For the last decades the majority of developed countries have been witnessing state role strengthening with national product distribution, which manifested itself in a marked increase in public expense financing. Therefore, public institutions came to putting forward new requirements for the effectiveness of the decisions implemented by the government authorities and for the consequences of the regulatory actions taken in various economic sectors. In this context many countries were forced to revise operational principles and mechanisms of one of the most significant constituent elements of government – the system of public finance, with the government efficiently carrying out its economic functions being a key issue in reforming the system. The article “Finance of Law-based State” dwells on the role of public finance in  a contemporary law-based state. The authors consider the institution of state as a subject for grasping the operational logic of public finance. Regarding the conception of a state, the new institutional theory turns back to J. J. Rousseau’s theory of social contract, provided for people to give up some rights to a government. The article draws a comparison between “market failures” and “government failures” in the light of the present-day public finance updating issues, aimed at transition to a result oriented budgeting. The public finance updating results in reducing negative consequences of both economic “failures” (market and government) with permanent control from public and state institutions. The authors give a thorough analysis of the French budget system reform model with the Constitutional Bylaw on Budget Acts as a key element. It should be noted that the government bodies’ performance objectives in the reform being implemented are viewed from the perspective of a citizen, taxpayer and consumer of the state services. The state budget is expected to become a document open to public scrutiny as a result of reform efforts. This will make it possible to estimate accurately the amount of finance being allocated by the government to any area and to correlate it with the achieved results. It is essential that not only executive bodies, but parliament and financial institutions participated at the initial stage of reform implementation.