The Government and Fiscal Policy

The Government
Fiscal Policy
How does the government affect us?
Mixed economies = government + private sector
What is the best mix???
Private firms more efficient.
Can best decide on: What? How? and For
Free markets cannot function properly without
gov. enforcement of the rules.
Markets sometimes fail and need government
Market systems do not produce equitable
distribution of income and wealth.
Market systems tend to experience business
Governments need to make decisions on…
• how much to spend
• what to spend it on
• how to finance its expenditure
This is called fiscal policy.
Budget speech outlines government’s spending
plans for the financial year (1 April - 31 March)
Excerpt from Budget speech 2014
With regards to the 2014/15 budget…
1. What is the biggest source of tax revenue
forecast to be in 2014/15?
2. What is the biggest expense that the
government will face in 2014/15?
3. Which 3 taxes have increased?
4. What are 3 aims of the major aims of the
government’s 2014/15 budget?
Government spending effects…
• aggregate production
• income
• employment
• the price level (inflation)
• the distribution of income.
The government uses the budget to…
• stimulate economic growth and
• redistribute income
• control inflation
• address balance of payments
Expansionary fiscal policies stimulate economic
• Government spending raised and taxes reduced
• Budget deficit will tend to increase.
Contractionary fiscal policies restrict economic
• Government spending reduced and taxes
• Budget deficit reduced, or surplus budgeted for
• Helps curb inflationary pressures
Government spending financed by…
Income from property
• interest and dividend income
• Eskom, Telkom and Transnet, sale of agricultural,
forestry and fishing products, mining rights
• deficit is financed by borrowing.
• Domestic/international capital markets & central bank
• increases quantity of money - potentially inflationary.
Should have minimum effect on relative prices – signalling
Ability to pay principle
• pay according to their ability
Benefit principle
• Pay for benefits derived
Administrative simplicity
Compliance and administration costs as low as possible.
What would your tax policy look like???
If you had the ability to introduce a new tax
and scrap an existing tax, what would it be and
Think about…
1. Who would it benefit?
2. Who would pay/save?
3. How would it affect the macroeconomic
objectives of a SA?
Please research and get definitions for the
Direct taxes
Indirect taxes
Progressive taxes
Proportional taxes
Regressive taxes
General taxes
Selective taxes
Pg 84, 85 in text book
The three main taxes in South Africa are…
1. Personal income tax
2. Company tax
3. VAT
Most important single source of tax revenue.
Taxable income = total income - personal and
other allowances.
Marginal tax rate: the rate at which each additional
rand of income is taxed.
Average tax rate: the ratio between the amount of
tax paid and taxable income - also called the
effective tax rate.
Personal Income Tax is a progressive tax.
Average tax rate increases as income increases
because marginal tax rate increases.
Capital gains tax: a tax levied on the gains
resulting from the sale of assets such as shares
and fixed property.
Introduced in 2001 to ensure horizontal equity.
Profits are taxed at a uniform rate
A proportional tax rate
Average tax rate = marginal tax rate.
2nd most valuable source of tax revenue in SA
Regressive tax
Ratio between tax paid & income greater for
low-income than high-income households.
Tax burden increases as income decreases
Fiscal policy is an instrument used by
government to influence the economy.
• Discuss in detail the effects of fiscal policy. (26
• To what extent was the South African
government successful in the implementation
of its fiscal policy? (10 marks)