Economics

RECAP - MODULE
OUTCOMES
 Introduction to macroeconomics
 Measuring performance of the economy
 The Monetary Sector
 The Public Sector
 Macroeconomic Theories
 Inflation
 Unemployment
 Economic growth and development
 The foreign sector

THE PUBLIC SECTOR:
STUDY UNIT 4

What are Your Views on Fiscal
Policy and How Fiscal Policy
Affects You?

Roles of Government in a mixed economy
1. Establishing and enforcing rules of exchange

such as Property rights, Contract law
2. Promoting competition/prevent anticompetitive

practices
3. Regulating natural monopolies
4. Provide public goods
5. Dealing with externalities i.e.cost or benefit that falls on third parties and is therefore ignored by the two parties to the market transaction 6. Redistribute income
7. Promote macroeconomic goals

How is the Monetary Policy different from the Fiscal Policy?
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The Monetary Policy regulates the supply of money and the cost and availability of credit in the economy. It deals with both the lending and borrowing rates of interest for commercial banks.

•

The Monetary Policy aims to maintain price stability, full employment and economic growth.

•

The Monetary Policy is different from Fiscal Policy as MP brings about a change in the economy by changing money supply and interest rate, whereas fiscal policy is a broader tool with the government.

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The Fiscal Policy can be used to overcome recession and control inflation. It may be defined as a deliberate change in government revenue and expenditure to influence the level of national output and prices. Meaning of Fiscal Policy
 Fiscal policy is also called Budgetary policy. It is

primarily concerned with the receipts and expenditures of the government; it also relates to the study of economic effects of these receipts and expenditures
 Fiscal policy refers to government policy that attempts

to influence the direction of the economy through changes in taxation, public borrowing and public expenditure with specific objectives in view.
 It refers to the Revenue and Expenditure policy of the

Govt. which is generally used to cure recession and maintain economic stability in the country.

Contd..
 Changes in the level and composition of taxation

and government spending can impact on the following variables in the economy:
– Aggregate Demand and the level of economic activity – The pattern of resource allocation
– The distribution of income.

Instruments of Fiscal Policy
 1.

Reduction of Govt. Expenditure
 2. Increase in Taxation
 3. Imposition of new Taxes
 4. Wage Control
 5. Public Debt
 6. Increase in Imports of Raw materials
 7. Decrease in Exports
 8. Increase in Productivity
 9. Provision of Subsidies

Instrument of fiscal policy Budget
 The main instrument of fiscal policy is the budget,

presented annually by the Minister of finance to
Parliament.
 Budget means ‘plans of government finances submitted

for the approval of the Legislature’

 It is a time bound financial program systematically

worked out and ready for execution fiscal year.

in the ensuing

 It is a comprehensive plan action which brings together

in one consolidated statement financial requirements of the government.

all

Budget has four major Functions
 Proper allocation of resources or the

provision of social goods
 Equitable distribution of income and wealth
 Securing economic stability or full employment  Long term economic growth

Financing of government expenditure
- Government spending is financed through
- Income from property (includes interests & dividends that is derived from government’s full or partial ownership of enterprises such as ESKOM,
Telkom, Transnet, profit earned from gvt prdn & sale of agric products, rent,etc.
- Taxes (compulsory payments to gvt and a largest source of government revenue)
- Borrowing (from domestic and international capital markets or from Central bank)

Expansionary Fiscal Policy
 When the economy is in recession,

expansionary fiscal policy may be in order.
 Expansionary fiscal policy is an increase in

government spending, a decrease in taxes, or some combination of the two for the purpose of increasing aggregate demand and real output.

Expansionary Fiscal Policy

Contractionary Fiscal Policy
 When demand-pull inflation occurs,

contractionary fiscal policy may help to control it.  Contractionary fiscal policy is a decrease in government spending, an increase in taxes, or some combination of the two for the purpose of decreasing aggregate demand and halting inflation. – Contractionary fiscal policy may create a budget surplus. Contractionary Fiscal Policy