Transcript Public Finance

CHAPTER 5
PUBLIC FINANCE
(FISCAL POLICY)
AZIZAH ISA
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Fiscal Policy
is a policy to influence the performance of
the economy by using government
expenditure and tax revenues collection for
regulating the aggregate level of economic
activities.
by changing the G and the T to regulate
the Aggregate Demand (AD) and Output (Y)
level.
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TOOLS
FOR
FISCAL POLICY
Government
Expenditure, G
2 TOOLS
Tax Revenue, T
G and T are used to regulate the aggregate
level of the economic activities, AD.
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OBJECTIVES
Government tend to implement fiscal policy for
the purpose to:
 maintain the stability of the economy -




solve all macroeconomic problems,
thus without inflation or recession.
reach an efficient economy at fullemployment.
have steady rate of economic growth.
stabilise prices and interest rate in the
economy.
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Composition of Government
Expenditure
1. Operating Expenditure
2. Development Expenditure
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1. Operating expenditure
includes expenditure for maintaining
government services and facilities
and its department:
includes the payments for:
emoluments, pension and gratuities, debt
service charges, aid to states government,
subsidies, maintenance, repairs and
supplies to improve the provision of
public services.
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2. Development Expenditure
is meant to support government’s
projects to boost-up economic growth.
There are three (3) main components
of development expenditure:
social services;
economic sectors development;
security sector.
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HOW TO IMPLEMENT THE
FISCAL POLICY?
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TYPES OF
FISCAL POLICY
DEFICIT BUDGET
SURPLUS BUDGET
G>T
G<T
BALANCED BUDGET
G=T
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Budget Policy/ Fiscal Policy
1. EXPANSIONARY FISCAL POLICY
(Deficit Budget)
G>T
2. CONTRACTIONARY FISCAL POLICY
(Surplus Budget)
G<T
3. BALANCED BUDGET POLICY
G=T
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NATIONAL INCOME EQUILIBRIUM
(Y=E)
AD=AS
Expenditure,E
(RM)
Y1=AD1=C+I+G+(X-M)
Inflationary Gap
Deflationary Gap

