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GOVERNMENT EXPENDITURE GOVERNMENT EXPENDITURE AND TAXATIONAND TAXATION

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GOVERNMENT CONTROL OF GOVERNMENT CONTROL OF ECONOMYECONOMY

We often hear in talk shows, suggestingWe often hear in talk shows, suggesting Devote more resources in improving public Devote more resources in improving public

health.health. More resources should be devoted in More resources should be devoted in

education of youth.education of youth. Unemployment in deep recession should Unemployment in deep recession should

be reduced.be reduced. But who will do this?But who will do this?

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Three major tools that government uses to Three major tools that government uses to influence private economic activity are:influence private economic activity are: TaxesTaxes ExpendituresExpenditures RegulationsRegulations

TOOLS OF GOVERNMENT POLICYTOOLS OF GOVERNMENT POLICY

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TAXESTAXES Tax reduce Private income, thereby reducing Tax reduce Private income, thereby reducing

private expenditures like automobiles and private expenditures like automobiles and restaurants food.restaurants food.

Provide resources for public expenditures like Provide resources for public expenditures like Defense Budget, Schools and colleges, roads.Defense Budget, Schools and colleges, roads.

Discourage certain activities by taxing them Discourage certain activities by taxing them heavily like Tobacco, Cigarettes; and heavily like Tobacco, Cigarettes; and encourage other activities by taxing them lightly encourage other activities by taxing them lightly or even subsidizing them like health care or even subsidizing them like health care programs, Projects by NGOs.programs, Projects by NGOs.

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EXPENDITURESEXPENDITURES Increasing expenditures on certain goods Increasing expenditures on certain goods

and services like roads, education or and services like roads, education or Security of Public.Security of Public.

Transfer PaymentsTransfer Payments Increase spending that provides resources Increase spending that provides resources

to individuals.to individuals.

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REGULATIONSREGULATIONS

Rules and Regulations that direct people Rules and Regulations that direct people to perform or refrain from certain to perform or refrain from certain economics activities.economics activities.

Rules that limit the amount firms can Rules that limit the amount firms can pollute, Freedom of Speech or Protest up pollute, Freedom of Speech or Protest up to certain limit and areato certain limit and area

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FUNCTIONS OF GOVERNMENTFUNCTIONS OF GOVERNMENT

Four major functions of a government are:Four major functions of a government are: Improving economic efficiencyImproving economic efficiency Reducing economic inequalityReducing economic inequality Stabilizing the economy through Stabilizing the economy through

macroeconomic policiesmacroeconomic policies Conducting international economic PolicyConducting international economic Policy

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IMPROVING ECONOMIC IMPROVING ECONOMIC EFFICIENCYEFFICIENCY

A Central economic purpose of government is to A Central economic purpose of government is to assist in the socially desirable allocation of assist in the socially desirable allocation of resources.resources.

Government concentrates on What and How of Government concentrates on What and How of economic life.economic life.

Some countries emphasize a hands-off, laissez-Some countries emphasize a hands-off, laissez-fare approach, leaving most decisions to market.fare approach, leaving most decisions to market.

Other countries lean toward heavy government Other countries lean toward heavy government regulation.regulation.

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INVISIBLE HAND APPROACHINVISIBLE HAND APPROACH

If all idealized conditions are met like:If all idealized conditions are met like: Consumers and firms must be fully informed Consumers and firms must be fully informed

about the prices and characteristics of the about the prices and characteristics of the goods they buy and sell.goods they buy and sell.

There are no externalities like air pollution.There are no externalities like air pollution. The invisible hand could provide perfectly The invisible hand could provide perfectly

efficient production and distribution of efficient production and distribution of national output, and there would be no national output, and there would be no need for government intervention to need for government intervention to promote efficiencypromote efficiency

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But there are certain limits of invisible hand But there are certain limits of invisible hand approach.approach.

No government can take hands off of the No government can take hands off of the economyeconomy

Courts and police forces would be needed to Courts and police forces would be needed to ensure fulfillment of contracts, nonfraudulent ensure fulfillment of contracts, nonfraudulent and nonviolent behavior, freedom from theft and nonviolent behavior, freedom from theft and external aggressionand external aggression

Government regulates all the activities of Government regulates all the activities of market economymarket economy

INVISIBLE HAND APPROACHINVISIBLE HAND APPROACH

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REDUCING ECONOMIC REDUCING ECONOMIC INEQUALITYINEQUALITY

It deals with income redistribution, so that It deals with income redistribution, so that rich should not become richer and poor rich should not become richer and poor become poorer.become poorer.

