Course Work Theory of Finance

7/28/2019 Course Work Theory of Finance

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The economic maintenance of the State expenditure

Plan.

1. Introduction.

2. Analysis.

3. Classification of state expenditures.

4. Financing economy.

5. Financing scientifictechnical progress.

6. Expenditures on welfare measures.

7. Expenditures on defense.

8. Expenditures on management.

9. Conclusion

10. List of literature.


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Introduction.

In common usage, an expense orexpenditure is an outflow of money to another

person or group to pay for an item or service, or for a category of costs. For atenant, rent is an expense. For students or parents, tuition is an expense. Buyingfood, clothing, furniture or an automobile is often referred to as an expense. Anexpense is a cost that is "paid" or "remitted", usually in exchange for something ofvalue. Something that seems to cost a great deal is "expensive". Something thatseems to cost little is "inexpensive".

In accounting, expense has a very specific meaning. It is an outflow of cash orother valuable assets from a person or company to another person or company.This outflow of cash is generally one side of a trade for products or services that

have equal or better current or future value to the buyer than to the seller.Technically, an expense is an event in which an asset is used up or a liability isincurred. In terms of the accounting equation expenses reduce owners' equity.

State expenditures are the money costs connected with functioning of the state.As an economic category state expenditures express economic relations connectedwith distribution, redistribution, and consumption of a part of a total public productin the purposes of development and perfection of public manufacture, satisfactionof various needs of a society.

The structure of the state expenditures consists of expenditures of the state budget,state off budget funds, state enterprises and organizations, establishments ofindustrial and nonproductive spheres.

The rule of state expenditures among other categories is defined by meaning ofstate ownership and role of the state in modern conditions. The state is the

proprietor of means of manufacture, acts by the organizer of production,participates in creation and distribution of a gross public product and according tothe functions and tasks through system of the state expenditures satisfies a

significant part of public needs. Through the share of public sector in economy ofrepublic for the period of reforming sharply has decreased, but at disposal of thestate there is a significant share of property , money resources. Therefore category`the state expenditures` reflect the steady economic the steady economic relationsand saves the meaning in the long term.

The role of the state expenditures is defined by their prevailing part is directed formanufacture or maintenance with the public goods, boons and services of the

population of the country. The expenditures on the welfare purposes, defense,

protection of the legal order, management, on production and services of the stateinfrastructural enterprises and organizations, are called to satisfy general needs of


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the population in addition to maintenance with market goods and services from thepart both state, and market sectors of economy.

The set of all kinds expenditures on directions and special purpose designationforms system of the state expenditures. The state expenditures in an overwhelming

part are made at the expense of net income of a society, centralized in the budgetof the state or taking place at disposal of the state enterprise. The part of the stateexpenditures are covered at the expense of means of the population as tax

payments, receipts from the loans and etc.

Observance of an economy mode in use of resources. Necessary principle oforganization of the state expenditures is the optimum combination of budget ,credit and own sources of their covering. This principle expresses the process of cofinancing of the state expenditures.

Analysis

A welfare state is a concept of government where the state plays a key role in

the protection and promotion of the economic and social well-being of its citizens.

It is based on the principles of equality of opportunity, equitable distribution of

wealth, and public responsibility for those unable to avail themselves of the

minimal provisions for a good life. The general term may cover a variety of forms

of economic and social organization.

Welfare provision in the contemporary world tends to be more advanced incountries with stronger developed economies. Poor countries tend to have limitedresources for social services. There is very little correlation between economic

performance and welfare expenditure.

There are individual exceptions on both sides, but as the table below suggests, thehigher levels of social expenditure in the European union are not associated withlower growth, lower productivity or higher unemployment, nor with higher growth,higher productivity or lower unemployment. Likewise, the pursuit of free market

policies leads neither to guaranteed prosperity or social collapse. The table showsthat countries with more limited expenditure, like Australia , Canada and Japan dono better or worse economically than countries with high social expenditure, likeBelgium, Germany and Denmark. The table does not show the effect ofexpenditure on income inequalities, and does not encompass some other forms ofwelfare provision (such as occupational welfare ). Overall, there is a slight positivecorrelation between increased spending on social services and higher GDP percapita as well as higher HDI rating.