e0
45°
Y0
e1

Yfe=ADf e =C+I+G+(X-M)
Y0=AD0 = C+I+G+(X-M)
ef
-GDP
Gap
Yfe
+GDP Gap
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Y1
Real Output
(National Income)
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WHERE IT
COMES
BORROWINGS:
Borrowings and
use of
government
debts 14.2%
Income
Taxes
38.9%
Social
services
17.3%
Export
duties
1.9%
Non-tax
revenue
and others
28.7%
REVENUE
Other
indirect
taxes
14.3%
Emolument
17.9%
RM134 mil
RM134 mil
Import
duties
3.1%
WHERE IT
GOES
DEVELOPMENT
EXPENDITURE
Other
Economic expenditures
17.9%
services
Supplies
and
services
15.3%
14.7%
Subsidies
3.2%
OPERATING
EXPENDITURE
ECONOMIC OUTLOOK
FAVOURABLE
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ISA
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1. Expansionary Fiscal Policy/
Deficit Budget
Government collects less tax revenue but
spends more on expenditure,
there will be a larger positive effects on real
output.
Deficit Budget is implemented to raise-up
the economic activities.
Is to cure the problem of recession.
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To reduce Recession:
with Deficit Budget
Since recession is related to the downturn
of an economy,
therefore to reduce recession, economic
growth has to be shoot-up.
More government expenditure, G that
increases the aggregate demand and
closed-down the deflationary-gap, while
the real GDP increases.
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2. Contractionary Fiscal Policy /
Surplus Budget
When government collects more tax revenue
and spends less on expenditure, the net
budget will be under surplus (T>G).
Surplus budget will narrow down the effect
on real output or national income (negative
effect).
Is implemented to overcome inflation
problem.
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To reduce Inflation:
with Surplus Budget
Since inflation is related to the booming
of an economy,
therefore to reduce inflation, economic
growth has to be slowed down.
Less government expenditure, G reduces
the aggregate demand and closed-down
the inflationary-gap, while the real GDP
falls.
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Contractionary Fiscal Policy
to combat inflation.
General
Price
Decreasing G
will reduce
AD and
lower the
price level.
AS
P0
P1
G
The
reverse
will
happen if
were to
reduce
recession
AD0
AD1
Y1
Y0
Y
To reduce inflation by lowering G or increases T or both.
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3. Balanced Budget Policy
Still can stimulate economic growth.
- but increases the real output by the same
amount of government expenditure only.
since its multiplier is 1.
Y = 1 . G
still can stimulate the economy, since the
spending multiplier effect is larger than the tax
multiplier effect.
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Expansionary Effect from
Balanced Budget, where multiplier =1.
If G = 100mil and MPC = 0.75,
Govt multiplier, mG = 1/MPS
= 1/0.25
=4
 ∆YG = 1/MPS X ∆G = 4 X 100mil = 400 mil
For a Balanced budget, ∆G = ∆T =100
(Government spends from what is collected from
revenue)
Tax multiplier, mT =  MPC/MPS
=  0.75/0.25 = 3
 ∆YT =  MPC/MPS X ∆G =  3 X 100mil
=  300 mil
 Net increase in Y = (400 300)mil = 100 mil
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Just Relax for a moment
LETS
HAVE A
BREAK
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Sources of Government Revenue
Tax Revenue
Non-tax Revenue
consist of:
1) Direct tax: where the burden
(incidence) of tax is paid by the
person being imposed by tax, i.e.
the taxpayer & the burden of tax
cannot be shifted to others.
e.g: income tax, petroleum
income tax, profit tax, stamp
duty, road tax and real property
gains tax.
2) Indirect tax: where burden of tax
is shifted to the third party.
e.g: expenditure tax, sales tax,
service tax, consumption tax,
export duty, import duty, custom
duty, excise duty and tariff.
Taxes are the most important source of
government revenue.
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consist of:
1) Revenue receipts such as from
licenses, permits, service
fees, regulation fees, interest
and returns(income) from
investment.
2) Non-revenue receipts include
refunds of overpayment,
grants and aid, contribution
from the federal government .
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Structure of Taxes
1) Progressive tax: tax rate increases as income rises.
2) Proportional tax: tax rate is constant as income rises.
3) Regressive tax: tax rate decreases as income rises.
income
Proportional
Progressive
Regressive
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Tax rate
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Structure of Tax
Types of
Tax
Income (RM)
1000
2000
3000
4000
Progressive
Tax
Rate
6%
9%
12%
15%
Proportional
Total
tax
60
180
360
600
Tax
rate
6%
6%
6%
6%
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Total
tax
60
120
180
240
Regressive
Tax
rate
6%
5%
4%
3%
Total
tax
60
100
120
120
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Tax Rates and Taxpayers
Progressive tax
falls heavily on people
with high income earners
but
Regressive tax falls relatively more on the
poor.
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Examples
Progressive tax - personal income tax
Regressive tax -
sales tax
(tax on consumption
expenditure)
- property tax .
Proportional tax - corporate income tax (with a
flat rate percentage of tax rate)
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Direct Tax: Personal income tax
E.g.: The income tax paid by the individuals at various
income level in a country is shown in the schedule below.
Which country is implementing the regressive, proportional
and progressive tax structure?
Country
Income
10,000
20,000
30,000
40,000
A
B
C
D
2,000
2,000
2,000
2,000
1000
2000
3000
4000
1000
3000
6000
9000
1000
1600
1800
2000
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Direct Tax: Personal income tax
Solutions: Tax rate for each country at each income levels
are as follows:
Country
Income
10,000
20,000
30,000
40,000
A
B
C
D
0.20
0.10
0.07
0.05
0.1
0.1
0.1
0.1
0.10
0.15
0.20
0.23
0.10
0.08
0.06
0.05
A: regressive B: proportional C: progressive D: regressive
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Exercise1:
Given the amount of taxes as follows. Classify each tax
structure i, ii and iii.
Income
RM 9 000
RM 6 000 RM 3 000
Total Tax
(i)
RM 1 800
RM 1 200
RM 600
(ii)
RM 2 700
RM 1 500
RM 600
(iii)
RM 1 350
RM 1 200 RM 1 200
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Exercise1:
Given the amount of taxes as follows. Classify each tax
structure i, ii and iii.
Income
RM 9 000
RM 6 000 RM 3 000
Total Tax
(i)
RM 1 800
RM 1 200
RM 600
(ii)
RM 2 700
RM 1 500
RM 600
(iii)
RM 1 350
RM 1 200 RM 1 200
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Answer to the Exercise 1:
Tax
Structure
Income RM 9 000 RM 6 000 RM 3 000
(i) Proportional
20%
20%
20%
(ii) Progressive
30%
25%
20%
(iii) Regressive
15%
20%
40%
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The purpose of taxation
- Why collect tax revenue?
To develop a country.
To redistribute the income and close the
income- gap between the rich and the poor.
To protect local and infant industries.
To correct the adverse balance of payment.
To solve inflation problem.
To improve the unfavourable terms of trade.
To reallocate resources.
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Exercise 2: Injection and Leakage
Given that the economy with;
C = 400m + 0.75 Yd, I = 500m and G = 1000.
i)
ii)
Determine the equilibrium national income.
If the income at full-employment is RM 8500mil.,
find the spending by government to achieve this
full-employment.
iii) Now assume tax is impose at ¼ Y and at the same
time government spends RM 1700m. Find the new
equilibrium income.
iv) Is it the government implement a surplus or
deficit budget?AZIZAH ISA
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Solution(i)
Y = C + I + G, Yd = Y.
Y = 400 + 0.75Y + 500 + 1000
Y = 1900 + 0.75Y
0.25Y = 1900
Y = 1900/0.25
= 7600m
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Solution(ii)
Y = 8500 –7600 = 900
Y = mG. G
Y = G X (1 / MPS)
900 = G X (1 / 0.25)
 G = 900 = 225
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To reach the full-employment, Government
needs to spend another RM225 mil.
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Solution (iii)
Y=C+I+G
= 400 + 0.75 (Y – 1/4Y) + 500 + 1700
= 2600 + 0.75 (3/4Y)
= 2600 + 0.56Y
0.44Y = 2600
Y = 5909.1
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OR Solution (iii) can be solve as:
Y = mGt. G
Y = (1 / MPSt ) X G
Y =
1
X (1700 – 1000)
(1 – b + bt )
 Y = 700 / [1 – 0.75 + (0.75)(0.25)]
 Y = 1590.91
Y=C+I+G
Y = 400 + 0.75 (Y – 1/4Y)
+ 500 + 1000
Y = 1900 + 0.75 (3/4Y)
= 1900 + 0.56Y
0.44Y = 1900
Y0 = 4318.18
Therefore, new Y = 4318.18 + 1590.91 = 5909.1
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Solution (iv)
To confirm weather G is larger or smaller
than T.
G = 1700mil.
T = 1/4Y = 1/4 (5909.1) = 1477.28
Therefore, G > T
where, 1700 mil. > 1477.28 mil.
So, budget is a DEFICIT.
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THAT’S ALL FOR TODAY
THANK YOU!
BUT
DON’T FORGET TO DO THE
REVISION
FOR NEXT CLASS: READ GOVERNMENT
REVENUE AND SPENDING IN ISLAMIC
ECONOMICS
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SOURCES OF GOVERNMENT REVENUE
IN ISLAMIC ECONOMICS
i) Taxation
major source of government revenue.
to ensure it does not de-motivate the taxpayers
from working harder.
to preserve justice - minimize the tax burden of
the poor.
to concentrate on direct taxes (usually collected
from the rich) instead of indirect taxes which are
normally borne by the poor.
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ii) Zakat
is collected from a full one-year possession of
wealth which reaches to the Nisab.
the coverage of zakat institution is very wide,
ranging from sheep and cattle, up to bonds and
equity shares.
establish a proper body to enable the zakat be
collected centrally.
In Malaysia, is collected by Pusat Pungutan Zakat
(PPZ) under Jabatan Agama Islam with close
supervision by Baitul-Mal.
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iii) Jizzyah
tax levied on non-Muslim citizens living in the
Islamic state.
Indeed, is the duty of the Islamic government to
protect their lives and property like any other
Muslim citizen.
As Holy Quran states:
“…… until they pay the
Jizzyah with willing submission, and feeling
themselves subdued….” ( 9 :29)
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iv) Kharaj
an agricultural land tax levied on the producer of
the landed property owned by the non-Muslims in
the Islamic state.
The rate will mainly depend on the quality of the
land, fertility, irrigation requirements, etc.
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v) Ushr

