Public Finance

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The following article is from The Great Soviet Encyclopedia (1979). It might be outdated or ideologically biased.

Public Finance


the aggregate of economic relationships arising from the creation and use of centralized and decentralized monetary resources. Public finance originated under conditions of regular commodity-money exchange as a result of the development of the state and the state’s requirement for resources. The essence of public finance, the sphere of commodity-money relations that public finance encompasses, the role of public finance in social production, and the patterns governing the development of public finance are determined by the economic structure of society and the class nature of the state.

Most of the state’s requirements in precapitalist formations were satisfied by taxes in kind and service obligations. K. Marx observed that “taxes in kind and services formed the basis of the Roman Empire at the high point of its development. Strictly speaking, the empire’s monetary economy was developed fully only in the army and never encompassed the entire labor process as a whole” (K. Marx and F. Engels, Soch. Public finance under capitalism,2nd ed., vol. 12, p. 729). In slaveholding and feudal states, state expenditures were mainly allocated for warfare, the monarch’s court, construction (temples, irrigation canals, ports, roads, aqueducts), and the bureaucracy. State revenues came mainly from state property (domains) and regalia (the monarch’s monopolistic right to receive income from certain trades), the spoils of war, tribute from conquered peoples, taxes in kind, service obligations, customs duties, and loans. Public finance acted to increase the exploitation of slaves, peasants, and craftsmen. With the disintegration of feudalism and the concomitant, gradual development of the capitalist mode of production, the revenues and expenditures of the state acquired greater importance. At the same time, the relative importance of taxes in kind and service obligations declined sharply.

In the early stages of the state’s development, no distinction was made between the resources of the state and those of the sovereign. Monarchs regarded the country’s resources as their personal property. The concept of public finance (as the aggregate of state revenues and expenditures), state budgets, and state credit originated in 16th-century France with the formation of a state treasury and the clear division between the treasury and the monarch’s property. Public finance provided a major impetus to the primitive accumulation of capital.

Under capitalism. Public finance under capitalism embodies the economic relations arising from the formation and use of monetary assets in the redistribution of national income. The essence of public finance is determined by the economic laws of capitalism and by the nature and activities of the capitalist state. The state uses its finances to increase the exploitation of working people, thereby allowing the bourgeoisie to consolidate its position and enabling the state to perform its functions. The principal elements of the financial systems of capitalist states are the national budget, the budgets of local governments, special government funds, and finance as it applies to state-run enterprises and corporations.

Public finance in capitalist countries has been characterized by a rapid growth of spending, a growth brought about mainly by the increased militarization of the economy (formation of standing armies, weapons research). By the end of the 19th century, state spending in almost all capitalist countries for military purposes and for servicing the part of the national debt arising from militarization accounted for more than two-thirds of the total. Large sums were also spent on maintaining the state apparatus, including the parliament, ministries, departments, public prosecutors, police, and prisons. The amounts spent on education and public health were negligible. Taxes were the principal source of state revenue, and the burden of taxation was borne solely by the working people.

During the period of state-monopoly capitalism, fiscal policy has been purposely used by imperialist states to manipulate the economy, enrich the monopolies, suppress workers’ and national liberation movements, underpin the capitalist system, and initiate wars of aggression. Through its policy, the state is able to affect production and the structure and rate of growth of national income. A key function of fiscal policy is the redistribution of national income in favor of the monopolies. In the early part of the 20th century, fiscal policy in the industrially developed capitalist countries effected a redistribution of 9–18 percent of the national income; in the 1960’s and 1970’s, the figure was 45–60 percent. Large sums from the national budget are transferred to the leading monopolies in the form of payments for defense contracts at artificially inflated prices, interest payments on state loans, large-scale subsidies, and export bounties.

A feature common to all imperialist states is the militarization of their budgets. Between 1966 and 1975 alone, defense spending in the United States rose from $56.8 billion to $94.8 billion ($122 billion in 1976); in Great Britain, defense spending went from £2,100 million to £4,500 million during this period (£5,600 million in 1976), and in the Federal Republic of Germany, defense spending rose from 19.4 billion marks to 31.8 billion marks. The manipulation of the economy under state-monopoly capitalism manifests itself in a fiscal policy that allows for increased state expenditures for capital investment, for large-scale machine-based production in agriculture, and for state-run enterprises, joint state-private enterprises, improvements in the country’s infrastructure, and research and development.

