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Lecture 11 summary
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Summary of 6 pages for the course EKN 320 at UP (Lecture 11 summary)
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Lecture 11Fiscal indicators
Meduim-term budget Policy Statement → important due to the policy direction of what
can be expected in the main budget
- Indicates to the market what policy changes are expected and how the changes
will be implemented
Main fiscal indicators
- Government expenditure
- Government revenue
- Government deficit
- Public debt
- Government (dis)saving
Introduction:
- Fiscal indicators provide indication of extent of government intervention in
economy, i.e. indication of fiscal policy
- Government intervention is important after periods of recession
o Gets the economy going again → builds confidence in the countries
economy again (done to create foreign investment) and government
controls a large portion of GDP due to their resources → can allocate
resources in a way to stimulate the economy
- Debate: Classicalists vs. Keynesians
o Classicalists
▪ Self-Interest and Competition: efficient production and beneficial
trade → i.e. importance of market
• Example of firm entry to lower prices – Economy can self-
adjust
▪ Limits to Unfettered Markets – Poor are usually harmed
• Preferred markets to government intervention
▪ Role for Government Intervention
• National defense (public good)
• Administration of justice
• Provide services not provided by private markets (public
goods)
o Keynesians
▪ Markets or Capitalism is Inherently Unstable
▪ Problems with Effective Demand in Markets
• Underemployment Equilibrium – high level of unemployment
and building of inventories and excess capacity
▪ No Self-Correcting Mechanisms to Return Economy to Full
Employment
▪ Justifies Government Intervention into Economy
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, - Important for foreign investors, aid agencies, etc.
- Fiscal policy outlined in National Treasury’s annual Budget
- Should not be analysed in isolation → affects micro level, politics, development
and poverty objectives
- Public sector (from chapter 1 in EKN 310)
Fiscal policy
- All deliberate efforts of government to use changes in government expenditure,
taxation (including transfers) & government borrowing to influence aggregate
expenditure in order to influence income, production, prices & the balance of
payments”
- Instruments of fiscal policy → used to stimulate economic activity
o Taxation
o Expenditure
o Borrowing/debt
Public debt
- Arises if government expendiure exceeds tax revenue
- Public debt at time t = Government expenditure at time t (includes debt
repayment) – government revenue at time t + public debt from previous period +
interest payment on public debt from previous period.
o 𝑃𝐷𝑡 = 𝐺𝑡 − 𝑇𝑡 + 𝑃𝐷𝑡−1 + 𝑟𝑃𝐷𝑡−1
▪ PD = all past borrowing – repayments
- Public debt is a stock
o Deficit = flow
o Debt = stock
- Implication of debt:
o Mainly financed domestically and has an increasing trend → transferred
from generation to generation
o Rising interest payments cut into government funds that could be spent
elsewhere
Notes can only be purchased through the following details:
gorgataylor@gmail.com or 0829369077 2
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