The table below shows, first, welfare expenditure as a percentage of GDP forsome (selected) OESD member states, with and without public education, andsecond, GDP per capita (PPPUS$) in 2001:


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State expenditure of Russia

In 2006, the state expenditures are to rise by 1% of GDP. However, the previous

years have seen their 3% fall. The countrys goal is to fix the expenditures; they

must be neither increased nor decreased. It will lead to an additional tax cut which

countrys economy still needs. No taxes are to be reduced in the near future. They

are to be administered in a proper way. The economy is not facing the threats it

faced before the 1998 collapse, thats why everyone is so enthusiastic about

situation. Nevertheless, this does not mean that the threats do not exist any more.

The state is enjoying the budget surplus but if oil prices drop to $27 per barrel the

country will experience a deficit of 0.5% of GDP.

If VAT is cut from 18% to 13% and oil prices reach $27 the gap will be evenwiderabout 2.5% of GDP. Meanwhile, the gap slightly exceeded 3% before the

1998 collapse. At the same time, the VAT reduction is to be discussed since it will

prevent the state from increasing expenditures. Moreover, such a reduction is quite

possible provided that the expenditures remain the same.

Health expenditure of Australia's economy:

$103.6 billion in 2007-08 9.1% of gross domestic product (GDP).

Australia spends a similar proportion of its GDP on health as Norway, Italy andNew Zealand. It spends more than United Kingdom and Japan, but considerablyless than the United States, which spent 16.0% of GDP in 2007.

The main areas of expenditure in 2007-08 were:

hospitals $38,557 million (39.3% of total recurrent expenditure) public hospital services $30,817 million private hospitals $7,740 million

medical services $18,338 million (18.7%) medications $13,720 million (14.0%) dental services $6,106 million (6.2%) community health $5,195 million (5.3%)

States and territories

In 2007-08, state and territory governments funded $16.5 billion of the totalexpenditure of $30.8 billion for public hospital services. This funding was67.9% of their total recurrent health funding. In addition, a large part of their$2.0 billion capital expenditure related to public hospital services.


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Long term trends

Health expenditure grew from $0.7 billion (3.8% of GDP) in 1960-61 to$103.6 billion (9.1% of GDP) in 2007-08. In 2007-08 prices, this was achange from $11.3 billion in 1960-61 to $103.6 billion in 2007-08.

Expenditure per person increased from $1,062 to $4,874 over the period(2007-08 prices).

The way health goods and services are funded, particularly by the AustralianGovernment and the non-government sector, was quite different in 2007-08compared to 1960-61. The Australian Government was responsible for27.1% of total spending in 1960-61 and 43.2% in 2007-08.

State expenditure of USA.

.


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Deduction of business expenses under the US tax code

For tax purposes, the Internal Revenue Code permits the deduction of businessexpenses in the taxable year in which those expenses are paid or incurred. This isin contrast to capital expenditures that are paid or incurred to acquire an asset.Expenses are costs that do not acquire, improve, or prolong the life of an asset. Forexample, a person who buys a new truck for a business would be making a capitalexpenditure because they have acquired a new business-related asset. This costcould not be deducted in the current taxable year. However, the gas the person

buys during that year to fuel that truck would be considered a deductible expense.

The cost of purchasing gas does not improve or prolong the life of the truck butsimply allows the truck to run.

Even if something qualifies as an expense, it is not necessarily deductible. As ageneral rule, expenses are deductible if they relate to a taxpayers trade or business

activity or if the expense is paid or incurred in the production or collection ofincome from an activity that does not rise to the level of a trade or business(investment activity).

