Public Revenue / Outlay Transparency
Recent financial accounting scandals have seriously damaged the reputation of business executives and the trust many had in financial audit professionals. Although these scandals involve the private sector of our economy, distrust of public officials in the management of public finances is historic and pervasive. A full analysis of the scandals is not yet complete, but it is apparent that questionable financial transactions increased markedly after Congress minimized regulatory oversight by deregulating energy and telecommunications industries to achieve neoclassical economic efficiency. This paper presents the public revenue / outlay transparency diagram to counterpoise an alternate financial management framework. It is an easy-to-use and easy-to-understand device for public finance accountability and performance monitoring. The ideas embedded in the diagram are presented in their historical context and explained through the diagram’s use with exemplary models of the present day. Use of the public revenue / outlay transparency diagram by public administrators could begin a process of building trust, by making financial planning, transactions, and auditing reports transparent, publicly available, and understandable.
Public Revenue and Public Outlay
Economics and its sister discipline of fiscal administration have been labeled the “dull” sciences for peculiar reasons, given the fact that the fates of individuals, family groups, cities, and nations hang on the outcome of decisions made consistent with those sciences. This irony washed against our faces with the regularity of ocean waves recently with the financial frauds of Enron, Arthur Anderson, WorldCom, and Halliburton, to name a few. An important reason for the irony is that the current application of economic science is divorced from key fundamental principles of its origins. In years prior to the writings of colonial East India Company’s scribe Adam Smith, administrators using basic economic principles did not tolerate the lack of oversight of commerce that provides the lifeblood of nations and societies as we are seeing tolerated today.
One of the originators of modern finance was Prussian economist Justi (1717-1771), who described wealth as blood in his analogy that compares fiscal administration of a republic with the maintenance of a healthy human body2. Later, Sonnenfels (1773 - 1817), in the same tradition as Justi, described “principles according to which the revenues of the State may be most advantageously raised.”3 A more simple but precise formulation of economic principles for fiscal administration cannot be devised. First, estimate the needs of he State (public), and dra(w) up a corresponding budget. Second, determin(e) the resources of the State (public). Third, by comparing the former with the latter, discove(r) the proportion of the resources (that) it will be necessary to use in order to cover the needs. Fourth, (apply a) technique of assessing and collecting the revenues. However, without an understanding of the two classes of governmental revenues and two classes of governmental expenses described below, these simple principles cannot be applied competently or sustainably.
Sonnenfels divides the sources of revenue into “mediate” and “immediate.”4 Mediate revenues are those that originate with the conduct of the nation’s business, such as from protective tariffs and taxes on commerce and industry. Today, mediate revenues include funds from the creation of public indebtedness such as through the sales of revenue bonds and the taking out of loans, and federal grants. Immediate revenues are those that originate from payments by individuals through income and property taxes, user fees, and penalties. Sonnenfels advocated the use of mediate revenues for covering the ordinary expenses of the state, such as the promotion of manufacturing and other “occupation enlarging” endeavors, and the provision of the general happiness of the citizens.5 In complementary fashion, he advocated the use of immediate revenues for extraordinary expenses of the State to cover unanticipated (e.g., war) or “luxury” expenses, i.e., those beyond the simple maintenance of society.6 A significant advance in understanding public finance and measuring the performance of fiscal administrators would be made if the ideas of Sonnenfels were systematized into a framework for use in economic analysis.
The public revenue / outlay transparency diagram is presented below, followed first by three public finance models described in terms of the diagram, then examples of the practical use of the diagram.
Public Revenue / Outlay Transparency Diagram
Figure 1 illustrates the basic public revenue / outlay transparency (PR/OT) diagram, consisting of two pie charts. The chart on the left is for revenue (receipts), and the other chart is for outlays (expenses). The revenue pie is divided into slice “a” for mediate revenues and “b” for immediate revenues. The relatively larger size of “a” over “b” is characteristic of a mature economy.
The outlay pie is divided into slice “x” for current services expenses and “y” for capital expenditure and debt payment outlays. Likewise, the relatively larger size of “x” over “y” is characteristic of a mature economy. Few would disagree that a fiscally responsible government would seek a relationship of a + b >= x + y (Eq. 1).
The divisions within the revenue and outlays are such so that what Mikesell describes as the “golden rule of governmental finance” can be attained; i.e., “…match current revenue to spending on current services, but borrow only to support capital spending and thereby maintain the net worth of the public sector.”7 The importance of this condition is detailed below.
