Unit 3 fiscal management

A. TEXT

Financial policy. Fiscal sphere

Financial policy is a very complex notion covering measures aimed at working out basic concepts, major guidelines, goals and objectives, as well as at creating an adequate financial mechanism and at directing financial activities of a country. Financial policy is based on strategic guidelines which set long-term and medium-term prospects for using financial resources and ensure attainment of major economic targets and solution of goals in the social sphere. At the same time a country pursuing its financial policy sets current goals and objectives connected with mobilization and effective utilization of resources and development of productive forces.

Over the past two decades financial problems have exacerbated the world over. Public debts have reached unsustainable levels in a growing number of industrial countries. This development and its results - higher interest rates, lower investment, and slower growth in living standards - have stimulated efforts by policymakers to find solutions to swollen budget deficits.

Central to these solutions is fiscal policy. Fiscal policy is the policy adopted by a government for raising revenue to meet expenditure.

For countries that now face unsustainable fiscal deficits, financial stabilization represents a top priority.

The answer to financial stabilization lies in the effectiveness of fiscal management - the principles, institutional arrangements, information flows, and techniques that govern the budget process and define fiscal relations between levels of government.

Most western nations operate some degree of fiscal federalism, which is the system of taxation and public expenditure in which revenue-raising powers and control over expenditure are vested in various levels of government within a nation, ranging from the national government to the smallest unit of local government.

A system of multilevel finance may be justified in terms of allocative efficiency on the grounds that while some public goods, such as national defence, confer benefits on the nation as a whole, the benefits of other goods, such as refuse collection, are more limited in geographical incidence. It is argued that by making decisions concerning the provision and financing of the latter type of goods at the level of local rather than national governments, the best or optimal level of provision is more likely to be achieved.

Since the onset of the reforms the Ukrainian Federation has been in the process of creating a new system of taxation and rules to administer taxes and to distribute those taxes and expenditure responsibilities among levels of government.

B. DIALOGUE

Effective fiscal policy

Ukrainian: What's the essence of effective fiscal policy?

Foreigner: You are raising a difficult question. In general, fiscal policy is the policy adopted by a government for raising revenue to meet expenditure.

U.: Yes, it's common knowledge that fiscal policy is a powerful tool in the hands of governments, it is a major factor determining macroeconomic performance. Substantial evidence exists, however, that some countries use this tool badly. As a result they have problems of internal and external balance, low growth rates and huge deficits.

F.: You are right, they do. But quite a number of governments seeking to overcome fiscal problems, work to design adequate fiscal policies. They give increasing attention to expenditure priorities and the structure of taxation.

U.: They introduce new taxes, don't they?

F.: Well, such measures are most unpopular. Governments give emphasis to raising tax elasticity, which enhances the ability of the tax system to generate increases in revenue without resort to new tax measures or rate increases. Countries try to broaden the tax base, reduce tax exemptions, and achieve a simplified and morel easily administered tax system.

U.: More often than not, however the budget deficit remains a problem for many countries. How do countries most often reduce, the burden of budget deficit?

F.: It all depends on the country's economic and financial position. In principle, the ways are only too well-known: borrowing from domestic bank and non-bank sources and borrowing from "the rest of the world", as economists say. Fiscal deficits can be rather easily reduced by countries having well-developed capital markets.

U.: True, but my feeling is that under fiscal crises, governments, first of all, cut spendings.

F.: Well, yes, some do. But governments seeking to pursue effective fiscal policy do their best to maintain the public deficit at a level consistent with other macroeconomic objectives like controlling inflation, promoting private investment and maintaining external creditworthiness. They work for most effective utilization of scarce government sector resources, for the allocation of resources to achieve growth and equity objectives.

U.: I see. Thus, tax and expenditure policy issues are central to an effective fiscal policy.

F.: Exactly. As far as I know, in Ukraine most of the revenue comes from four taxes. I mean the profit tax, the value-added tax (VAT), the personal income tax, and excise taxes.

U.: Yes, you are right. These taxes account for the bulk of the revenue. But in general, the system is still complicated more than 150 taxes are collected in Ukraine: federal, regional and local.

