Economics 348
Fiscal Policy
Session one: overview and introduction
Fiscal policy is defined as decisions by national government regarding the nature, level and composition of
government expenditure, taxation and borrowing, aimed at pursuing particular goals. For the purpose of
this course the focus is on macroeconomic goals of fiscal policy. Fiscal policy is the manipulation of
government spending, taxes and Deficit before borrowing to pursue macroeconomic policy goals.
Examples of macro goals include fair distribution of income: balance of payment stability; Process stability;
Economic growth.
In practice, macroeconomic and microeconomic aspects are inseparable. While this course mainly covers
macroeconomic concepts, these are based on a micro scope and include the basics of microeconomics.
Who makes fiscal policy?
Monetary policy in South Africa is controlled by the Reserve Bank. they have goal dependent an instrument
independent policy. Some targets are set by the government, but the Reserve Bank has freedom to use
whatever instruments to ensure these targets are met. For example, the inflation target is set by the
government, but the Reserve Bank have instrument independence. Fiscal policy is determined by the
National Treasury and is inherently political in nature. Due to the fact that governments are pursuing
macro, social and political goals, there will always be a political element to fiscal policy because fiscal policy
feeds into these goals. There has been some controversy around fiscal decisions in the past.
Fiscal policy in democracies
they awesome questions around where the fiscal policy is too complicated to work in democracies. In
some countries, bad political decisions have left countries in bad fiscal positions. According to Karl Marx,
good fiscal outcomes are not possible in democracy. However, it has been found that he was wrong.
studies have shown that the happiest populations have strong democracy equilibrium outcomes for a
considerable period of time. This means they were happy with their taxes paid and the services received.
This means that democracy and healthy fiscal policy are compatible.
In South Africa, the Minister of Finance, treasury and SARS or involved in fiscal policy making. The Minister
of Finance has constitution an act of parliament, and has the overall responsibility for fiscal an
macroeconomic policy. This includes the collection and allocation of tax money. The National Treasury
deals with preparation and implementation of the budgets and intergovernmental financial regulations.
This is the government's department. SARS is responsible for tax collection and tax policy as well as tax
policy preparation. The cabinet on involved in the preparation of departmental budgets, and are involved
in all key fiscal decisions. The president supports the Minister of Finance and this support is essential for
good fiscal outcome. The budget council consists of the Minister of Finance and municipal ministers of
finance for each of the provinces. They coordinate fiscal policy making across national and provincial
sectors. Parliament hold a power, and have authority to enact tax legislations an authorized spending of
public money. The national budget is only a proposal for the financials, and this needs to be approved by
parliament, which can take three to four months. the Minister of Finance is accountable to parliament for
all fiscal policy decisions.
South Africa has a waste minister top system, and they are seldom clashes with executive branches. This is
because cabinet, and members of parliament are a part of the same party running the country. That would
therefore be contradictory for the two to have different interests. This does however, lead to weaker
accountability. In countries with presidential systems, such as the United states, there are more clashes.
This is because the president is from different parties to Congress. nine is the reserve bank's decision on
interest rate affects how much government pays one debt.
, Fiscal Policy and The Budget: Public Sector Concepts
fiscal policy analysis is largely statistical analysis and we therefore need to understand basic concepts. The
public sector includes education; Health care; Police. We cannot interpret figures and daughter without
understanding the basic concepts. It is important to note the big difference in spending between national,
central and general government.
The main budget
all revenue and expenditures that flow through the national revenue fund are included here. This is
essentially the spending of national government departments, but includes large transfers to other public
sector entities. An example of this was National Treasury providing R572 billion two provincial
governments. This includes block grants to spend on education, schooling and infrastructure.
consolidated budget
This includes the national and provincial government departments, Social Security funds and 145 other
public entities. Other entities include extra budgetary agencies, and some government enterprises. This
includes all spending from the national revenue fund and own revenues of provinces and extra budgetary
agencies. It is important to ensure that no money is recorded twice. The budget balance is normally
negative, resulting in a budget deficit. There is occasionally a budget surplus, but have only been two of
these in the history of South Africa. A large portion of total revenue is made up from tax revenue. The total
deficit must be financed buy either borrowed funds or cash balances. This refers to national debt
Definitions of The Budget Balance
The conventional balance is the total revenue minus total expenditure
the primary balance is total revenue minus non-interest component of spending
The current balance is the current income minus current expenditure. This indicates government savings. If
it is positive, there is an increase in gross savings, which can be invested. If there is this savings,
government takes a private sector savings to finance current expenses. This is not good for the economy as
it is money that could be invested and use more effectively elsewhere.
Session 2: the financing of budget deficits
Are budget deficits ever justified?
There are three valid justifications for budget deficits:
• tax smoothing considerations: this is to avoid tax rate volatility. If there are no deficits,
governments would need to adjust tax rates, which is bad for tax rate volatility.
• Skype for countercyclical flow measures as Caroline according to Keynes, recessions lead to
governments stimulating the economy.
• Fair distribution of financing costs across generation: this spreads the burden of the cost of
something where many generations will benefit, across these generations. Borrowing money makes
this possible
it is not necessarily a problem if government spins more money then they mobilize in taxes. What really
matters is how often deficits occur, how large the deficits are, and how the deficits are financed. Note that
there are different ways of financing budget deficits.
Four financing sources
these include seigniorage; Foreign exchange reserves; Domestic borrowing; Foreign borrowing. Each of
these are associated with a macro economic risk.
