The external sector is also directly related to the state budget of any country. By definition, the sum of all types of budget revenues should be equal to the sum of all types of budget expenditures:
| REV+F=EXP, | (1.12) |
| where rev | – budget revenues( revenues); |
| EXP | – budget expenditures; |
| F | – financing. |
Budget revenues usually include current revenues from taxes and state subsidies, and expenditures include current government expenditures, capital investments and net lending. There are other compositions of the budget [5, pp.59-64].
Taxes and other fees that go to the budget revenue reduce aggregate demand in the economy by reducing the purchasing power of the private (non-state) sector. Government expenditure from the budget increases aggregate demand and is, along with the consumption of enterprises and households, the most important part of gross consumption (C) in the economy. Public consumption consists of government spending on goods and services, including the income of state workers and employees.
Fiscal balance is the difference between the amount of budget revenues and the total amount of its expenditures.
The balance can be positive or negative and is respectively called a budget surplus or budget deficit. The balance is an indicator of the savings rate in the public sector. A surplus, denoting a high level of savings in the public sector, can be considered as a factor in economic development (since these savings can finance significant capital investments). A negative balance, which means a loss of savings in the public sector, may indicate a government policy of stimulating production by expanding aggregate demand by increasing public spending.
To ensure a balance between the budget and its current liquidity, the negative balance must be financed (F). Budget financing should not be confused with the financing of certain priority areas or programs. Financing of the budget is divided into financing from internal and external sources:
| F=Fd+Ft | (1.13) |
External financing (Fe) – new loans provided to a given country by other countries minus principal repayment amounts. Payment of interest on foreign loans is not considered as negative financing (capital outflow) and is included in current budget expenditures. The state’s operations to attract external loans to finance the budget are reflected both in the budget in national currency as external financing, and in the external sector in the capital flow account of the balance of payments as the attraction of medium- and long-term capital. External budget financing is the main link between the budget and external sectors.
Domestic financing (Fd) is usually carried out by providing bank and non-bank loans. The total amount of bank loans to the budget is contained in the statistical review of the state of the monetary sphere. This amount is equal to the magnitude of the change in the amount of credit the banking system granted to the state, minus the government’s deposits in banks. Non-bank loans represent the revenue going to the state budget from the sale of government debt obligations (bonds, treasury bills, etc.).
Brief conclusions. So, there is a direct relationship between the external sector, on the one hand, and the real, monetary and budgetary sectors, on the other. In the accounts of each of the vectors there is an international component, which is displayed in the external sector on the account of the balance of payments. The relationship between the real and external sector is that the balance of domestic income and expenditure, savings and investment is reflected in the current account balance. If the total income of residents is greater than their total expenses or savings exceed domestic investments, the current account balance is positive; if the total income of residents is less than their total expenses or domestic investments exceed savings, the current account balance is negative and there is a deficit. The relationship between the monetary and external sector lies in the fact that, since the sources of international financing of the current account deficit are the inflow of capital from abroad and / or the use of international government reserves, every operation of the banking system with foreign assets is reflected in the country’s balance of payments – in the capital account or in the general balance sheet. The relationship between the budgetary and external sectors is expressed in the attraction of external sources of financing the budget deficit in the form of loans to the government from other governments and international financial organizations, which are reflected in the account of operations with the capital of the balance of payments.