an agricultural land tax levied on the producer of
the landed property owned by the Muslims,
 Charged at the rate of 10% if it is through natural
rainfall or 20% if the water is supplied through
irrigation.
As Holy Quran states: “ ….. and render the dues
that are proper on the day that the harvest is
gathered ……”
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Khums and Fay’
vi) Khums: Muslim army gets as booty
(Ghanimah) after fighting, war with enemies and
gaining victory over them. It is used for the
welfare of the nation.
Vii) Fay’: - property captured from the enemy
forces without fighting any battles with them.
Such property, the acquired will go to the central
funds of the Baitul-Mal.
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Ushur dan Waqf
viii) Ushur:
revenue collected from trade and
business carried out by all the citizens of the
Islamic state irrespective of their religions and
beliefs. The revenue will also goes to Baitul-Mal.
ix) Waqf:
these are the religions trust and the
proceeds from these trust goes to the Baitul-
Mal.
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Kira al-Ard & Amwal al Fadilah
x) Kira al-Ard:
is the income generated from
the services provided by the government.
xi) Amwal al Fadilah:
is the income
received from the government owned natural
resources.
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Infaq Fi Sabillillah (Sadaqah)
is a voluntary charity given by individuals over
and above the payment of the compulsory zakat
to relieve the problems and suffering of fellowhuman being.
According to Al-Hadith, sadaqah must be given in
such a way that even the left hand (the donor)
must not know what the right hand gives.
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How Islamic Government Spends?
8 main channels
where the expenditure should be distributed:
Defense
Law and order
Public justice
Public administration
Basic need fulfillment
Dakwah activities
Enjoining right conduct and forbidding
wrong.
Fulfillment of such socially obligatory
duties as the private sector fails to perform.
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Priorities given based on hierarchy
of needs:
priorities should be given on expenditures
based on the hierarchy of needs for four
types of goods,
that is:
Dharnniat
- Basic Necessities
Hajiat
- Complements
Kamaliat and - Luxuries
Thasiniat.
- Haram/Forbidden
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To achieve Al-Falah
A Muslims country’s objective for the use of
government expenditure is to achieve AlFalah (the success in this world and the
hereafter).
How this Al-Falah is achieved is based on the
foundation of At-Tauhid;
which has the relationships of:
Hablumminallah (the relationship
between man with Allah)
and Hablumminannaas (the relationship of
man with his mankind).
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That’s all for today!
THANK YOU
FOR
LEND ME
YOUR EARS
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