CHAPTER 3Public Sector
What you need to know (CAPS)
• Evaluation of the role of the public sector in the economy with special reference to its socio-economic 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
Necessity of the public sector
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.
Other gov. responsibilities
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
Problems of public sector provisioning
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
EfficiencyNecessities (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 planningPublic 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 problemMeans 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.
PrivatisationPrivatisation: sale of state-owned enterprises to private individuals.
Problem: free market economics takes over. Public interest → profit motive.
NationalisationNationalisation: government takes over privately owned enterprise.
Problem: Profit motive → public interest (can cause inefficiencies).
Objectives of the public sectorand its budgets
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 BudgetsProvincial 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 (including Laffer curve)
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.
Types of taxation
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
What makes a good tax?
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
Types of taxes
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.
The Laffer curve
Laffer curve: shows the relationship between possible tax rates and the resulting government revenue at each rate.
Reasons for Public Sector Failure
Public sector failure: country’s resources mismanaged - welfare people not maximised & delivery of services ineffective and inefficient.
Lack of capacityInability to perform services efficiently. • Lack of school facilities• Hospitals running out of medicines• Lack of proper sanitation
Funds often not spent even when needed.
Corruption
Exhibit A
Rapid urbanisationPoverty in rural areas led to rapid rate of urbanisationDifficult to keep up with social services.
Lack of management and accountability
Lack of leadership – lack of skilled leaders due to lower pay.Not directly accountable to taxpayers – little motivation.No incentives for efficient service delivery.
Lack of pricing and market forces
• No market mechanism to guide allocation of resources.
Short-term solutions for long-term problems
Political cycle = 5 years. Spending/taxation plans geared around re-election, not around best interests of citizens.
Unrealistic/unattainable objectives
Macroeconomic objectives VERY difficult for government to influence with little tax collected and HUGE demands for state provision.
How much of Chapter 3 do
you remember???
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