Best example is Benazir income support Best example is Benazir income support ProgrammeProgramme

Other examples can be Free education in Other examples can be Free education in Pakistan, ScholarshipsPakistan, Scholarships

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STABILIZING THE ECONOMYSTABILIZING THE ECONOMY

Government has the responsibility of preventing Government has the responsibility of preventing calamitous business depressions by the proper calamitous business depressions by the proper use of monetary and fiscal policy, as well as use of monetary and fiscal policy, as well as regulation of the financial system.regulation of the financial system.

Government tries to smooth out the ups and Government tries to smooth out the ups and downs of the business cycle, in order to avoid downs of the business cycle, in order to avoid either large-scale unemployment at the bottom either large-scale unemployment at the bottom of the cycle or high inflation at the top of the of the cycle or high inflation at the top of the cycle.cycle.

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CONDUCTING INTERNATIONAL CONDUCTING INTERNATIONAL ECONOMIC POLICYECONOMIC POLICY

Government plays a critical role representing Government plays a critical role representing interests of the nation on the international stage interests of the nation on the international stage and negotiating beneficial agreements with and negotiating beneficial agreements with other countries on a wide range of issues.other countries on a wide range of issues.

International issues of economics policy are:International issues of economics policy are: Reducing Trade BarriersReducing Trade Barriers Conducting Assistance ProgramsConducting Assistance Programs Coordinating macrorconomic PoliciesCoordinating macrorconomic Policies Protecting the Global EnvironmentProtecting the Global Environment

The total outlay of budget 2011-12 is The total outlay of budget 2011-12 is Rs Rs 2,7672,767 billion. billion.

14.2% higher than the size of budget 14.2% higher than the size of budget estimates 2010-11.estimates 2010-11.

The total outlay of budget 2010-11 was The total outlay of budget 2010-11 was estimated at Rs 2,423 billionestimated at Rs 2,423 billion

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PRINCIPLES OF TAXATIONPRINCIPLES OF TAXATION

Once the Government has decided to Once the Government has decided to collect some amount of taxes, It has many collect some amount of taxes, It has many taxes available to it.taxes available to it.

IncomeIncome ProfitsProfits SalesSales Rich or poorRich or poor

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BENEFIT vs. ABILITY-TO-PAY BENEFIT vs. ABILITY-TO-PAY PRINCIPLEPRINCIPLE

Individuals are taxed in proportion to the Individuals are taxed in proportion to the benefit they receive from government benefit they receive from government programs.programs.

Toll TaxToll Tax

ParksParks

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ABILITY-TO-PAY PRINCIPLEABILITY-TO-PAY PRINCIPLE

Amount of taxes that people pay should Amount of taxes that people pay should relate to their income or wealth.relate to their income or wealth.

This is a redistributive tax system, that This is a redistributive tax system, that means raising funds from higher-income means raising funds from higher-income people and distributing among poor and people and distributing among poor and needy people.needy people.

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HORIZONTAL AND VERTICAL EQUITYHORIZONTAL AND VERTICAL EQUITY

Horizontal Equity states that those who are Horizontal Equity states that those who are essentially equal should be taxed equallyessentially equal should be taxed equally

Those who have equal incomes should be Those who have equal incomes should be imposed same tax rates.imposed same tax rates.

Parks are enjoyed by both Rich and Poor Parks are enjoyed by both Rich and Poor but that doesn’t mean that rich should pay but that doesn’t mean that rich should pay more; If benefit is equal than tax should be more; If benefit is equal than tax should be equalequal

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VERTICAL EQUITYVERTICAL EQUITY

Tax treatment of people with different Tax treatment of people with different levels of income.levels of income.

Imagine S/L ABC taking 50,000 Pay and Imagine S/L ABC taking 50,000 Pay and F/L XYZ taking 30,000, S/L enjoying more F/L XYZ taking 30,000, S/L enjoying more privileges than F/L.privileges than F/L.

Does that mean that S/L and F/L should Does that mean that S/L and F/L should pay tax at same rate?pay tax at same rate?

No, It will be fair if S/L pays more tax.No, It will be fair if S/L pays more tax.