Chapter 3: The Public Sector Flashcards
What sectors make up the government sector?
Central
Provincial / Regional
Local
SOE
What is the basic economic question?
What to produce, how to produce it and for whom?
When do governments need to intervene in free markets?
- When there is market failure
- To enforce rules (contracts, defence, property rights, etc
- When markets are not equitable (even when they are efficient they aren’t necessarily equitable)
- To assist with macro objectives (full employment, rapid growth, price stability
- When business cycles aren’t smooth enough
Macroeconomic policy is what?
Monetary, fiscal and other policy.
Monetary: interest rates
Fiscal: taxes
Fiscal policy is also known as what?
Where is its sphere of influence?
Demand Management.
It is used alongside the budget. The budget is the composition of government spending, taxation and borrowing.
What areas does Fiscal policy impact?
- Aggregate production
- income and employment
- price levels
- distribution of income
What are the characteristics of expansionary vs contractionary (restrictive) policy?
Expansionary: Increased G spending + reduced taxes. Increases the budget deficit.
Contractionary: used to slow a rapidly expanding economy. Also used to control balance of payments or inflationary issues.
How is government spending viewed?
Economical spending: Consumption spending (final consumption spending) and consumption + investment spending (total expenditure).
Functional spending: Composition of spending. On security, education, etc
Where does the government get its income?
Property, tax and borrowing.
Where does the government borrow from?
Capital markets through issuing bonds
Central bank through overdraft - this can cause inflationary issues because the quantity of money is increased.
What constitutes a good tax? Old and modern.
Old:
- Equitable
- Economical
- Convenient
- Certain
Modern:
- Neutrality
- Equity
- Administrative simplicity
Describe the modern principles of a good tax.
Neutrality:
- distorts the allocation of resources which can have a negative impact on welfare of society.
- Can disincentivise owners of the factors of production if tax on income is too high. Less work = less income to tax. Called the cost of tax, deadweight loss or excess burden.
- It should not impact relative prices so taxpayer behaviour remains unchanged or NEUTRAL
Equity:
- spread fairly among taxpayers
- pay according to ability
- horizontal (same position, same tax)
- vertical (different positions, different tax) or rich taxed more
- beneficiaries of government spending should pay for goods and services
- some government spending has no allocation (justice, defence, etc)
Administrative simplicity:
- compliance costs (the cost to submit a return)
- administrative costs (costs for government to write laws, assess tax, etc)
- too expensive or complicated presents loopholes
What are the names of the different taxes?
- Direct and indirect
- General and selective
- Progressive, proportional and regressive
What is a direct or indirect tax?
Direct: Through persons on income and wealth tax. Personal, company and estate duty tax.
Indirect: On goods and services, like VAT, customs and excise duties.
What is a general or selective tax?
VAT is general because it is on most goods and services.
Excise is selective because it is only on specific goods.
