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CONSIDERATIONS REGARDING THE IMPACT OF TAXES AND

PROCUREMENT ON PUBLIC DEBT

MARIA PIROI1

DANA-CODRUŢA DUDĂ-DĂIANU2

1 Buchares University of conomic Studies , Bucharst, Romania, e-mail: m.piroi@gmail.com

2 Aurel Vlaicu University of Arad, Arad, Romania, cddaianu@yahoo.com

Abstract: The paper aims the diagnosis of international theory and

practices regarding the impact of economic policies on public debt.

Research methodology of working paper consist in the fundamental

concepts and treaties belonging to various schools of classical and modern

thought regarding economic policy of the state, their impact on economic

recovery, and increase of social welfare, as well as the definition of public

debt. The practical value of the work lies in analyzing the impact of taxes

and government purchases of government debt.

Key words: economic policies, public debt, social welfare

INTRODUCTION

The government has systematically solved the problem of the final product coverage

of state debt created by previous governments; th problem to determine the share of the

final product intended for productive and unproductive consumption. The amount of

unproductive consumption currently has an impact on economic development; productive

consumption operating impact in subsequent periods; state debt, which in the past have

contributed to solving problems become a "burden" on the economy.

Technical endowment of labor is the key lever for ensuring the country's economic

development. In highly industrial developed countries the unproductive consumption

volume is about 66-70% of the final product. This is a consequence of past economic

policies. The theory of consumer behavior was treated along the time by Hicks (1937),

Friedman M., Schwartz A. (1963), P. Temin (1976), Bernanke B. (1983), Brown E.C.

(1965), Gray J. (1976), Fischer S. (1977), Friedman M. (1998). In which regard the

consumption, J.M. Keynes started his theory from three assumptions: propensity to

consumption is a fraction less than unity; average propensity to consumption decreases

when income increases; consumption is determined by current income. The assumptions of

J. M. Keynes was confirmed by a row of practical investigations belonging to Hall R.E.

(1988), Campbell I.Y., Mankiw G.N. (1994).

State debt occurs when the government admits a state budget deficit exceeding the

allowable one. State debt helps to reduce financial savings from bank interest rate increase

and therefore reduces investment and jobs. State debt may be the result of several

activities, such as reducing taxes, contributing to increased consumption and therefore

reduce unproductive financial savings with subsequent negative effects.

Reduction of taxes and covering the created budgetary deficit from the account of

state debt can create effects on the economy in several ways. For short periods, the

increasing of unproductive consumption growths demand for goods and services, causing

the expansion of production and the reducing of unemployment. But the reduction of

financial savings and increased requests for finances increases the demand, therefore bank

interest rate will increase, thus hindering national investments, and helping to increase the

flow of foreign investment

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It can also be added thaton long-term reduction of taxes contributes to decrease the

productive accumulation, to increase external debt, the GDP will decline, and the share of

external debt to GDP will increase foreign debt, the following generations will return the

burden of return foreign debt with low economic potential. The impact of tax cuts to

increase government procurement can be exemplified. Under N. Gregory Mankiw (1994)

in 80s last century, the United States faced with a situation without precedent. In 1981 year

in support of president Ronald Reigan, the Congress passed a law regarding the reduction

of income tax for the next three years. Consequently, the federal budget deficit was about

4% of GDP over the next 10 years. Since 1960 until 1985 (before the entry into force of

this act) account current operations was positive, with a proficit between 1 and 2% of

GNP; the profit of federal budget was about 3-4% of GDP. Since 1985, the US was

transformed from a creditor country into a debitor one, the burden on the federal budget

has increased considerably.

MATERIALS AND METHODS

Given that government debt is the result of the economic policies of the state and the

result of management capacity of state for financial flows at budgetary level, has been

undertaken a methodological research of the impact of taxes and governmental purchases

on public debt. Considering the fact that a part of the public debt - foreign debt - is the

country's image vis-à-vis the rest of the world, there was an analysis of public debt in

relation to development assistance from outside.

Research methodology is represented by concepts and fundamental treaties

belonging to various schools of classical and modern thought regarding economic policy of

the state, their impact on economic recovery, and increase social welfare, and also the

analyze of public debt concept. During the investigation, being used scientific theory of

knowledge bases applied by the methods of induction, deduction, analysis and synthesis,

comparison, was employed statistical methods, mathematical-economic research to reveal

the factors that greatly influence the level of public debt.

RESEARCH RESULTS

The amount of taxes, government procurement drive revenue in the budget means for

determining the size of government procurement.

