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Summary ECS1601 - Chapter 3
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ECS1601 - Chapter 3 Exam Summary
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CHAPTER 3THE GOVERNMENT AND FISCAL POLICY
Central government: concerned with national issues such as defence and our relationship
with the rest of the work.
Regional government: concerned with regional issues such as housing, health
service and education.
Local government: Deals with local issues such as the provision of sewerage, local
roads, street lighting and traffic control.
Public coporations: other government business enterprises such as Eskom, Transnet
and Rand Water.
General Government: consists of the general departments of the central, provincial
and local government.
Public Sector: General government plus the public corporations and other government
enterprises.
Role of government in the economy: an overview
All economies can be classified as mixed
Government, private sector and market forces all play a role
How does government intervene?
What instruments can government use to achieve its objectives?
Public provision: achieved by public ownership and public financing.
Market participant: Government is the largest employer of labour
Government spending: Both the level and the composition of government spending has a
powerful impact on the economy.
Taxation: To finance government spending
Regulation: Refers to all laws, rules and regulations that affect private behaviour.
Government failure
Two broad groups of public officials:
Politicians (who are elected) aim is vote maximising
Bureaucrats: (who are appointed) – agents for politicians and the public.
Rent-seeking (economic rent) interest groups: refers to attempts by private firms,
households, organised business, organised labour and other interest groups to benefit at
the expense of society at large.
Nationalisation and privatisation
Nationalisation: government takes over ownership or management of private enterprises.
Privatisation: opposite of nationalisation – it refers to the transfer of ownership of assets
from the public sector to the private sector i.e. the sale of state owned assets to the
private sector.)
o First concerns the problem of financing increasing government expenditure in a
situation where tax burdens are already very high
o Second: Government ownership is less efficient than private ownership.
o Third: based on the view that the losses of inefficient state-owned enterprises are an
important source of budget deficits and other fiscal problems.
Arguments for privatisation:
o Will attract foreign direct investment
o Will broaden the tax base
o Greater access to investment capital and will be able to adapt more easily
to changing economic conditions
o Make funds available for spending on housing, education and health
, o Increase share ownership in the economy and serve as an instrument of black
economic empowerment.
Arguments against privatisation:
o Private firms will not necessarily be exposed to greater competition and be
more efficient that state-owned firms. (extreme: state monopoly could be
replaced by private monopoly)
o State-owned firms are supposed to take account of any possible external costs
or benefits; the same does not apply to privately owned firms.
o Private owned firms will not take a broader view of the public interest.
Fiscal policy and the budget
Define fiscal policy
Policy in respect of the level and composition of government spending, taxation
and borrowing that effects economic activity
It is an effective means of influencing total spending (is an instrument
of demand management)- an instrument that can be used to manage
or regulate the total demand for goods and services in the economy.
Monetary policy (manipulation of interest rates) is an important part of
demand management (controlled by SARB)
Often close link between the National Treasury (who executes fiscal policy) and
SARB as fiscal policy and monetary policy need to be applied in harmony
At times of recession expansionary fiscal and monetary policy are applied to
simulate economic activity.(usually government spending is raised and taxes
reduced) (which causes budget deficit(difference between government
spending and taxation) to increase)
When expansion is too rapid (with inflation or balance of payment issues)
contractionary or restrictive fiscal and monetary policies are applied (gov
spending reduced and taxes increased)
Mention the instruments of fiscal policy
The main instrument is the budget (spending and taxation are the main variables)
It reflects the political decisions about how much to spend, what to spend
it on and how to finance the spending
Is often used to stimulate economic growth and employment, redistribution
of income, control inflation or address balance of payments problems
4.3 Government spending (chapter 16.8)
Explain briefly why government is involved in economic activity
Government spending is a large share of the total spending in the economy
Can be classified:
Economically (distinguish between consumption and investment
spending) Total expenditure (consumption plus investment
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