Section 162 of the Internal Revenue Code is the deduction provision for business

or trade expenses. In order to be a trade or business expense and qualify for adeduction, it must satisfy 5 elements in addition to qualifying as an expense. Itmust be (1) ordinary and (2) necessary, 290 U.S. 111, defines this as necessary forthe development of the business at least in that they were appropriate and helpful).Expenses paid to preserve ones reputation do not appear to qualify. In addition, itmust be (3) paid or incurred during the taxable year. It must be paid (4) in carryingon (meaning not prior to the start of a business or in creating it) (5) a trade or

business activity. To qualify as a trade or business activity, it must be continuousand regular, and profit must be the primary motive.

Section 212 of the Internal Revenue Code is the deduction provision forinvestment expenses. In addition to being an expense and satisfying elements 1-4


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above, expenses are deductible as an investment activity under Section 212 of theInternal Revenue Code if they are (1) for the production or collection of income,(2) for the management, conservation, or maintenance of property held for the

production of income, or (3) in connection with the determination, collection, orrefund of any tax.

In investing, one controversy that mounted throughout 2002 and 2003 waswhether companies should report the granting of stock options to employees as anexpense on the income statement, or should not report this at all in the incomestatement, which is what had previously been the norm.

Classification of the state expenditures

The structure of the state expenditures consists of expenditures of the state budget,

state off budget funds, state enterprises and organizations, establishments of

industrial and nonproductive spheres: 1) expenses connected with industrial,

economic-operational activity. 2)on the extended reproduction (basic and

circulating capitals). 3) payments in the budget and off-budgets funds.4)in

incentive and stimulating funds.

The first group of expenses are connected with circuit of funds 9capital) represents

both compensation of production costs and concern to the expenditures

conditionally (in meaning of the of `expense`). Therefore state expenditures on the

enterprises include only second and third group of expenditures.

The organization of the state expenditures is reached by means of their forecasting

and also establishment of the strict order of their financing and use of means.

Therefore one of principles of organization of the state expenditures is planned

character. The special purpose character of financing f the state expenditures

assumes use of the public funds on strictly certain measures.

The irrevocable character of financing of the state expenditures does not direct

compensation of the given resources (as against a credit method). The financing ina measure of performance of the plans (forecasts) of development assumes

allocation of financial resources only at performance of industrial parameters and

realization of measures according to the forecasts of economic and social

development.

Separate kinds of state expenditures are non-uniform on the economic content and

meaning. Distinctions in sources, forms and methods of financing of expenses are

caused by it. Major criterion of differentiation f state expenditures is their relation

to process of material manufacture and creation of national income. According to it

the state expenditures on economic contents subdivided into three basic groups:


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1) expenditures directly connected with manufacture and concerning to industrial

sphere.

2) expenditures in nonproductive sphere of activity.

3)expenditures on creation of state reserves.

The first group of expenditures is caused by economic activity of the state and is

connected with creation of the national income. The second group of state

expenditures is connected with consumption of national income for satisfaction of

public needs of a society. The state expenditures of the third groupon creation

and replenishment of state reserves intend for satisfaction of needs both industrial

and nonindustrial spheres at force majeure, for example, at acts of nature, for

compensation of losses and maintenance of uninterrupted operation of supply of

the enterprises, establishments, organizations population by the goods andproducts.

To a subject attribute, welfare measures, science, defense and management. To a

territorial attribute the state expenditures are divided on accommodation of

productive forces and perfection of proportions in a national economy. The state

expenditures on a branch attribute in sphere of material manufacture are divided

into expenses in an industry, construction, agriculture, transport and

communication, trade, supply and preparations; on nonproductive sphere

subdivided into expenses for education, science, public health services and

physical culture, social insurance and social maintenance, on a defense and

management.

