MODULE 5
Government Economics
5.1 The role of government
The state or the public sector is responsible for providing certain goods and
services to citizens. It determines the policy regarding goods and services at
national, regional and local levels.
Economic role of government
- Intervenes where private initiative is lacking or reluctant to enter a specific field
of production
- Passes legislation to protect the public and promote sound competition.
The government role as an entrepreneur
- When some products/ services are undervalued by the market mechanism the
government intervened e.g. (Health, education, sanitation etc.)
- Certain goods and services require huge capital outlay which private sector is not
prepared to provide.
- To achieve potential and socio economic aims
- Financial institutions in the public sector are specifically organized to render
certain collective functions on behalf of the state.
The government as legislation
It is important to have rules and regulations so that people know what they are
allowed to do and what not to do. The government passed legislation to ensure
that:
- The production process functions in an orderly fashion
- Entrepreneurs make real effort to promote socio - economic aims of the
government.
The government as supplier, organizer and coordinator of economic activities
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Where private sector is lacking, government supplier essential services. The
government ensures efficient allocation of natural resources, develop trade,
stimulate and stabilize economic growth.
Functions of government
- Economic order and protection function (citizens must feel free & safe)
- Social welfare ( wellbeing of the nation )
- Economic welfare ( Government regulates the economy and stimulate economic
growth)
The budget
Budget is a document in which government presents its revenue and expenditure
forecast for the coming year. It requires approval of parliamentarians before it can
be implemented, it is a plan that specifies how much money is available for a given
period and the expenditures to which this money will be allocated.
There are two sides to each budget, the income (revenue) side and the expenditure
side.
Main source of government revenue
- Taxes
- Central bank
- Foreign markets
- Government bands
- Donations
- Administrative income
- Commercial income
- State property
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5.2 Expenditure and taxation
Government spends money on general services, community services, social
services and economic services.
Concept of taxation
Taxes are compulsory contributions levied by the state on its citizens for financing
services of public interest.
Incidence of tax - refers to the person who ultimately must pay the tax.
Tax shifting - When tax is levied on are person, who shifts it on to the shoulders of
someone else, the tax is shifted.
Tax avoidance - The method the taxpayer uses to reduce the tax load. Reducing
income in some other forms to avoid taxation.
Tax evasion - The tax payer does not give an accurate report of income and
expenses because she/he is trying to pay less tax, or pay no tax
Progressive taxation - The percentage levied rises with an increase in the level of
income. Higher income groups are taxes at higher rate.
Regressive taxation - The percentage levied remains a constant percentage with an
increase in the level of income. All incomes are taxed equally.
Average tax rate - is the percentage of the overall taxable income that is paid in
taxes.
Marginal tax rate - is the percentage at which the last rand of income was taxed
Types of taxation
1. Direct taxation
2. Indirect taxation
Classification of the state expenditure
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State expenditure is classified according to the nature of services rendered
1. General or collective services (Defense, maintenance of law& order and general
administration of the country)
2. Community services (roads and sanitation)
3. Social services (education housing, health and creation)
Economic services (direct production)
Fiscal policy
It is the attempt of government to influence the economy by means of changes in
expenditure or taxes to minimize unemployment or inflation and encourage
economic growth.
The aims of fiscal policy (Gear)
1. Full employment
2. Economic stability (Redistribution of wealth)
3. Developing economic growth
Fiscal policy instruments
1. Income policy (obtaining income from tax payers)
2. Investment policy (Encouraging investment than spending)
3. Public debt policy and control (The government most compete with citizens in
borrowing funds from financial institutions)
Effects of fiscal policy
Encourages industrial development
Private enterprise
Reduces government spending
Promotes exports by means of export subsidies
Promotes decentralization of industries (Privatization)
Stabilizes economic growth
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