Transcript CHAPTER 3 Public Sector

• Evaluation of the role of the public sector in the
economy with special reference to its socioeconomic responsibility in the South African
context.
• The composition and necessity of the public
sector
• Problems of public sector provisioning
• Objectives of the public sector and its budgets
• Fiscal policy (including the Laffer curve)
• Reasons for public sector failure
Assists the private sector when there is market failure.
Market failure: when free market unable to allocate
resources and/or goods and services efficiently.
Gov. has socio-economic responsibility that it must fulfil.
Adam Smith (1723–1790) identified responsibilities of
gov.:
• To protect its citizens against foreign threats
• To maintain law and order
• To provide certain essential goods and services.
Provide community (public) goods
• Public goods are non-rival & non-excludable
Reduce demerit goods
• Drugs, pollution etc.
Children's rights
Compensation for human rights abuses in the past
• Redressing inequalities of apartheid, reduce
poverty & unemployment. Eg. BBBEE
Social security
• Welfare grants to decrease poverty
Protection of the environment
Manage the economy
• Fiscal & monetary policy
Encourage Competition
• Regulate monopolies & promote competition
Public–private partnership (PPP): contract
between gov. institution & private businesses
where private organisation takes responsibility
for some of the financial, technical and
operational risks of the project.
DO Challenge – pg 64
• Answer Activity 1 - pg 64 Q 1.1 – 1.4
Accountability
• Not driven by a profit motive
• Monopolies in some cases
• Leads to low productivity & lack of accountability
In SA, accountability underpinned by…
• Ministerial responsibilities
• Parliamentary questioning by opposition party &
regulators.
• Treasury control –controls expenditure of gov.
departments
Efficiency
Necessities (health, education, policing etc) provided by
public sector to even out social welfare imbalances.
Pareto efficiency: providing goods and services in a way
that no one can be made better off without making
someone else worse off.
Problems in achieving this…
• Bureaucracy and red tape –procedure over individual
needs.
• Lack of training – civil servants not adequately trained.
• Corruption – lower-than-average wages make
corruption ‘acceptable’.
Assessing needs and correct planning
Public enterprises do not operate under market
conditions – not responding to demand (money
votes).
Problems…
• undersupply of public goods
• inefficient forecasting of future needs
Correct pricing
• Lack of money should not exclude people
from public goods - provided under cost or
free.
• Free services and goods are frequently abused
• Eg, people employed in informal sector
claiming unemployment benefits.
• Means testing can solve problem
Means test: investigation into finances of
individuals/households to determine necessity
of financial assistance
State-owned enterprises (parastatals)
Inefficiency due to skills gap - private sector
offer better pay and working conditions.
Parastatals are created in one of two ways:
• government starts an enterprise
• an existing enterprise is nationalised.
Privatisation
Privatisation: sale of state-owned enterprises to
private individuals.
Problem: free market economics takes over. Public
interest profit motive.
Nationalisation
Nationalisation: government takes over privately
owned enterprise.
Problem: Profit motive
inefficiencies).
public interest (can cause
Objectives of the public sector…
• Economic growth
• Full employment
• Price stability
• Exchange rate stability
• Economic equity
The budgets
National budget: a plan for raising and spending the money
of the people of the country.
Receives from…
• Taxation
• state-owned enterprises
• loans
Spends on…
• Social services
• economic growth
• Government worker salaries (among other things).
Medium-term budget policy statement
(MTBPS)
• Info about how government expects economy
to perform over the next three years
• How much tax is expected to be collected
• Levels of government spending for next 3
years and government deficit
• How revenue will be shared between national,
provincial and local government
• Delivered by Minister of Finance in last week
of October.
Using the table below, answer Activity
4 on page 73
The main budget
• Budget of central government
• Presented second half of February by MOF.
• Fiscal year = 1 April to 31 March.
Provinces/local authorities allocated
revenue in 2 forms:
• Equitable share: according to pop.
• Conditional grants: paid for specific
• Projects/infrastructure.
Provincial and Local Budgets
Provincial Budgets
• Provinces raise some revenue - vehicle
licences, duties and taxes; most from national
budget
• Provinces spending - education (40%), health
(20%) & social welfare (18%).
Local government budgets
• Municipal councils receive revenue through
property rates, service fees for water and
electricity, and fines.
• Metros (largest municipalities) get portion of
fuel levy.
• Smaller councils rely central government
grants.
Please complete Activity 5 on pages 77 & 78
Fiscal policy: how gov. raises money (forms of
taxation) and spends money (expenditure).
Fiscal policy is…
• goal-bound –budgetary process used to
determine economic and social goals
• demand-based – main policy instrument in
demand-side policies.
• cyclical –business cycle affects fiscal policy.
Direct taxation
• Person/organisation makes payment straight
to the tax authority.
– Standard Income Tax on Employees (SITE) and Pay
As You Earn (PAYE)
Indirect taxation
• Intermediary pays tax to authority.
• Eg. VAT
– customer pays their portion of VAT to shop
– shop pays total VAT to SARS
– shop serves as intermediary
Forms of indirect taxation are…
• excise duties
• customs duties
• value-added tax – a 14% spending tax on
value of most goods
• capital gains tax –tax on gain from sale of
certain assets
• inheritance tax – tax on transfer of wealth at
death or on gifts during lifetime
Taxes should be:
• fair: treat those in same circumstances equally
• easy to understand: easy to calculate and pay
• easy and cheap to collect
• an encouragement to work: mustn’t
disincentivize work
Proportional: % same regardless of income.
Progressive: % increases as income increases
Regressive: lower incomes pay higher % of
income in taxes than do the rich, for example
excise duties and VAT.
Laffer curve: shows the relationship between possible tax rates
and the resulting government revenue at each rate.
Public sector failure: country’s resources
mismanaged - welfare people not maximised &
delivery of services ineffective and inefficient.
Inability to perform services efficiently.
• Lack of school facilities
• Hospitals running out of medicines
• Lack of proper sanitation
Funds often not spent even when needed.
Exhibit A
Poverty in rural areas led to rapid rate of
urbanisation
Difficult to keep up with social services.
Lack of leadership – lack of skilled leaders due to
lower pay.
Not directly accountable to taxpayers – little
motivation.
No incentives for efficient service delivery.
• No market mechanism to guide allocation of
resources.
Political cycle = 5 years.
Spending/taxation plans geared around reelection, not around best interests of citizens.
Macroeconomic objectives VERY difficult for
government to influence with little tax collected
and HUGE demands for state provision.