If the value of resources for government procurement is lower than government

procurement, at government disposition be some alternatives: the government reduces

government procurement; use state debts from future generations; allow an increase in

inflation, that means debt burden puts on actual generation. And the situation in which the

value of resources for government procurement and government procurement are equal,

the government can afford certain fiscal policy reforms according to the political color of

the ruling party, the government program, the successes and failures of technical-scientific

progress in country and abroad. If the amount of resources devoted to government

procurement is higher than government procurement, the government may consider the

same alternatives as for equality, in addition to transferring the surplus thereafter.

Investment function determines the dependence of the amount of investment required

(I) and financial percentage fee amount (r) with increasing actual percentage fee required

investment amount is reduced. This dependence can be expressed by function:

(figure no.1.).

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The function of investment represents the investment’s demand. The investment’s

offer consists of private savings and government savings, so it depends on the bank

interest, namely S(r) = 0 ⋅ r + S .

r - bank interest rate, real percentage tax, cost of borrowing funds

Fig.1. Function of investment

The fee Percentage change until the condition is satisfied: , that means

investment’s demand equals investment’s supply. Bank interest rate (r) depends on the

value (the amount) of economies (S). This dependence is also available for reversed

situation: the economy contributes to decreasing percentage fee increase r and vice versa.

Increasing government procurement or tax cuts, or both, can leading at reduction of

potentially amount of funds for investment. Consequently percent tax increase and

otherwise, will decrease (figure no.2).

Reduction of taxes and increasing of government purchases moves right SS parallel

"down" and tax percentage will increase; otherwise - right SS moves alongside "up" and

the cost of borrowing is reduced from r * to r2

Fig.2. Increase, decrease of percentage fee for credit, for loan funds

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The investment’s function in a general form has the relation:

C > 0 expresses increasing demands for investment; C < 0 – reduction of investment

demand. In the first case the cost of borrowing will increase, in second case - will decrease.

From the assumption that private and governmental savings, depending on rate (r), changes

with speed proportional to the amount of savings. We compiled equation ,

de where we get: In this case the percentage fee, the cost of finance for

investment can be determinate by the equation: , hence we get:

. This result can be interpreted graphically (figure no.3).

Fig. 3. The cost of the balance of resources for investment

Depending on fiscal policy, the initially amount of S0 can increases with ΔS1 or can

decreases with ΔS2. Therefore the balance cost in the first case will be reduced from r* pto

r1, in th second case – will grow up r2. The examined consequences can be considered at

the basis of economic policy if the productive funds, labor, production technologies are

constant, exogenous sizes. Was establishd that the functions I(r) and S(r) determine the

national banking rate for equilibrium state. Changes in government purchases (G) and

taxes (T) in some way determines the amount of resources (S) for investment.

Next indicator that should be taken into account when it is accepted or not accepted

state debt is global banking rate that open can be influenced by a small economy. We

recognize that national bank rate is (r *) (figure no.4.).

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Fig. 4. Impact of global banking rate on net exports

If the national bank rate r(n)

coincide with world bank rate then net exports is zero; if

, than NX > 0; if , than NX < 0. Deci datoria de stat are un anumit impact

asupra ofertei de investiţii, în consecinţă asupra ratei bancare naţionale, a exportului net. So

state debt has an impact on the supply of investment, consequently on national bank rate,

in effect on net exports.

CONCLUSIONS

We concluded that the state debt depends directly on the amount of taxes. These can

be targeted to increase productible accumulation or to reduce their accumulation. In our

opinion, taking into account international practice on, it is reasonable that taxes be viewed

exclusively only means of securing government contracts because they serve as regulators

in stimulating the accumulation of productive processes.

Being composed of the algebraic sum of the state budget deficit, of the assets and

liabilities of the government, state debt can be quantified in the division of each year by

discounting coefficient, by updating coefficient. Assets may consist of fixed capital,

financial resources in the form of dividends from loans, rent of buildings,rent of land. The

algebraic sum of capital assets and liabilities is zero, so we find that capital assets not

reduce nor increase state debt.

The international community faces an unprecedented circumstances of the

requirements and opportunities of building a healthy global economy, lasting and balanced.

While some developing countries have managed to achieve a rapid external growth lie on a

satisfactory external financial position, more countris continues to have a more acute

situation on the achievement of development resources. For these countries is necessary to

increase the external funding sources to supplement their economies by imposing an

appropriate financial support. The aid to developing countries should be qualitatively and

quantitatively. So external financial assistance is an especially helpful, very important. But

this must be considered in the broader context of the development of exogenous sources,

sources that not replace, but complement the internal factor, own effort, which is and must

remain an essential element of economic growth of a nation.

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