Chapter 3

Question 1

The government or public sector

CRLP

Answer 1

A. Central government ( national issues ie foreign affairs)
B. Regional/provincial government (Regional issues, housing, health, education)
C. Local government( local issues, sewage)
D. Public corporations(eskom, rand water)

• A + B + C = general government
• A + B + C + D = Public sector

Question 2

Government participation in the economy

Answer 2

1. Private initiative and market forces are generally more efficient than
   government
2. Government must provide an appropriate environment (e.g. legal
   framework) in which markets can operate
3. Markets sometimes fail
4. Markets produce efficient, but not necessarily equitable outcomes
5. Markets tend to generate instability through business cycles
   Both government and markets needed in economy.

Question 3

How does government intervene?

Answer 3

1. Public provision of goods and services
2. Government as a market participant
3. Government spending
4. Taxation
5. Regulation

Question 4

Fiscal policy and the budget

Answer 4

• Definition of fiscal policy:
Level and composition of
• government spending,
• taxation,
• and government borrowing

Question 5

Government response to business cycles

Answer 5

• Recession
➢Expansionary fiscal policy
➢Government spending increases
And/or
➢Taxes decrease
➢Budget deficit increases

Expansionary phase
➢Contractionary fiscal policy
➢Government spending reduced
And/or
➢Taxes increase
➢Budget deficit decreases

Question 6

Government spending financed by:

Answer 6

• Income from property
• Taxes
• Borrowing
• Domestic capital markets (government bonds)
• International capital markets (government bonds)
• Central Bank (SARB – inflationary financing)
• Borrowing increases public debt and interest on public debt

Question 7

Criteria of good taxes

Answer 7

• Neutrality
• Should have minimum possible effect on relative prices
• Equity
• Ability to pay principle
• Horizontal equity
• Vertical equity
• Benefit principle
• Administratively simple
• Compliance costs
• Tax avoidance vs tax evasion

Question 8

Different types of taxes

Answer 8

• Direct taxes: Ievied on persons, specifically on wealth and income
• Indirect taxes: Income on goods and services, levied on transactions
• General taxes: levied on most goods and services
• Specific taxes: levied on selected goods and services
A tax can be across these categories, for example:
VAT is an indirect tax and a general tax

Question 9

Progressive, proportional and regressive taxes

Answer 9

• Progressive
• The higher your income, the larger the percentage of income paid
in tax.
• Proportional
• Tax ratio is the same for all levels of income.
• Regressive
• Takes a larger percentage of poorer individuals’ or households’
income in tax.

Question 10

Personal income tax

Answer 10

• The most important form of direct taxation in SA and also the most
important single source of revenue
➢Levied on taxable income (tax base)
➢Marginal tax rate and average (or effective) tax rate
➢Includes capital gains tax
➢Progressive tax

Question 11

Company tax

Answer 11

• Company profits (tax base)

* Proportional tax

Question 12

Value-added tax (VAT)

Answer 12

• Indirect tax
• Regressive tax
• 15% in South Africa
• Some products exempted:
dried beans, samp, maize meal, rice, brown bread, vegetables, fruits,
vegetable oil, mealie rice, pilchards in tins, edible legumes and pulses
of leguminous plants, eggs, milk, dried mealies, dairy powder blend,
lentils, cultured milk, milk powder, brown wheaten meal