How do public finances get into trouble?

State debt, the great theme of these elections, which is exacerbated by the current situation in Greece. Politicians are vying for who will bring a better and more amazing solution to this debt. However, in order to find the right solution, we must also look at how this debt arises. So how do public finances get into trouble?

The cycle of state finances
The cycle of state finances - click for better quality

Take a good look at the image above this text. This article will be about him (and not only about him).

There are roughly two (basic) views on the issue of state debt and state finances as such - the first says that spends too much power, that is, it is necessary save in expenditure. The second says it again few chooses, so it is necessary increase revenue.

In 2009, the state collected almost 30% of GDP in taxes. So almost every third crown earned in this country traveled to the state budget (simply put). Do you still think your income is low?

The first problem: paying and collecting taxes

The opposite is true - the income is still there too big, stand just unbelievable spends. The state collects money in taxes - and the state must already pay this collection. Tax collection is done by clerks at counters, forms are still processed by various clerks. The fact that taxes are collected honestly continues to be controlled by other government officials, all of whom need to pay a salary, office, facilities.

It's alone tax calculation is however, for taxpayers and taxpayers cargo (transaction cost). To calculate taxes, the company usually has to employ someone, or the calculation and payment of taxes costs time, which would certainly be more meaningful to use. The more complex the tax system, the more exceptions and rules they will contain, the more difficult their knowledge will be, and therefore rarer. People who know the tax system will be more expensive and will continue to do so reduce profits companies.

Another problem with paying and collecting taxes is that one is paying taxes sacrifices utility (profit) that an individual could make from this money. So does that the sacrificed benefit is a cost for the payment of taxes - the amount of this cost thus reflects the sacrificed income from the "second" best use of this money.

One always makes decisions weighs revenues and costs. The revenue from the payment of taxes are services that the state provides to individuals. Do you think these services exceed the cost of paying them? In my opinion, far from it. Taxes are thus a highly loss-making affair for society.

The second problem: bureaucrats

Imagine being in a position where you have power over almost one third of the Czech economy, over more than 1 billion crown. Your power is immense.

Imagine King Ugumba. This king is the absolute ruler of his country. He has several advisers whose advice he follows: Danonbo is an adviser on economic issues, Ukrutbo is an adviser on criminal matters, Slizonbo is an adviser on diplomacy, Akanbo is an adviser on military affairs. Do you think they are "mere" advisors?

No, it's not. In fact, it may be you the most powerful person in the state. After all, the king follows their advice, so all you have to do is make these advisers your friends and thus increase your own influence for enforcement. their interests.

In the case of high taxes, it is very advantageous for a manufacturer to make friends with Daňonb and convince this friend that taxes are too high, especially for his industry, and so that he would like them some exception in the tax system.

Of course, after Danonbo has many such "friends", people will start to complain about who Danonbo meets. He starts to watch out so that he is not too seen with someone compromising. There is nothing easier for the factory owners than finding someone unknown to the public who "friends" with Daňonb. So they will hire lobbyists. And of course - the greater Danonb's power, the greater the profits lobbyists will be able to bring to their customers (entrepreneurs), so the greater their "salary".

With a greater degree of redistribution, bureaucrats also have access to more money. The more money bureaucrats have access to, the greater their power and importance. The higher their power and importance, the more attractive they are for different interest groups. The level of corruption is growing in the state administration and the power of lobbyists.

The third problem: standing everywhere you look

After a while, however, machinations with tax laws will not be enough for interest groups. There is still a huge mass of the only honest taxpayers who are also the largest (and therefore the least organized and weakest) interest group - consumers, ordinary employees of companies. They send another quantum of money to the treasury. And so lobbyists start making new friends for their employers - in addition to Daňonba, there are also other advisers. It is possible that some counselors, looking at the luxury that a corrupt Danonbo enjoys, they will come to the lobbyists themselves.

Entrepreneurs, of course, will use it skillfully - suddenly the army equipment is outdated and necessary buy new. Suddenly, judges' robes are "out of fashion" and need to be changed. Out of nowhere is a need for diplomats new cars, and so on. Of course, most of it that is not necessary, but who do you think will profit from these trades? And you think so price will it really be the "best possible" that can be found on the market?

Imagine Mr. Vláčkomb in this kingdom. This gentleman runs a larger railway company. It works in the field of railway transport tough competition, both between the railway companies themselves and between the manufacturers of various locomotives and train systems.

Mr Vláčkombo - like others - is constantly thinking about how to outperform the competition and cut a bigger share of the rail market pie. And so one day he calls his acquaintance Lobomb, his lobbyist, who is Mr. Daňonb's "friend". "Hello, Lobombo," he says on the Train Train phone, "I need you to get me a little thing at Daňonbo, I need to get rid of the competition, I'm annoyed. Arrange it somehow, thanks! ”

Lobombo thinks, thinks when he gets a brilliant idea. He goes to Daňonb and says to him: “Hal, buddy, that's how I went by train yesterday and I noticed that normally every company that runs trains has its own trains otherwise colored! Like, it's just crazy chaos then at that station. But to make matters worse, normally there were pieces a few years old standing next to the fungl of new trains! As, how do those people come to thatwhat an old train ride when the Pendolino is standing next to them! And you terrible prices... "

Lobombo will describe the problems and not to disappoint his friend, right away offers a solution - establishment of the state Commission for the Quality of Rail Transport. It will be great - the quality will increase and the king will look like he takes care of his people!