The state expenditures should ensure the most complete satisfaction of state needs

at as much as possible (maximum) an effective utilization of means. In this

connection there are two methods of financing of the state expenditures determined

by features of managing:

1) Financing the selfsupporting enterprises and organizations are made at the

expense of own resources, credits of bank and in a missing partat the expense of

budget assignments.

2) Budget financing. In this order expenses for welfare measures, contents of

bodies of state authority and managements are financed, defense determined on the

basis of the special documentsof the individual plans of financing (estimates).

The establishments and organizations financed in such order are called budget.

3) As the way in exclusive cases is applied emission financing at the expense of

release of cash money in the reference and credit issue (noncash).


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The following forms of budget financing are applied : the grants, subventions,

subsidies. At grants of money resources are allocated in the irrevocable order from

the budget and of off- budget funds for covering of the losses of the enterprises

and organizations and also for balancing below worth budgets .

Subventionsform of the target state financial help on programs and measures onmaintenance of social support of population and other purposes; in case of

infringement of target use of means they must be returned.

The subsidiesgrant in the money or natural form at the expense of means of the

budget, off - budget and special funds on irrevocable financing of the certain

measures on a share basis. The listed forms (in case of their realization) has a form

of transferring financing. Transfers in a broad sensegratuitous and irretrievable

from the budget and off - budget funds.

Financing economy

Expenditures on development of economy are money resources directed on

creation of conditions for constant growth of volumes of manufacture and

increases its efficiency. The following concern to them : investments in a fixed

capital (capital investment), repair of a fixed capital, gain of circulated means,

creation of material reserves, formation of special funds and funds of target

financing.

The main place in expenditures on economy occupy investments in a fixed capital

(capital investment)set of expenses of the material, labor and money resources

directed on extended reproduction of a fixed capital of all branches of a national

economy.

Expenditures on repair (for partial restoration of physically worn out and obsolete

fixed capital and maintenance them in a efficient condition) is made at the expense

of special fund of repair of a fixed capital created on the specification withinclusion of expenses in the cost price of production, jobs and services of the

enterprises and organizations.

The gain of circulated means in financed at the expense of own or equating to them

of means of enterprises. At their lack the budget means basically for the new

enterprises are allocated of the credit with its subsequent repayment is given.

The expenses for creation of reserves are a necessary condition of maintenance

continuous of circuit means and all process of the extended reproduction,observance of economic proportions, compensation of losses from natural disasters

of nature. The financial reserves enable to maneuver money resources to eliminate


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temporary financial difficulties arising during economic activity at the enterprise.

The reserve funds are created at different levels of managing. State reserves

stocks, created by the state of major kinds of raw material, materials, fuel, some

kinds of machines and equipment, grain, articles of food, production intended for

defense needs.

Financing scientifictechnical progress

The choice of a source of financing of scientific and technical progress (STP)

depends on stages and accordingly kinds of scientific and technical development,

among which : fundamental and applied scientific researches, design development,

introduction of new engineering and technologies, methods of organization of

manufacture, work and management.

The basic principles of financial maintenance STP should be multitude of sourcesof financing and their target orientation. Applied and introducing measure STP

should be financed from selfsupporting (centralized and decentralized) funds

and at the expense of bank credits. As these measures directly influence on

efficiency of manufacture, influence on its final directly results the flexible tax

policy ensuring close communication of incomes of enterprises and organizations

with final results of their activity in sphere STP should be conducted.

By the important direction of stimulation of acceleration STP can be the grating of

the target grants and soft loans for the subjects who are carrying out priority

directions STP, indemnifications at the expense of specially created investment

funds of the increased expenses on development, application of the accelerated

amortization of a fixed capital.

Source of financial security of STP can become resources of innovative funds for

rendering financial support; these funds can be formed in branches or regions at the

expense of means of the developers and consumers of scientific and technical

production, banks, other interested enterprises and organizations and also budgetmeans of local bodies of authority.

