FISCAL POLICY

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FISCAL POLICY is a policy to influence the performance of the economy

by using and for regulating the aggregate level of economic activities.

by changing the Government Expenditure (G) and the Government income (T) to regulate the Aggregate Demand (AD) and Output (Y) level.

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TOOLS

FOR

FISCAL POLICY

Government Expenditure, G 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 full-employment.

have steady rate of economic growth.

stabilise prices and interest rate in the economy. 4

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. three (3) main components of development

expenditure: 1. social services: (education, research and development, retraining programs) 2. economic sectors development: road & transport infrastructure, free trade zone, etc;

3. security sector: Ministry of Defense expenditure, military equipments purchase.

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SOURCES OF GOVERNMENT REVENUE

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Tax Revenueconsist 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.

Non-tax Revenue 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 .

CASE STUDY QUESTION:

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ECONOMY REPORT – MALAYSIA: FISCAL POLICY

Prior to the financial crisis in 1997, the federal government achieved five consecutive

years (1993-1997) on budgetary surplus. From 1998 to 2000, the federal government

budgetary position incurred deficit, largely because of expansionary fiscal policy

designed to support economic recovery. For 2001, there were downside risks

associated with external developments that could pose a threat to Malaysia’s

economic recovery process. In view of this development, the focus of the 2001

budget was to continue the recovery process to a level consistent with Malaysia’s

growth potential. The budgetary operations of the government continued to be

expansionary to stimulate economic activities through higher allocations for both

operating and development expenditures. In addition, the annual budgets contained

both tax and non-tax fiscal incentives focused on expanding domestic demand while

strengthening the nation’s competitiveness and resilience through promoting new

sources of growth, developing skilled manpower and technological competence, and

expediting the restructuring of the financial and corporate sectors.

Extracted from 2001 economic outlook.

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QUESTION 1: What is fiscal policy and what are the

main sources of government revenues?- Fiscal Policy is the management of government Budget (Government Expenditure and Revenue) to influence economic activities and to achieve economic goals-Sources of government revenue:

i) Taxesii) Non-taxes

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QUESTION 2:

What is meant by a budgetary surplus?

How does it differ with a budgetary deficit?

-Budget surplus is when Government Expenditure

less than its Revenue, normally budget surplus is

used to overcome inflation

-It differs with Budget deficit, since budget deficit is

when Government Expenditure greater than its

revenue, normally budget deficit is used to

overcome recession

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QUESTION 3:

What are the two types or government expenditure discussed in the article? Give one example each for both types of government expenditure.- Two types of government Expenditure are:

a. Operating expenditure b. Development expenditure

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QUESTION 4: Explain how expansionary fiscal policy can stimulate

economic activities and increase economic growth.

- When government expenditure more than its revenue, for

example when government adopt budget deficit.

- It can stimulate economic activities since large government

spending will increase aggregate demand, AD. Similarly, low tax

collection means higher disposable income which will also

increase AD. Higher AD means more economic activities and

production taking places to meet the increased demand.

-Eventually, when production rises, economic growth is expected

to increase.

THE END

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