Notes on Government Finance Part 1

A. Public Finance.

· govt. provides :

i. public goods : housing, roads , hospitals etc.

ii. services : recreation, defense, sports etc.

Q : How does actions affect economy ?

· govt. actions (taxing/spending) alters the structure of incentives facing eco agents.

i. incentives : a/thing created in you to behave in certain ways (rewards / punishment).

ii. Eco agents : inc. both Ind. & companies , productive producing units in general. Involves savings, consuming, investing , selling etc.

B. Public Budgeting

· budgeting is the hard-core & the heart of politics as e/one want the shares.

· Involves :

i. where public money come ?

ii. how much should be spent & in what areas ?

· Participants :

1. The Guardians of the Public Purse :

1.1 The Parliament (law makers.)

1.2 MOF

1.3 The Auditor General (AG) : annexed by Parliament.

2. Spenders (spending unit) : ministries – budget maximizers.

Q : How They Interact ?

· After requesting the money , follow these stages :

1. Budget Formulation : MOF process the request & went to Parliament for budget proposal.

2. Budget Authorization : MPs examined and the parliament allocate the amount of money to dept & ministries.

3. Budget Implementation : MOF must make money available.

4. Budget Auditing : done by the AG.

Topic : Key Concepts

Capital Flight

· Speculation : a diversion of scarce resources (savings) from productive economic activities (industrial or agricultural) to unproductive uses. (Inflation encourage speculation).

· Money supply : total amount of money in economic . increase when govt. borrows from back which lead to monetary expansion.

· Types of borrowing :

a. bank-borrowing : from govt. central bank controlled by MOF.

b. Non-bank public (bond floatation).

Unemployment

· eco conditions where some parts of labor force have no jobs.

· Arise when supply of goods & services exceed total demands.

Q: Inflation is self-enforcing through expectation :

· based on human past experience.

· When inflation started & if employees expect more inflation in future through their past experience, their behaviour will demand more wages & salaries as price going up. This lead to more & higher inflation.

· The relationship between inflation & unemployment is inverse (opposite).

Balance of payment.

· ? : a statement of an economics or a country’s dealings or transactions with the rest of the world in a one year time.

· Involves import payments and export earnings.

· Trade balance account : results of imports & exports balance (surpluss & deficits or zero balance).

How to Achieve the 3 objectives ?

1. Fiscal (Budget) Policy

· policy of MOF.

· ? : changes in govt. spending as well as borrowing &/or taxation :

a. spending

b. borrowing

c. taxation

· Disinflationary (Deflation) Fiscal Policy :one way where govt. increase tax & reduce spending. Govt. use expansionary fiscal policy to reduce inflation :

a. govt. spending increase.

b. Tax cuts (esp. tax on companies.)

2. Monetary (Financial) Policy

· ? : policy of the Central Bank (CB) .

· includes :

a. CB

b. Commercial banks. (borrows money from CB with fixed interest & later on lend to public at a higher interests).

Expansory Monetary Policy (EMP)

· opposite of Tight Monetary Policy (increase tax rate)

· govt. reduce interest rate.

2 eco growth: GNP, only via eco growth that govt. have the money to offer social welfare. Too much money may will also kill the growth .

2. eco development: eco growth + social welfare/democratization/ecological.

2.1 social welfare : well being of the people . Supply via :

2.1.1 civil society : voluntarily

2.1.2 market : privates

2.1.3 state.

2.2 democratization : people’s in power.

2.3 Ecological : environment , govt. must take ecology into account.