With the collapse of the colonialist system, imperialist states have increased their “aid” to the developing countries of Asia, Africa, and Latin America. This “aid” is an instrument of neocolonialism in that it is used by imperialist states to keep underdeveloped countries within their sphere of influence and to perpetuate the status of the latter as sources of cheap raw materials and labor power and as a sphere for profitable capital investment. As the state-monopoly trend becomes more pronounced, greater expenditures are required for the apparatus of the state, that is, for the police, courts, public prosecutors, higher state bodies and local agencies.

Spending on social needs increased in all imperialist countries after World War II. This rise stemmed, on the one hand, from the intensification of the struggle of the working people to improve their living conditions (especially in view of the successes achieved in raising the standard of living in socialist countries) and, on the other, from the need created by the scientific and technological revolution for better-educated workers. Monopolies rely on the national budget to meet a considerable percentage of the cost of reproducing labor power.

The huge growth in state expenditures has made necessary a continuous rise in direct and indirect taxes. But even with an increase in taxes, the budgets of most imperialist countries chronically show deficits, which increase the national debt. Between 1913 and 1975, the national debt of the United States increased from $1.2 billion to $577 billion, that is, by a factor of more than 440. In Great Britain, the debt during this period grew from £700 million to £46,000 million, or by a factor of more than 65. The growth of the national debt has increased both taxation and inflation.

Budgets on the local level (provinces, counties, municipalities), which are not part of national budgets, supply a considerable portion of the funds for the construction and maintenance of the infrastructure and the reproduction of labor power. The budgets of local governments rose sharply in the 1960’s and 1970’s as monopolies strove to use spending programs in their own interests. In view of the narrow revenue base of local governments, this growth in expenditures has increased reliance on the central government. In a number of countries (Great Britain, Japan) local governments rely on subsidies from the central government to cover more than 50 percent of their expenditures.

Social insurance funds, which are formed by contributions from workers, employers, and government, are the major special-purpose government funds. The contributions of workers to these funds in 1974 amounted to 5.85 percent of wages in the United States, 6 percent of wages in France, 15 percent in the Federal Republic of Germany, and 8.0 percent in Japan.

The expansion of the state sector in the economy has led to the creation of government corporations—large-scale state-run production associations encompassing all or a considerable percentage of the enterprises in a given branch. Examples are provided by the nationalized industries in Great Britain (coal, electric power, gas, steel, rail transport); in all, there are 17 government corporations. State-run enterprises also exist in the United States, France, Austria, Japan, and many other capitalist countries. These enterprises draw up income statements and balance sheets; the place they occupy in national and local budgets is established by law. Government corporations typically have low profitability, and they must resort to borrowing to finance a large part of their capital expenditures. Other distinguishing features are the small amount of reserve capital and the high degree of indebtedness to the national budget. Thus in fiscal year 1974–75, four of Great Britain’s largest government corporations (electric power, gas, rail transport, post office) sustained an aggregate loss of £749 million, whereas the combined profits of two other associations (coal and steel) amounted to only £123 million. Capital investment by all the country’s state-run enterprises in the fiscal year 1975–76 totaled £3,939 million. Of this amount, £1,052 million, or 27 percent, was put up by the enterprises themselves (depreciation, profit), and £2,887 million, or 73 percent, came from outside sources (government credits, subsidies, foreign loans). The use of large-scale credits to finance investment projects increases the indebtedness of state-run enterprises. While the indebtedness of Great Britain’s industries at the time of their nationalization (1946) was £2,100 million, in 1975 it amounted to £16,400 million.

Asia, Africa, and Latin America. In the developing countries of Asia, Africa, and Latin America, public finance is an important instrument for overcoming economic backwardness and achieving economic independence. In countries going through progressive socioeconomic transformations (Algeria, Burma, Somalia, the Republic of Guinea, Tanzania), the state actively uses its finances to overcome the effects of colonialism, restructure the economy, develop the state sector, restrict the sphere of activity of foreign capital, and raise the people’s standard of living. In countries following a capitalist path of development, public finance works primarily to strengthen the position of the national bourgeoisie.

In the majority of countries where the state sector either has not been developed to any significant degree or is used for the redistribution of wealth in the interests of the bourgeoisie, state revenues come mainly from taxes. Indirect taxes, mainly customs duties and excise taxes, predominate, providing between 70 and 95 percent of total revenues.

