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 that² 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.³

Since the onset of the reforms the Russian 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

Russian: 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.

R.: Yes, it's common knowledge that fiscal policy is a powerful tool in the hands of governments, it is a major factor determining macroeconorriic performance. Substantial evidence existsts,⁴ 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.

R.: 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 more easily administered tax system.

R.: More often than not, however,⁵ 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.

R.: 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.

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

F.: Exactly. As far as I know, in Russia 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.

R.: 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 Russia: federal, regional and local.

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

R.: 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.

Notes

¹ are vested in various levels of government – переданы различным уровням власти

² It is argued that... – Утверждают, что...

³ ... is likely to be achieved – ... по всей видимости, будет достигнут

Конструкция «is likely + инфинитив» называется «именительный падеж с инфинитивом» или «сложное подлежащее».

Этой конструкцией можно заменить сложноподчиненное предложение с главным предложением, выраженным безличным оборотом типа it is said 'говорят'; it is reported 'сообщают'; it seems, it is likely 'похоже, по-видимому' и т.п.:

It is said that they know English well.  They are said to know English well.

Оборот «сложное подлежащее» употребляется, когда сказуемое выражено:

1) глаголами to say, to state, to report, to announce, to believe, to consider, to hear, to suppose, to think, to expect, to know, to understand, to see в пассивной форме.

Перевод предложения со сложным подлежащим начинают со сказуемого, которое по-русски выражается неопределенно-личным оборотом «Известно ...», «Говорят...», «Сообщают» и т.д. Дальше строится дополнительное придаточное предложение, в котором роль сказуемого будет играть инфинитив. Перфектный инфинитив переводится глаголом прошедшего времени:

Non-tax revenues are reported to have Сообщают, что с прошлого года

considerably increased since last year. неналоговые доходы существенно возросли.

2) глаголами to seem, to appear, to prove, to happen, to chance в активной форме:

I happened to be there at the time. Случилось так, что в это время я был там.

3) оборотами to be likely, to be unlikely, to be certain, to be sure: They are likely to come. Вероятно, они придут.

⁴ Substantial evidence exists... – Имеются веские доказательства того, что ...

⁵ More often than not, however... – Однако, гораздо чаще ...