Monika Strugała – Economia e Financas Publicas

1. Explain the functions of State in national economy

The role of government is essential for every country, but in a market economy, most economic decisions are made by individual buyers and sellers, not by the government.

Economists, however, identify six major functions of governments in market economies. Governments provide the legal and social framework, maintain competition, provide public goods and services, redistribute income, correct for externalities, and stabilize the economy.

The government must use a combination of various policies such as fiscal, monetary and exchange, as they will interact anyway. And if they are not property coordinated the interaction effect can lead to an ineffective result or worse. The judiciary and legislative systems must be well organized, effective and focused on these new economy demands. These institutions are critical for the country’s reliability, which definitely encourages the foreign investors. It is useless to have the best monetary, exchange and fiscal policies if the legislative and judiciary systems are outmoded, ineffective, weak and not committed to the country’s development in this new era. If the legislative branch does not work properly, the laws tend to be insufficient and ineffective to discipline the country legal framework where the financial market is located. On the other hand, even with a good legal framework, it’s essential to have an engaged and active judiciary system to help to enforce the law. Of course, all the governmental institutions are expected to be well synchronized and active, creating a positive synergy where the legislative and judiciary systems will provide the support for a suitable economic policy to succeed.

3.The taxes policy in Poland

At the end of the 1990s, one of the main features of the Polish tax system was its

capacity to generate a sizeable revenue on a continuous basis, so as to finance government spending and lower the budget deficit. Because of this reason, unlike other transition economies, Poland has not experienced any kind of fiscal crisis.

A new pension fund system was introduced in 1999: labor taxes have been substituted with contributions to individual pension accounts, which are a form of compulsory savings.

The Polish tax system is not very diversified and the level of aggregate taxation is more stable than that of most other transition economies.

In 1997 tax issues were regulated in the new constitution. In the same year, The Act on Rules for Taxation came into force: it regulates tax liabilities, tax information, tax proceedings, tax audits, fiscal confidentiality. The basis of assessment of the income tax, collected by the Government and partially distributed to the local communities, includes all revenues from labor, capital, business, property, but there is a wide and generous set of allowed deductions and exemptions. The corporate income is taxed on the basis of the classical system but, with reduce the impact of double-taxation.

The major remaining State sources of revenue are the social security contributions, paid by the employers, the employees and the self-employed individuals and earmarked for large extra-budgetary social security funds. The picture is completed by the Agricultural Property Tax, the Forestry Property Tax, the Real Estate Property Tax and some other minor taxes

The tax system is less diversified than in other countries: small taxes, such as property,

inheritance or environmental fees, produce almost no revenue. Thus Poland has a somewhat narrow range of tax instruments.

11. The deficit of budget in last years (Poland)

A government budget deficit is the amount by which some measure of government revenues falls short of some measure of government spending.

If a government is running a positive budget deficit, it is also said to be running a negative budget surplus (and conversely, a positive budget surplus is a negative budget deficit).

The meaning of 'deficit' differs from that of 'debt', which is an accumulation of yearly deficits. Deficits occur when a government's expenditures exceed the revenue that it generates. The deficit can be measured with or without including the interest payments on the debt as expenditures. The primary deficit is defined as the difference between current government spending on goods and services and total current revenue from all types of taxes net of transfer payments. The total deficit (which is often called the fiscal deficit or just the 'deficit') is the primary deficit plus interest payments on the debt.

Reasons of financial deficit in Poland:

1. transition costs

2. consequences of the introduction of parallel four reforms (pensions, health care, local government, educational)

3. excessive increase in spending, primarily social in relation to the real possibilities of income,

4. economic slowdown,

5. excessively elaborate, costly public administration,

6. lack of a coherent, clearly defined fiscal policy,

7. low tax collection

Over the past 19 years only once succeeded to the state budget revenues were higher than expenditures. In 1990 there was a budget surplus.

Since 1991, all subsequent years, the budget was less money than they were spending

Comparing deficits in quantitative terms, however, is unreliable. Because inflation does not reflect that in the 90s was a two-digit, and the level of budgetary expenditure and revenue and economic growth.

Therefore, the most common measure of the scale of the deficit is its relation to Gross Domestic Product. It shows how many percent of national income in that year it was.

The height of the budget deficit is closely linked to economic growth.

Economic slowdown automatically translates into a decrease in budget revenues - declining profits for companies, so they pay lower taxes on income, consumption decreases are therefore lower revenues from indirect taxes.

In this situation, to finance government spending has a choice: reduce expenses, increase revenues, mostly by increasing taxes and privatization, or recourse to deficit.

The first and second solutions are difficult to achieve - to a large extent require legislative changes, and are unpopular in society. Therefore the easiest way is to increase the deficyt.