The nationalization of financial institutions and insurance companies in a number of countries and the creation of national development banks have promoted an internal buildup of capital. Nonetheless, the ever-mounting requirement for resources compels these countries to resort on a regular basis to domestic and foreign loans. The developed capitalist countries grant credits primarily for the development of the infrastructure and the production of export crops (coffee, cacao beans, peanuts, cotton). The foreign indebtedness of 86 developing countries for state and state-guaranteed credits (including unpaid balances) amounted to $140–160 billion in 1974 (compared with $74 billion in 1970). According to the International Bank for Reconstruction and Development (World Bank), servicing the foreign debt absorbs more than 20 percent and sometimes more than 30 percent of export earnings.

The greater cooperation between developing countries and especially between oil-producing countries and developing countries without oil has been important in strengthening the financial position of the poorer countries. Members of the Organization of Petroleum Exporting Countries (OPEC) use some of their “petrodollars” to assist other developing countries, especially Arab and African countries. A number of special funds for this purpose have been set up in OPEC countries; the Arab Bank for Economic Development in Africa was set up in 1974.

Financial aid from socialist countries promotes the development and genuine economic independence of the poorer countries. Member nations of the Council for Mutual Economic Assistance (COMECON) grant long-term credits to finance major economic projects. The USSR plays a leading part in extending financial aid and granting credits to the developing countries. Credits granted by the USSR to 47 developing countries (in the latter part of 1974) financed the construction or reconstruction of 870 enterprises, 450 of which are now in operation. Through the International Investment Bank, cooperation between developing countries and COMECON nations with regard to grants and credits is being expanded on a multilateral basis.


Under socialism. Public finance under socialism is an economic category that expresses the production relations arising from the formation, distribution, and use of financial resources during the process of extended socialist reproduction. The essence of public finance is determined by the socialist economic system, which is based on public ownership of the means of production, and by the nature and functions of the socialist state.

Public finance ensures an orderly, uninterrupted circulation and turnover of resources in each economic unit and in the national economy as a whole; it plays an important part in establishing the proper proportions in the development of the national economy, in balancing the physical and value elements of reproduction, and in increasing overall economic efficiency. Socialist public finance is characterized by its planned nature, by its consistency and stability, and by its direct link with material production and commodity circulation. The state uses its finances to solve a wide variety of economic, political, and social problems.

Socialist public finance has two principal functions. One is the distribution of the social product and national income in such a way as to promote the planned development of social production and a rise in the people’s standard of living. The other involves attainment of control over society’s material, labor, and financial resources and encouragement of the efficient use of these resources. Finance also serves as an instrument for furthering socialist economic integration, strengthening friendly ties with developing countries, and expanding mutually advantageous economic, scientific, technical, and cultural ties with capitalist countries.

IN THE USSR. Public finance has played an important part in the development of productive forces, the realization of socialist transformations, and the improvement of production relations at all stages of socialist and communist construction in the USSR. It has also figured in the establishment of socialist ownership, the industrialization of the country, the collectivization of agriculture, and the cultural revolution. The steady meeting of the requirements of the front and the rear during the Great Patriotic War (1941–45) and the postwar reconstruction and dynamic development of the national economy were directly influenced by public finance. The effect of finance has also been seen in the steady rise in the people’s standard of living and in the construction of the material and technical basis for communism. Under developed socialism, public finance and a unified fiscal policy play a greater role in forming a rational structure of social production and increasing the efficiency of the structure in order to accelerate the rates of communist construction and the improvement of living standards.

Soviet public finance has at its disposal the finances of socialist enterprises (associations), the finances of economic sectors, and national finances. The finances of enterprises (associations) and sectors of the economy are the basic elements of the financial system since they are directly involved in material production, where the gross social product and national income are created. Enterprise finances are linked with economic performance through profit-and-loss accounting, requiring that expenditures on production and sales be covered by earnings and that profits be sufficient to develop production (fund for the expansion of production), form economic incentive funds, and meet commitments to the state.

The profits of state enterprises and organizations increased from 27.7 billion rubles in 1960 to 87 billion rubles in 1970; in 1976 the figure was 109.8 billion rubles (according to plan). Of the profits from 1976, 41 percent were retained by the enterprises for capital investment and for working capital, economic incentives, and other purposes. Enterprises and economic organizations make payments to the USSR state budget; included here are payments for production assets, fixed (rent) payments, payments from the residual profit balance, and payments of turnover tax.

