend to the state can do in this situation. This is a legal sanction.
b. Discretionary Consolidation – The state decides on the consolidation process by making use
of legal means, that is, by enacting a law on this subject. However, it does not force creditors to
do so. Citizens who want to earn high interest can optionally apply this method.
3. Conversion (Debt Exchange)

 A conversion is a process used to relieve a debt burden. Conversion means the
substitution of a new debt in place of an old debt by alternating from a higher to a lower
rate of interest.
 The aim here is to reduce the debt burden by reducing the interest to be paid to the
creditors.
 Conversion may be resorted for two reasons. Firstly, the government may not have
adequate funds at the time of redemption of a loan. Secondly, the current interest rate is
lower than the rate at which the government is paying for its existing debts; so that the
government can reduce its interest obligations.
 The success of conversion, however, depends upon;
 The creditworthiness of the government
 The maintenance of an adequate stock of securities, and
 The efficiency in managing the public debt.
3. Conversion (Debt Exchange)
a. Mandatory Conversion – With a unilateral decision, the state declares that it has turned high-
interest debts into low-interest debts, and citizens comply with this situation. Because there is
nothing that citizens who lend to the state can do in this situation. This is a legal sanction.
b. Discretionary Conversion – The state decides on the conversion process by making use of
legal means, that is, by enacting a law on this subject. However, it does not force creditors to do
so. It offers the citizen the option of either accepting an early payment or replacing their bond
with a new, low-interest bond, and the citizens choose one of them.
3. Conversion (Debt Exchange) – Types of Conversion
 Gradual Conversion: Decreases in the interest rates of the bonds are made in periods, not
suddenly.
 Breakthrough Conversion: It is a conversion that reduces only the interest rates without
making any change in the nominal value of the government's borrowing.
 Under Break Conversion: The interest rates of newly issued bonds are set at a lower level
than the current market interest rate, but the bonds are sold at a price less than their
nominal value, that is, below the Breakeven.
REDEMPTION OF PUBLIC DEBT

Ordinary Public Debt Management Transactions
If the government pays its debts on time, it is a compulsory payment; If it pays before the
contract day, this is also a discretionary payment.
 Debt Depreciation: The government pays the principal and interest of the debt when it is
due, this is called debt amortization.
 Moratorium: It is the state's declaration that it is incapable of paying debts. We can also
say that the moratorium is the financial bankruptcy of the states. With the moratorium,
the government stops the repayment of the debt. However, it accepts the terms of the
debt and does not terminate the debt. An agreement is reached with the creditor country
or countries, and views are exchanged on a suitable payment plan.
 Rachat: It is the process of buying its own bonds from the capital market when the state is
in good condition. If the state is good, it buys its own bonds from the market if there is a
budget surplus.
ECONOMIC EFFECTS OF PUBLIC DEBT

Impact on Economic Growth
 Public debt plays an important role in economic development. This function can only be
realized by channeling development-oriented borrowing into productive investments.
 The economic growth rate may be positively and adversely affected by public debt. When
the national savings of a country is not large enough to finance public projects,
governments borrow foreign currency from external sources.
Impact on Economic Balance
 Government debts can have various effects on both consumption and production levels.
As a result of the effects created in terms of monetary and credit policy, it can have either
stabilizing or protective results in the economy.
 The effect of public debt on the consumption level can be examined in two ways. The first
of these is related to its constricting effects and the other to its expansionary effects.
The Burden of Public Debt
 There has been considerable confusion and controversy regarding the burden of public
debt and the shifting of the tax burden to the future generation.
 Classical economists maintain that any loan which is incurred for a purpose that does not
yield any direct money return imposes a burden on society.
 The post-Keynesian approach rejected this view and maintained that public borrowing for
the purpose of generating effective demand is no burden because it would activate idle
savings in the private sector and generate income and employment.
PUBLIC DEBT – ECONOMIC EFFECTS OF PUBLIC DEBT – The Burden of Public Debt – A. The
Burden of Internal Debt
A. Burden of Internal Debt
1. Direct Money Burden
 Direct money burden is the amount of tax that the people have to pay to the government
for the repayment of principal and interest.
 If the taxpayer and bondholders are the same, there is no money burden. Internal debt
involves the transfer of funds within the country because both the bondholders and
taxpayers belong to the same country.
 If the bondholders and taxpayers are different persons, and if the lower income groups
contribute more as taxes to be paid to rich bondholders, the money burden or debt is
heavier on the low-income in favor of the rich bondholders.
2. Indirect Money Burden
 The indirect money burden is felt through its effects on production. When the loans taken
by the government are utilized on development projects, it results in the creation of
demand for goods and services will rise, imposing an additional burden on society.
3. Direct Real Burden
 The direct real burden is in the form of a reduction in economic welfare and the stresses
and strains undergone by the taxpayers. Payment of interest results in the transfer of
money from one set of people to another.
 Generally, bondholders are rich people and even though they are taxed progressively, the
burden of tax fall sharply on the poor people. Besides, the bondholders are comparatively
old people, while the taxpayers are mostly young.
 The ultimate result of the repayment of internal public debt is that wealth gets
transferred from the active to inactive users of wealth. The burden of debt falls on young
persons. This, in fact, is contrary to national interests.
4. Indirect Real Burden
 The indirect real burden of debt is also felt through its adverse effects on production and
curtailment of public expenditure in development activities with a view to maximizing
resources for repayment of principal and servicing interest charges. Production suffers if
the ability and desire to work and save fall. The indirect real burden of the tax will be
heavy.
PUBLIC DEBT – ECONOMIC EFFECTS OF PUBLIC DEBT – The Burden of Public Debt – B. The
Burden of External Debt
B. The Burden of External Debt
1. Direct Money Burden
 External debt is more burdensome than internal debt because it involves the transfer of
money from the debtor country to the creditor country.
 The direct money burden of external debt arises because funds have to be transferred in
payment of interest and principal to a foreign country. Moreover, the payment is made in
foreign currency.
2. Indirect Money Burden
 The debtor country often pays interest to the creditor country by exporting goods and
services. This inevitably results in a rise in the prices of those goods and services in the
country.
 As a consequence, there is a fall in the economic welfare of the community.
3. Direct Real Burden
 The direct real burden of external debt is the effect of transference of funds because the
creditor country obtains a claim on goods and services of the debtor country. The burden
of deprivation varies according to the proportion of taxes levied for raising funds for the
different classes of people.
 If the goods on which the creditor country obtains claims are generally for the use of the
richer section of the country, the real burden of the country will be smaller.
4. Indirect Real Burden
 The taxes are imposed upon the members of the community to pay the external debt. If
heavy taxes are imposed, it would affect the willingness and ability to work of the people.
 Consequently, this decline in people’s capacities produces unfavorable effects on
production.