Recently such source of financing, as sponsor`s receives the certain development,

by granting the grantsspecial money and other means transmitted gratuitously

and irrevocably by the citizens and the legal persons, including foreign,

international organizations on realization of concrete scientific researches on

beforehand stipulated conditions.


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Expenditures on welfare measures

The important direction of the state expenditures is financing expenses on social

and cultural measureseducation, information services (seal, broadcasting and

TV), culture, art, public health services, physical culture and sports, the state social

insurance and social security. The given expenditures are divided into thefollowing kinds:

1) Education and professional training of staff;2) Culture, art, sports and mass media;3) Public health services;4) State social insurance and social help;

The mentioned expenditures are a part of the expenditure on public goods, boon,

service. They are directed by the state on collective and individual consumption ofthe members of a society as money transfers and also free of charge (or potential0

material boons and services.

Expenditures on education include: general secondary education, outside of school

education (children`s establishments, musical schools etc.), professional, average

special and maximum education. All listed expenditures become covered by

budget resources in a part of a level, guaranteed by the state.

Expenditures on preparation and improvement of professional skill of workers andother staff on manufacture are included in the cost price of production, jobs and

service.

The establishments of education involve offbudgets means and resources,

including currency, at the expense of granting paid educational services; the part of

means is given by the enterprises in organization - sponsors.

Financing of culture and the arts includes the contents of libraries, clubs, houses of

culture, museums and exhibitions, theatres, philharmonic societies, musical staff,ensembles, filmstudious; they are financed from the budget and also means of

the enterprise and organizations, public organizations. A number of establishments

of culture and the grants from the budget on size of the expenditures established on

them which are not covered with the own incomes.

The expenditures on physical culture and sports are financed at the expense of

means of the state budget, means of trade union organizations, incomes of the

enterprises and organizations, own means of sports societies.


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Expenditures on supporting mass media in Republic of Kazakhstan are directed on

financing of state broadcasting, TV, publishing houses, newspapers and magazines

in which the state acts as the founder. Sources of financing of state public health

services are:

Means of the republican and local budgets selected on the budget programs. Deductions from the income of the enterprises and organizations, target

grants of ministers, departments and other bodies of management.

Means of the international organizations under the special programs. Means of medical establishments received for performance of above

permitted standard medical and other services to the employers and for

rending of paid services and other kinds of economic activity.

The charitable contributions of organizations and citizens, including otherstates.

Means of state public health services are directed on :

Rending medical aid to the citizens;Target complex programs of public health services;Development of material base of state public health services;Support of medicalpreventive in sanitaryepidemic establishments;Preparation and improvement of professional skill of the medical staff;Development and introduction of a medical science;Liquidation of epidemics of infectious diseases;

The expenditure on physical culture and sports are financed at the expense of

means of the state budget, means of tradeunion organizations, incomes of the

enterprise and organizations, own means of sports societies.

Expenditures on social protection of the population

The given group of expenditures occupies the greatest densities in the system of

state expenditures. In conditions of transition to the market relations expenditures

on social protection of population become priority also grow in connection with a

rise in prices of consumer goods and services and also as a result on inflation and

depreciation of money.

Social protection represents system of priorities and mechanisms of their

realization through state and other institutes for maintenance of a level, guaranteed

to the citizens of normal ability to live according to concrete conditions of publicdevelopment.


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Social expenditures are carried out through the state centre on payment of

pensions, State accumulation pension fund, State fund of social insurance, social

funds or funds of consumption of the enterprises and organizations. The payments

are made by bodies of social protection of population, enterprises and

organizations, organizations of nonmaterial sphere.

Expenditures on social protection of population in the financial documents, plans,

forecasts, reports are reflected as the expenditures on social security and social

help.

Social security covers a wide spectrum of the relations on material support of the

invalid and not working members of a society. Social insurance acts as a form of

social security, payments of the social grants and so named the social help to

needy layers of the population.

