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Topic 9 - Government Revenue & Expenditure

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Topic 9 - Government Revenue & Expenditure

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PSCI 150 : INTRODUCTION TO ECONOMICS
Bachelor of Political Science, KIRKHS, IIUM

PSCI 150 : INTRODUCTION TO ECONOMICS
Bachelor of Political Science, KIRKHS, IIUM

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Topic 9 - Government Revenue & Expenditure

  1. 1. PSCI 1500: Introduction to Economics Government Revenue & Expenditure: The Fiscal System
  2. 2. MACROECONOMIC POLICIES Overview of Macroeconomics Policy  Fiscal Policy Influencing the levels of aggregate output and employment or prices through changes in federal government purchases, transfer payments, and/or taxes.  Monetary Policy Influencing levels of aggregate output and employment or prices through changes in interest rates and the money supply.
  3. 3. Categories of Government Expenditures i. Government purchases of goods & services Government spending on new goods and services  Public good – good/service provided to society.  Quasi public good - government-provided good that could be sold in a private market. ii. Transfer Payments Money from the government for which no direct work is required in return. iii. Others Interest paid on borrowed funds; grants-in-aid to state and local governments OVERVIEW OF GOVERNMENT EXPENDITURES & REVENUES
  4. 4. OVERVIEW OF GOVERNMENT EXPENDITURES & REVENUES GOVERNMENT EXPENDITURE GOVERNMENT OPERATING EXPENDITURE GOVERNMENT DEVELOPMENT EXPENDITURE General administration Social services Economic services Defense and security
  5. 5. OVERVIEW OF GOVERNMENT EXPENDITURES & REVENUES Example : US Case
  6. 6. Example : US Case OVERVIEW OF GOVERNMENT EXPENDITURES & REVENUES
  7. 7. OVERVIEW OF GOVERNMENT EXPENDITURES & REVENUES
  8. 8.  Tax refers to financial charge or levy imposed on the eligible taxpayers  Important feature of tax system is the percentage of the tax burden relative to income or consumption  Each term/type describe the way the rate progresses from low to high, vice versa, or proportionally.  Each term describe different distribution effect of tax on the income or consumption. TAX AS THE MAIN GOVERNMENT SOURCE OF REVENUE
  9. 9. TERMS OF TAX STRUCTURE 1. Progressive Tax  Tax reflecting a direct relationship between the percentage of income taxed and the size of the income.  As income increases, so too does the rate at which that income is taxed, and vice versa. TAX AS THE MAIN GOVERNMENT SOURCE OF REVENUE
  10. 10. 2. Proportional Tax (flat tax)  Tax equal to the same percentage of income regardless of the size of the income.  As income increases or decreases, the rate at which that income is taxed remains constant. 3. Regressive Tax  Tax reflecting an inverse relationship between the percentage of income taxes and the size of the income.  As income increases, the rate at which that income is taxed decreases, and vice versa. TAX AS THE MAIN GOVERNMENT SOURCE OF REVENUE
  11. 11. FISCAL POLICY  Fiscal Policy Influencing the levels of aggregate output and employment or prices through changes in government purchases, transfer payments, and/or taxes.
  12. 12. TYPES OF FISCAL POLICY BY MECHANISM EXPANSIONARY FISCAL POLICY CONTRACTIONARY FISCAL POLICY
  13. 13.  Two ways of managing the fiscal policy: 1. Automatic Fiscal Policy • Also called automatic stabilization. • Changes in government expenditures and/or taxes that occur automatically as the level of economic activity changes to control unemployment or demand-pull inflation. 2. Discretionary Fiscal Policy • Deliberate changes in government expenditures and/or taxes to control unemployment or demand- pull inflation. FISCAL POLICY
  14. 14. FISCAL POLICY Discretionary Fiscal Policy Expansionary: 1) Unemployment due to a decline in spending - resolved by any or all of the following tools: • Increase government purchases of goods & services • Increase transfer payments • Decrease taxes
  15. 15. FISCAL POLICY Discretionary Fiscal Policy Contractionary: 1) Demand-pull inflation from too much spending - resolved by any or all of the following tools: • Decrease government purchases of good & services • Decrease transfer payments • Increase taxes
  16. 16. SUMMARY OF FISCAL POLICY
  17. 17. In what phase of a business cycle would contractionary fiscal policy be appropriate? Describe how it will take effect during the phase. REVIEW
  18. 18. TYPES OF GOVERNMENT BUDGETS 1. BALANCED BUDGET The government’s total expenditure is equal to its total revenue. 2. SURPLUS BUDGET The government’s total expenditure is less than its total revenue. 3. DEFICIT BUDGET The government’s total expenditure is more than its total revenue.
  19. 19. CONTRACTIONARY POLICY • Contractionary policy is designed to enlarge the budget surplus or reduce budget deficit. • This is to dampen aggregate spending thus aid in managing demand-pull inflation. EXPANSIONARY POLICY • Expansionary policy is designed to enlarge the budget deficit or reduce budget surplus. • This will increase the aggregate spending and help to reverse a recession. BUDGET & FISCAL POLICY RELATIONSHIP
  20. 20. National Debt • Government, public or sovereign debt • Money (credit) owed by a central government. Financing the National Debt • Issued by government in return for funds lent to it. • Largest portion of the national debt is held by private investors, and the rest is owned by the central banks, government agencies, and trusts. NATIONAL DEBT
  21. 21. SOURCES OF NATIONAL DEBT NATIONAL DEBT INTERNAL SOURCES EXTERNAL SOURCES
  22. 22. SOURCES FOR NATIONAL DEBT • Borrowing from citizen • Borrowing from financial institutions • Loans from the central bank • Loans from commercial bank • International money market • Currency loans from foreign government • Loans from international financial institutions INTERNAL SOURCES EXTERNAL SOURCES
  23. 23. Issues in assessing the National Debt Debt Service Cost to maintain debt, measured in interest. Crowding Out Occurs when borrowing by the government reduces borrowing by households and businesses. NATIONAL DEBT
  24. 24. REVIEW  Identify the budget type most likely invoked during: Recession - Inflation -  Explain the relationship between the budget type and its fiscal policy. • Budget deficit indicate expansionary policy - increase government expenditure, transfer payment and/or decrease the tax. • Budget surplus indicate contractionary policy - decrease government expenditure, transfer payment and/or increase the tax. budget deficit (enlarge deficit/ reduce surplus). budget surplus (enlarge surplus/ reduce deficit).

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