F.: What about non-tax revenue, where does it come from in Ukraine?

U.: Mainly from privatization and sale of government securities. In spite of the efforts to improve the budget system, we still have a lot of confusion and intermingling of functions in our fiscal sphere.

F.: Streamlining of intergovernmental fiscal relations is a serious task for many governments.

А. VOCABULARY LIST

Англійський варіант	Російський варіант	Український варіант
fiscal management	управление государственным бюджетом	управління державним бюдже­том
fiscal sphere	бюджетно-налоговая сфера	бюджетно-податкова сфера
notion	понятие	поняття
major guidelines	основные направления	головні напрямки
long-term	долгосрочный	довгостроковий
medium-term	среднесрочный	середньостроковий
attainment	достижение	досягнення
current	текущий	поточний
productive forces	производственные силы	виробничі сили
exacerbate	ухудшить(ся)	погіршити(ся)
public debt	государственный долг	державний борг
unsustainable	постоянный	постійний
swollen	раздутый	роздутий
fiscal policy	бюджетно-налоговая политика	бюджетно-податкова політика
fiscal deficit	дефицит бюджет	дефіцит бюджету
fiscal relations	бюджетные отношения	бюджетні відносини
fiscal federalism	бюджетный федерализм	бюджетний федералізм
revenue-raising powers	полномочия по сбору налогов	повноваження зі збору податків
multilevel	многоуровневый	багаторівневий
justify	оправдывать, (зд.) считать целесообразным	виправдовувати, (тут) вважати доцільним
public goods	общественный товар	суспільний товар
refuse collection	сбор мусора	збір сміття
incidence	сфера охвата	сфера обсягу
create	создавать	створювати
to administer taxes	руководить сбором налогов	керувати збором податків

В.

Англійський	Російський	Український
essence	суть, сущность	суть, сутність
internal balance	состояние внутренних расчетов	стан внутрішніх розрахунків
huge	огромный	величезний
tax elasticity	эластичность налоговой системы	еластичність податкової системи
enhance	увеличивать	збільшувати
resort	обращение	звертання
to broaden the tax base	расширять налоговую базу	поширювати податкову базу
tax exemption	освобождение от уплати налогов	звільнення від сплати податків
capital market	рынок долгосрочного капитала	ринок довгострокового капіталу
consistent	совместимый	сумісний
creditworthiness	кредитоспособность	кредитоспроможність
income tax	подоходный наог	прибутковий податок
excise (tax)	акциз	акцизний збір, акциз
аccount for	составлять	складати
non-tax revenue	неналоговые доходы	неподаткові прибутки
securities	ценные бумаги	цінні папери
confusion	неразбериха	плутанина
intermingling of functions	дублирование функций	дублювання функцій
streamlining	усовершенствование	удосконалення

EXERCISES

Ex. 1. Answer these questions:

A. 1. What does the notion "financial policy" mean?

2. Do many countries face financial problems these days? What are they?

3. What is fiscal policy?

4. What fiscal trends have been registered in the industrial countries since the early 1970s?

5. What does the effectiveness of fiscal management imply?

6. What is fiscal federalism?

7. What has been done in Ukraine so far in the field of fiscal relations?

8. What expenditure responsibilities are practised in Ukraine?

9. What measures should countries facing unsustainable fiscal de­ficits take?

B. 1. Is fiscal policy a powerful tool in the hands of a government?

2. What are the major taxes in Ukraine these days?

3. Does the tax system provide for collection of a great number of taxes?

4. Where does non-tax revenue come from in Ukraine?

Ex. 2. Give derivatives of:

financial adj collect v effectiveness n

measure n shift v government n

objective n consumption n distribute v

unsustainable adj transfer n defense n

produce v

Ex. 3. Say in a few words what the main text is about. Use the opening phrases from Ex. 3 (Unit I).

Ex. 4. Sum up the content of the main dialogue. Use the phrases from Ex. 4 (Unit 1)

Ex. 5. Work on vocabulary and grammar.

a) Study the key words for the unit in the dictionary at the back of this book:

macroeconomic performance, deficit, management, taxes, revenues, expenditure, policy, taxation, balance of payments, trade, debt;