Social insurance on its economic nature connected with labor activity of man and

formation of funds for the appropriate payments dependent on results of this

activity. That is, the means on social insurance are formed substantially by a

principle of self financing with a large or smaller time interval from their reception

by the user`s (insurants).

Social aid to needy is distributed to many categories of population which is

basically for poor and has character rendering assistance at the expense of

the state or charitable fundspublic, target, private and has the purpose

charity for poor .

Thus, it is possible to emphasize three methods of formation of means for

financing social needs: insurance, budget, charitable payments (donations).

The insurance method means assumed deductions of means in the certain size from

volumes of activity listed on channels of redistribution for financing of kinds of

social payments.At a budget method means are allocated from nationwide fund of money

resources at a level determined by opportunities of the state and the purposes of

social and budget policy.

At a method of charitable payments (donations) means have no the fixed sizes and

are spent in a measure of their receipt on channels and for the purposes determined

by organizations, carrying out charitable payments.

Social insurance is realized mainly through system of pension provision, payment

of grants, social payments in case of loss of the supporter, in case of lose of job, in


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connection with pregnancy and sorts, in connection with adoption of the newborn

child (children), on a care of the child after achievement by him age of one year.

Expenditures on defense

Financing of defense is directed on guaranteed satisfaction of requirement of the

Armed Forces of other armies and military formation in financialmaterial and

other resources.

The centralization of management and management in the Ministry of Defense of

Republic of Kazakhstan requires the appropriate centralization of financial

resources directed on defense. Therefore expenditures on defense are financed

mainly from the republican budget (about 80%). Except for budget means, it is

possible to use other means : the state establishments of the armed forces have the

right to receive and to use the sponsor`s, charitable help and also aid renderedwithin the framework of militarytechnical cooperation.

The financial security of defense includes :

a) Financing the armed forces;b) Expenses for development, manufacture and purchase of arms, military

engineering, production of technological purpose;

c) Scientific researches and development of defensive character;d) Capital construction of military objects (air stations, ranges, bases, places

dislocations of military parts and divisions etc.);

e) Creation and development of information systems;f) Individual share in keeping the joint armed forces and military objects at

formation of militarypolitical unions of the several states;

g) Expenses for preparation and retraining of the military staff;The initial data for planning expenditures on a defense are the plans of battle and

political preparation, material and economic plans, staffs, number of personalstructure, norm of a material and money contentment, price for military deliveries.

At planning expenditures the material and money norms are used. At summary

financial planning the combined norms are applied, and by comparison of the

estimates of financing of military partsindividual financial norms.

The selfsupporting industrial enterprises and building organizations of a

defensive structure are financed, basically on the same principles as enterprises and

organizations of branches. The ministry of finance checks the estimates of the

Ministry of Defense from the point of view of validity of account, conformity to


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their established norms; analyses annual gives on them the conclusions; checks

expediency of use the selected resources and validity of expenditures.

Expenditures on defense are considered by Government in structure of the

republican budget and the Parliament accepts the Law on a republican budget for

the appropriate year, where expenditures on defense are affirmed by separatefunctional group. The bodies of a financial service in military districts and in

military parts, educational institutions carry out control of expenditures of money

resources on keeping army.

In Kazakhstan expenditures on functional group `defense` are included

expenditures on organizations of prevention and liquidation of consequences of

extreme situations natural and of technologic character, on measures of a civil

defense, fireprevention protection and liquidation of fires. Appreciably these

expenditures are financed from the local budgets as well as expenditures on

keeping military registration and enlistment offices.

Expenditures on management

The system of bodies of state management is a set of legislative, executive and

representative bodies of all levels and also machinery of an economic board.

Expenditures on keeping of bodies of state management annually affirmed in the

structure of expenditures of the budgets of all levelsfrom republican up to local.The budget means are spent according to the authorized estimate, which is the

basic document determining volume of expenditures of establishment, target

direction of means and their on quarter distribution.