Note of Public Finance

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Note of Public Finance

Uploaded by

Copyright:

Available Formats

Iskender Bektenov Note of Public Finance

Assistant Professor Tuğçe AKDEMİR

Week – 1 – PUBLIC EXPENDITURE

The major theories of public expenditure are:

Similarities Between the Public and Private Expenditures

AIMS AND OBJECTIVES OF PUBLIC EXPENDITURE

Public expenditure has a vital role to play in the following aspects:

The major objects of public expenditure:

CLASSIFICATION OF PUBLIC EXPENDITURE

 It is the classification according to the  It is based on the activities of

 The aim is to determine the cost of the

2. Scientific Classification (A. Real Expenditures and Transfer Expenditures)

II. Transfer Expenditures

Week – 2 – EFFECTS OF PUBLIC EXPENDITURE

EFFECTS OF PUBLIC EXPENDITURE – 1. Effects on Production

SOURCES OF PUBLIC EXPENDITURE LAW

H. Constitutional Court Decision

2. Auxiliary (Secondary-Subsidiary) Resources

THE RELATIONSHIP BETWEEN PUBLIC EXPENDITURE LAW AND OTHER DISCIPLINES

Week – 3 – PUBLIC FINANCE MANAGEMENT AND CONTROL LAW NO. 5018

PUBLIC FINANCE MANAGEMENT AND CONTROL LAW NO. 5018

Advantages of Fiscal Transparency:

Disadvantages of Fiscal Transparency:

The Role of Fiscal Discipline in the Budget

The indicators of effective accountability are as follows;

Week – 4 – PAYMENT AND RECORDING OF PUBLIC EXPENDITURES

2. Finding and Releasing the Allowance

6. Connection of Expense to Payment Order

7. Subjecting Expense to Pre-Financial Control

PAYMENT AND RECORDING OF PUBLIC EXPENDITURES

PAYMENT AND RECORDING OF PUBLIC EXPENDITURES

2. Special Circumstances in Realization of Public Expenditures

3. Recording of Public Expenditures

Expenditures Made by Direct Payment

Expenditures Made by Payment on Account

Expenditures Made by Recording as Receivable in the Budget

LIABILITY IN PUBLIC EXPENDITURES

Fulfillment of Liability through Accountability Reports

Administrative Audit on Public Expenditures

Administrative Audit on Public Expenditures

Administrative Audit on Public Expenditures

Administrative Audit on Public Expenditures

Administrative Audit on Public Expenditures

Administrative Audit on Public Expenditures Results of Audit

Conducting the Audit in Compliance with International Standards

Other Ways of Audit on Public Expenditures

INSTRUMENTS OF FISCAL POLICY

INSTRUMENTS OF FISCAL POLICY

INSTRUMENTS OF FISCAL POLICY

INSTRUMENTS OF FISCAL POLICY

INSTRUMENTS OF FISCAL POLICY

CROWDING OUT AND CROWDING IN CONTROVERSY

CROWDING OUT AND CROWDING IN CONTROVERSY

THE EFFECTS OF LAGS IN ECONOMIC ACTIVITY

Fiscal Policy During Inflation (a)Government expenditure

Fiscal Policy During Inflation

Raising the ratio of savings to national income by checking

FISCAL POLICY FOR UNEMPLOYMENT IN AN UNDERDEVELOPED ECONOMY

FISCAL POLICY FOR UNEMPLOYMENT IN AN

Purpose of the Public Debt

Differences Between Public Debt and Private Debt

Classification of Public Debt

According to the triple classification, the term debts are as follows:

Comparison of Short and Long-Term Debt