Size of the Government:Its Implication of Public Finance

Lecture 5.2

Dato Nik Azman Nik Abdul Majid

30 May 2015

EMA 756 Public Financial Management

*Role of govt. How deep the govt. should be involved3. Impact on govt. finance4. Implications on the economy5. Conclusion

Outline: Size of the Govt.

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1. Role of govt.

Outline: Size of the Govt.

* Disagreement of the Size of Govt. (1/2) The role of the govt in the economy is important. Wide disagreement on how the SIZE much the govt. in the economy. E.g. The 4 Nov. 2012 American presidential election, President Barrack Obama (Democratic) believes in a bigger role of the government. Republican challenger, Mitt Romney thinks the American people will be better off with a smaller govt.

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2. How deep the govt. should be involved

Outline

* Mr. Obama argued for federal govt. spending on education, new energy sources & health care

He said that Mr. Romneys proposal to cut taxes for the wealthy & roll back regulations, had failed to boost the economy in the past.

The differences was on the role of the govt. was whether the govt. or the private sector can best provide health care for Americans

Barrack Obama versus Mitt Romney

* At one time Malaysia corporaisedband then privatised many govt. depts such as Telecoms Dept., Postal Dept., National Electricity Board, Malaysia Airlines Many govt-owned companies are still in business, such as PETRONAS, National Heart Institute Bhd., UDA Holdings Bhd., MAS, 1MDB Govt linked companies (GLC) such as TNB, TM, PosMalaysiaGovt owned companies and GLCs played certain roles bth business and social rolesThat was in US four years ago nearer to homeshould the Malaysian Govt be in business?

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3. Impact on govt. finance

Outline

* Impact of Bigger Govt. on Finance

The impact of a bigger govt. in the economy, especially in education, energy & health care in relation to public financial management in terms of: ExpenditureRevenueGovernment debt.

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Bigger Govt.: Impact on Expenditure Higher expenditure in education, energy & health care (1/3)

Education Investment in human capital Economic return: productivity Better jobs: higher income Positive externalities of education Positive economic impact Well-educated population Positive social impact less social problems

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Bigger Govt.: Impact on Expenditure Higher expenditure in education, energy & health care (2/3)

Health care Provide the poor with adequate health care Basic role of the governmentPositive externalities from health careEconomic returns from healthy populationSocial returns from health population

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Bigger Govt.: Impact on Expenditure Higher expenditure in education, energy & health care (3/3)

EnergyEnergy source of developmentEfficient energy use ensure sustainable environment (using non-renewable energy resources such as coal or petroleum resources)For long term purpose, future generation

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Size of the Govt.: Impact on Expenditure Overall Expenditure

Higher expenditure means greater financial burden to the govt.

If no change in revenue, higher deficit and higher debt

Weaken fiscal position

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Impact of Bigger the Govt.: Revenue

Revenue Need to increase revenue to pay for higher government expenditure Higher tax will reduce supply of labour and disincentive to investment Affect disposable income on households and firms, thus less money for consumption (C) & investment (I). Lower economic activities and GDP

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Impact of Bigger Govt.: Debt

Debt If no tax increase or tax increase is insufficient to cover higher expenditure, higher expenditure means higher deficit. Higher deficit means higher borrowing and hence higher debt Higher debt worsen the govt.s fiscal position.

* Impact of Bigger Govt.: Increase in Contingent Liabilities & Exposes Govt. to Debt BurdenGovt. sometimes provide guarantees to GLCs & GoCs so that these companies get loans at lower interest rates. If GLCs & GoCs couldnt pay the interest rates & principal loans then the govt as the guarantor has to pay for the loans. Additional burden to the Govt. Higher debt worsen the govt.s fiscal position.

*4. Implication on the economy

Outline

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Impact of Bigger Govt. on the Economy Crowding out effect (1/3) When the govt and the private sector compete for limited sources, such as land, labour and capital Push up rent, wages, interest rates Push up prices : inflation but ultimately no increase in output Mere shift in resources (labour, land and capital) from private sector to government sector

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Impact of Bigger Govt. on the Economy Crowding out effect (2/3) Welfare effect may increase through government providing more service as cheaper (welfare effect) but if later on price increases the welfare effect will be affected by the price effect. Top universities & hospitals is US are private, e.g. Harvard, Yale, MIT, Columbia; Johns Hopkin Hospital

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Impact of Bigger Govt. on the Economy Crowding out effect (3/3) Government may be less efficient than the private sector in providing some of education, health care & energy service Government more on regulatory role and certain role Most innovation comes from private sector (e.g. I-Phone, I-Pad from Apple)

* 5. Conclusion

Outline

ConclusionManaging public finance not as straight forward as managing corporate financePolitical angleImpact on the peoples well-beingImpact on the economy

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*Thank You

The era of the Government knows everything is over - Dato Sri Mohd. Najib Tun Abdul Razak Prime MinisterThe Government has no business to be in business - Tun Daim Zainuddin, former Finance Minister

*Quotations

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