In conformity with economic classification structure of expenditures on keeping

the machinery of management are: current expenditures (expenditures on goods

and services including wages, compensatory and money payments; payment of

compensation; the grants etc. current transfer payments); capital expenditures:granting credits, individual share and financing.

The main documents determining expenditures on keeping of management are a

list of staff and individual plan of financing (estimate) of the expenditures.

The bodies of management, organization and establishment at formation of a list of

staff are guided by typical structures, typical staffs, specifications of numbers,

circuits of the official salaries of the workers, rates of wages and norms on other

kinds of the device of management.


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Expenditures on keeping management of the state enterprises and organizations are

included in production costs are reflected in the cost price of production, and their

coordinating bodiesare the expense of deductions from the income which is be

at the command of enterprises and organizations after payment of prime payments

(according to the made contracts about division of powers and functions of

management).

Bookkeeping for expenses

In double entry bookkeeping , expenses are recorded as a debit to an expenseaccount (an income statement account) and a credit to either an asset account or aliability account, which are balance sheet accounts. An expense decreases assetsor increases liabilities. Typical business expenses include salaries, utilities,depreciation of capital assets, and interest expense for loans. The purchase of a

capital asset such as a building or equipment is not an expense.

Cash flow

In a cash flow statement, expenditures are divided into operating, investing, andfinancing expenditures.

Operational expense (OPEX)salary for employees Capital expense (CAPEX)buying equipment

Financing expenseinterest expense for loans and bonds

An important issue in accounting is whether a particular expenditure is classifiedas an expense, which is reported immediately on the business's income statement;or whether it is classified as a capital expenditure or an expenditure subject todepreciation, which is not an expense. These latter types of expenditures arereported as expenses when they are depreciated by businesses that use accrual

basis accounting, which is most large businesses and all C corporations.

The most common interpretation of whether an expense is of capital or income

variety depends upon its term. Viewing an expense as a purchase helps alleviatethis distinction. If, soon after the "purchase", that which was expensed holds novalue then it is usually identified as an expense. If it retains value soon and longafter the purchase, it will be viewed as capital with life that should beamortized/depreciated and retained on the Balance sheet.


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Conclusion

The aim of state expenditure - is to produce controlled, accurate and timelyfinancial results of the highest standards by developing norms and standards,systems for monitoring financial performance and professionally qualifiedmanagers in all spheres of government through integrated financial systems, theeffective management of information and resources and professionally trained

people.

Government expenditures are measured by two criteria: characteristic and function.The characteristic classification of general expenditures is measured according tothe time element involved. The functional classification is the arrangement ofexpenditure data according to purpose or type of service rendered.

There are different ways to design expenditure rules.

- Targets can be set for overall general government expenditure or excludesome categories (interest payments, unemployment benefits, capitalexpenditure). Targeting total government expenditure has the advantage ofsimplicity and transparency. However, it can induce a bias towards thereduction of less politically-sensitive spending categories, for example capitalspending.

- The target can be defined in nominal or in real terms. A target defined in

nominal terms is more simple and makes monitoring easier. It can also provemore helpful in stabilizing the economy in case demand-pull inflation wouldemerge. On the other hand, a target set in real terms allows to take intoaccount the impact of inflation on expenditure developments.

Finally, there is the issue of the time span covered by the rule. It is generallyconsidered that multi-annual spending rules are superior to annual rules,

because the latter can be more easily circumvented by postponingexpenditures to the period immediately following the budget year. Ideally, in

the context of multi-annual rules, deviations in one year should becompensated for the following years.


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List of literature

1. IFRS Framework, F.702. Capital expenditures must recovered over a period of years through

depreciation and amortization.

3. For more on this subject, see Donaldson, Samuel A., Federal IncomeTaxation of Individuals: Cases, Problems and Materials 170-73 (2d ed.2007).

4. 2009 year. V.D. Melnikov. Finance `the textbook for high schools

Course Work Theory of Finance

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