National finances include the funds of the state budget, state social insurance, state property and personal insurance, and state credit. A central place in finance on the national level is occupied by the USSR state budget—the basic state financial plan—which forms a centralized monetary fund. The budget plays a coordinating role in the unified system of Soviet public finance. As the socialist economy develops, as its planned character is strengthened, and as the state’s economic, organizational, cultural, and educational activity grows, the state budget increasingly becomes a budget of the entire national economy, and it plays a greater role in extended socialist reproduction. The state budget is used to distribute and redistribute more than 50 percent of the national income and approximately two-thirds of the country’s total financial resources.

The concentration of vast financial resources in the state budget and the planned distribution of these resources create a solid financial base for ensuring high rates of development in social production and science and technology, for raising the people’s living standard, and for strengthening the nation’s economic and defensive might. At the same time, the centralization of a significant part of net income in the state budget facilitates the detection and efficient utilization of reserves and the strengthening of economic accountability and the policy of economies. The state budget is used to distribute and redistribute resources between productive and nonproductive spheres, among the various sectors of the national economy, and among the nation’s republics and economic regions. This type of distribution makes it possible to concentrate resources in the key areas of social production and to resolve other nation-wide problems.

The leading place of the state budget in the system of Soviet public finance is determined not only by the vast amount of resources distributed through the budget but also by the influence the budget exerts on the formation and use of monetary resources in all elements of the financial system. Through financial planning, the accumulation of monetary resources, and budget financing, the state budget operates as an effective instrument for monitoring the economic and financial activity of enterprises, associations, and sectors of the economy. A distinguishing feature of the Soviet state budget is that the resources come primarily from the socialist economy’s revenues and accumulations, which together constitute more than nine-tenths of the total budget. Taxes levied on the population contribute less than 9 percent of budget revenues.

State budget revenues under the ninth five-year plan (1971–75) totaled 950.6 billion rubles, of which 865 billion rubles (91 percent) came from the socialist economy. An overwhelming percentage of budgetary allocations (approximately 85 percent in 1975) are used to finance the national economy and sociocultural measures; this high percentage attests to the economic efficiency of the allocations. Budgetary expenditures under the ninth five-year plan amounted to 933.2 billion rubles, of which 467.1 billion rubles were for the national economy, 338.6 billion rubles were for science and sociocultural measures, 88.7 billion rubles were for defense, and 9.4 billion rubles were for government operating expenses.

The USSR state budget is an integrated budget system comprising approximately 50,000 different types of budgets. It also includes the social insurance budget, which is drawn up and administered by bodies belonging to the All-Union Central Council of Trade Unions. The drafting, approval, and administration of the USSR state budget and the division of revenues and expenditures among the various elements of the budget system are carried out on the basis of democratic centralism and the unity of the budget system and fiscal policy of the Soviet state.

State property and personal insurance is based on the state monopoly of insurance activity; the state forms an insurance fund to cover damage to cooperative and kolkhoz production and personal possessions caused by natural calamities or accidents. The fund of the Central Administration of State Insurance (Gosstrakh) is formed by payments from cooperative and kolkhoz enterprises, public organizations, and the population; it forms part of the national economic reserves intended to ensure the continuity of socialist production.

State credit is used by the government to channel the unused assets of enterprises and the savings of the country’s population toward the expansion of socialist production.

IN OTHER SOCIALIST COUNTRIES. Just as in the USSR, public finance in other socialist countries is characterized by the unified nature of the financial system and by the prominent role within the system of the state budget. At the same time, these countries have certain specific ways of organizing the finances of enterprises and sectors of the national economy and of incorporating the incomes of socialist enterprises into the budget. In some countries, the part of the profits of socialist enterprises going to the budget is governed by fixed norms; each sector of the economy may have a norm (Czechoslovak Socialist Republic), or payments may be determined by a progressive tax (Hungary, Poland). In order to regulate payroll funds, enterprises pay a tax on wages; the tax is either paid out of profits (Czechoslovak Socialist Republic, Poland) or added on to unit costs (Hungary). Variations can also be seen in the methods employed in setting up and using funds of economically accountable enterprises. In most countries, the fund for the expansion of production is intended not only for the financing of capital investments but also for the formation or replenishment of working capital. Poland and Bulgaria draw heavily upon bank credit for capital investments; in other socialist countries, however, enterprises and economic organizations rely primarily on their own resources and on allocations from the state budget to finance extended reproduction of fixed capital stock.



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