Fiscal Policy Overview

Understanding the Public Sector

To understand how governments influence society, it is essential to define the public sector.

• The Public Sector includes government services and enterprises dedicated to public welfare, contrasting with the profit-oriented private sector.

Key Differences from the Private Sector

• Ownership:
  • Public: Operated by the government.
  • Private: Owned by individuals or corporations.
• Objectives:
  • Public: Prioritises public service areas such as health and education.
  • Private: Seeks profit through goods or services sales.
• Example: Public transportation is government-provided, whereas private companies offer taxi or ride-sharing services.

Core Functions of the Public Sector

• Provision of Essential Services:
  • Education: Accessibility ensured by public schools and universities.
  • Healthcare: Public hospitals deliver crucial medical services.
  • Transportation: Public transit systems support citizen mobility.
• Example: Recent funding increases for public education emphasise the sector's commitment.

Why Does the Public Sector Exist?

• Market Failures:
  • Governments intervene to address monopolies and manage externalities, such as utility regulation.
• Provision of Public Goods:
  • Services like street lighting that are universally available at no direct cost.

• Income Redistribution
• Economic Stabilisation

Composition and Necessity of the Public Sector

Introduction to the Composition of the Public Sector

The public sector is vital for societal stability.

• Central Government: Handles national policy issues, including fiscal management and national defence.
• Provincial Government: Addresses regional necessities, aligning local services with community demands.
• Local Government: Provides immediate services, such as sanitation and road upkeep.

Together, these levels ensure effective service delivery, promoting national welfare.

Roles of Public Enterprises and State-Owned Entities

A Public Enterprise is a government-operated organisation providing key goods or services.

• Market Gaps: Areas addressed by public enterprises include:
  • Telecommunications: Ensures communication accessibility.
  • Public Transport: Operated to fulfil public transportation needs.

Necessity for Societal and Economic Function

Key roles include:

• Efficiency: Mitigating market and service deficiencies.

• Equity: Fair distribution of resources.

• Stability: Promoting economic balance through fiscal measures.

Fiscal Policy: An Introduction

Definition and Objectives

Fiscal Policy encompasses government actions through spending and taxation to steer economic dynamics.

Key Terms:

• Aggregate demand: Overall demand for products and services, like homes and vehicles.
• Employment: Job opportunities available in the economy.
• Inflation: Rate at which prices increase.
• Economic growth: Enhancement in production, boosting wealth.

Objectives:

• Economic Growth: Stimulating growth through production and spending.
• Controlling Inflation: Stabilising prices for affordability.
• Reducing Unemployment: Generating jobs through governmental measures.
• Balanced Budget: Achieving equilibrium between income and expenditure.

Types of Fiscal Policy

• Expansionary Fiscal Policy:

  • Implemented during economic downturns.
  • Entails increased spending and reduced taxes.
  • Encourages demand and economic vigour.

• Contractionary Fiscal Policy:

  • Applied to curb high inflation.
  • Involves decreased spending and raised taxes.
  • Designed to dampen demand.

Fiscal vs. Monetary Policy

Monetary Policy differs from fiscal policy through distinct tools.

• Monetary Policy: Employs interest rate alterations and money supply management.

Laffer Curve in Fiscal Policy

The Laffer Curve demonstrates the relationship between tax rates and overall tax revenue.

Mechanics of the Laffer Curve

• Illustrates how increasing tax rates can initially raise revenue but might eventually cause a decline.
• Pinpoints an optimal tax rate for revenue generation without adverse economic impacts.

Example: If a government raises income tax from 20% to 30%, it might see increased revenue as taxpayers still find it worthwhile to work. However, if tax rates reach 70% or higher, people might work less or find ways to avoid taxes, causing total revenue to fall. The optimal rate might be around 50%, where revenue is maximised.

Challenges Faced by the Public Sector

Corruption & Inefficiency

• Impacts:
  • Diminishes effective resource allocation.
  • Erodes public trust.

Budget Constraints

• Allocation Challenges:
  • Balancing healthcare and education funding.
  • Strategies:
    • Prioritise essential services.
    • Utilise data-driven allocation.