Daňonb really likes the idea, he immediately tells the king and in a month the Commission for Railway Quality transport in the world. The Commission will, of course, immediatelyrequirements for the quality of rail transport"Where it is specified maximum age of trains, type of brakes used and more. Lobbyists of locomotive and train system manufacturers (for the benefit of their employers) is raving.

Train likes - smaller companieswhich cut together a large chunk of the rail market, very quickly they fail. Of course, Mr. Vláčkomb's company uses this to expand to abandoned tracks and railway stations. It will increase the price - competition is low and new (due to quality requirements) just like that does not arise - and reduce innovation. What to invest inwhen people and goods have to travel somehow?

The Commission for the Quality of Rail Transport itself is, of course paid by the state, for the commission must be established spaces for operation, the commission requires hiring other officials and "experts" to assess other regulations. And state money does spends, spends and spends.

Other entrepreneurs in other sectors, who see the "success" of this step in the railway market, immediately call their lobbyists to ensure something similar on their sand. Of course here it's about time - whoever convinces the adviser first, the commission will be more friendly with its results.

Stand out of nowhere ensures and controls everything everywherewhere do you look. Did you know, for example, that in the Czech Republic we have an office for support (marketing) for winemaker? You also pay this from your taxes.

The fourth problem: standing everywhere and nowhere

A huge number of new agendas means new officials, new expenses, more corruption. Few in the state know all the authorities, the whole agenda that the state provides. The state administration is opaque.

The kings report that some officials are corrupt, people are calling for redress. So the king slams into the throne and establishes Audit Office, which should control procedures in the state administration and eliminate corruption. And it threatens to be for corrupt practices punish harshly.

Lobbyists are reaping, so many new friends and potential profitable partnerships! Entrepreneurs, of course, do not want their corrupt practices to be discovered, but on the other hand, they also welcome the establishment of this office as a whole. Officials began to be quite expensive, this way they can notice to cheeky people who will claim too much threaten to influence the control authority. Of course, only after bribing important officials of the audit office.

State on paper it provides everything, but in fact nothing. The quality of rail transport is deteriorating (and this may be due to the weather, secondly to a bad tourist season, thirdly to excessive taxes, according towhat needs to be subsidized or changed), military equipment becomes obsolete what is suitable for manufacturers, not what suits the military), the level of corruption is increasing (only practices are more and more inconspicuous), "friendly" networks are expanding.

Of course, there is also an inspection office paid by the state. And it is paid very generously, the control officials defend their salaries by saying that they must be "inapplicable".

The fifth problem: where to get it?

The great expansion of the scope of the state, the increase in the level of corruption, clientelism and opaque state procurement lead to the state incredibly increase costs. The king will notice. The king knows that the people, when they get angry, can be cruel. And since the king does not want to end up one day under the guillotine, he decides not to raise taxes, but will borrow. He believes that the situation will improve in the future, and if he does not, he will probably not live to see the repayment of the loan.

However, the decision to borrow is not just the king's judgment. The king, of course, first he asked his adviser, Daňonba. And he has one acquaintance who is a bit like that lobbyist of several banks.

The state will therefore issue government bonds. Banks first they procrastinate with their purchase - through his lobbyists they know the king will decide increase the offered interestif no one wants them buy. Indeed, this has increased interest rates - and banks are willing to lend to the state. Of course that at the expense of private entrepreneurs, because the state will almost always have some way to pay at least interest. The risk of default is minimal.

However, debt repayments cut a significant part of the state budget after some time. The king therefore decides to increase taxes unpopularly. He doesn't want to find the label "foreclosure" in his castle one day. And the whole cycle is starts new.

How to get out of it?

Our imaginary kingdom is in a terrible state. But - doesn't it remind you of something?

Our kingdom has just passed vicious circle of state finances (see picture above). State he raised a lot of money on taxes, achieved profit. That happened attraction for various interest groups who wanted to make a living from this profit as well - after all, it was their money, after all, that.

By collecting enough taxes on taxes, they gained a lot moc bureaucrats who naturally got to this money. They became corruptable - it wasn't about their money, and they weren't for them either, so what would take care of some "best use", still when something could "drip" from them, right?

Interest groups thus began to pamper "their" officials. You pay them they awarded state contracts and helped them get rid of competition (regulation, various industry licensing and more).

The solution to the situation of our kingdom is clear - it is necessary to reverse the trend of a growing state and vice versa reduce the influence of the state. It is a need reduce the number of commissions and offices To protect and regulate anything, it is necessary dismiss unnecessary officials, it is necessary to replace the corrupt and corrupt, it is necessary change the system of employment of civil servants. It is also necessary pay a debt and then form purely balanced budgetsfor the state to choose only what it really needs.

The old king of Ugumba died one day, and the clever, young, brave son of Chytrombe ascended the throne. He is aware of the need for change and what needs to be done. He went to look at it New Zealandbecause there reform of the late 80s (PDF,, 854 KB) is very inspiring.

What do you think the new King Chytrombe will do when he returns from New Zealand? Do you already know how public finances get into trouble? What would you do in the place of the new king?


  1. Patrick, thanks. With those "surplus" budgets - this is the procedure, I write at the end. What was at the beginning of everything? Surplus budget…

    Jiří Vebr: This is not a deep-seated analysis.

  2. Good quote, nice metaphor 🙂 But I was confused by terminology. Surplus budgets? Aren't they called * deficient *? Surplus was if something increased… Here we are talking about the state debt…

  3. Strongly naive text, I do not intend to linger on another comment

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