PSCI 150 : INTRODUCTION TO ECONOMICS Bachelor of Political Science, KIRKHS, IIUM

1. PSCI 1500:
Introduction to Economics
Government Revenue &
Expenditure:
The Fiscal System

2. MACROECONOMIC POLICIES
Overview of Macroeconomics Policy
 Fiscal Policy
Influencing the levels of aggregate output and
employment or prices through changes in federal
government purchases, transfer payments,
and/or taxes.
 Monetary Policy
Influencing levels of aggregate output and
employment or prices through changes in interest
rates and the money supply.

3. Categories of Government Expenditures
i. Government purchases of goods & services
Government spending on new goods and services
 Public good – good/service provided to society.
 Quasi public good - government-provided good that could
be sold in a private market.
ii. Transfer Payments
Money from the government for which no direct work is
required in return.
iii. Others
Interest paid on borrowed funds; grants-in-aid to state
and local governments
OVERVIEW OF GOVERNMENT
EXPENDITURES & REVENUES

4. OVERVIEW OF GOVERNMENT
EXPENDITURES & REVENUES
GOVERNMENT EXPENDITURE
GOVERNMENT OPERATING
EXPENDITURE
GOVERNMENT DEVELOPMENT
EXPENDITURE
General
administration
Social services
Economic
services
Defense and
security

5. OVERVIEW OF GOVERNMENT
EXPENDITURES & REVENUES
Example : US Case

6. Example : US Case
OVERVIEW OF GOVERNMENT
EXPENDITURES & REVENUES

7. OVERVIEW OF GOVERNMENT
EXPENDITURES & REVENUES

8.  Tax refers to financial charge or levy imposed on
the eligible taxpayers
 Important feature of tax system is the
percentage of the tax burden relative to income
or consumption
 Each term/type describe the way the rate
progresses from low to high, vice versa, or
proportionally.
 Each term describe different distribution effect
of tax on the income or consumption.
TAX AS THE MAIN
GOVERNMENT SOURCE OF REVENUE

9. TERMS OF TAX STRUCTURE
1. Progressive Tax
 Tax reflecting a direct relationship between the
percentage of income taxed and the size of the income.
 As income increases, so too does the rate at which that
income is taxed, and vice versa.
TAX AS THE MAIN
GOVERNMENT SOURCE OF REVENUE

10. 2. Proportional Tax (flat tax)
 Tax equal to the same percentage of income regardless
of the size of the income.
 As income increases or decreases, the rate at which that
income is taxed remains constant.
3. Regressive Tax
 Tax reflecting an inverse relationship between the
percentage of income taxes and the size of the income.
 As income increases, the rate at which that income is
taxed decreases, and vice versa.
TAX AS THE MAIN
GOVERNMENT SOURCE OF REVENUE

11. FISCAL POLICY
 Fiscal Policy
Influencing the levels of aggregate output and
employment or prices through changes in
government purchases, transfer payments, and/or
taxes.

12. TYPES OF FISCAL POLICY BY MECHANISM
EXPANSIONARY FISCAL POLICY
CONTRACTIONARY FISCAL POLICY

13.  Two ways of managing the fiscal policy:
1. Automatic Fiscal Policy
• Also called automatic stabilization.
• Changes in government expenditures and/or taxes
that occur automatically as the level of economic
activity changes to control unemployment or
demand-pull inflation.
2. Discretionary Fiscal Policy
• Deliberate changes in government expenditures
and/or taxes to control unemployment or demand-
pull inflation.
FISCAL POLICY

14. FISCAL POLICY
Discretionary Fiscal Policy
Expansionary:
1) Unemployment due to a decline in spending -
resolved by any or all of the following tools:
• Increase government purchases of goods &
services
• Increase transfer payments
• Decrease taxes

15. FISCAL POLICY
Discretionary Fiscal Policy
Contractionary:
1) Demand-pull inflation from too much spending -
resolved by any or all of the following tools:
• Decrease government purchases of good &
services
• Decrease transfer payments
• Increase taxes

16. SUMMARY OF FISCAL POLICY

17. In what phase of a business cycle would
contractionary fiscal policy be appropriate? Describe
how it will take effect during the phase.
REVIEW

18. TYPES OF GOVERNMENT BUDGETS
1. BALANCED
BUDGET
The government’s
total expenditure
is equal to its
total revenue.
2. SURPLUS
BUDGET
The government’s
total expenditure
is less than its
total revenue.
3. DEFICIT
BUDGET
The government’s
total expenditure
is more than its
total revenue.

19. CONTRACTIONARY POLICY
• Contractionary policy is designed to enlarge the
budget surplus or reduce budget deficit.
• This is to dampen aggregate spending thus aid in
managing demand-pull inflation.
EXPANSIONARY POLICY
• Expansionary policy is designed to enlarge the
budget deficit or reduce budget surplus.
• This will increase the aggregate spending and help to
reverse a recession.
BUDGET & FISCAL POLICY RELATIONSHIP

20. National Debt
• Government, public or sovereign debt
• Money (credit) owed by a central government.
Financing the National Debt
• Issued by government in return for funds lent to it.
• Largest portion of the national debt is held by private
investors, and the rest is owned by the central banks,
government agencies, and trusts.
NATIONAL DEBT

21. SOURCES OF
NATIONAL DEBT
NATIONAL DEBT
INTERNAL
SOURCES
EXTERNAL
SOURCES

22. SOURCES FOR NATIONAL DEBT
• Borrowing from citizen
• Borrowing from financial institutions
• Loans from the central bank
• Loans from commercial bank
• International money market
• Currency loans from foreign government
• Loans from international financial institutions
INTERNAL SOURCES
EXTERNAL SOURCES

23. Issues in assessing the National Debt
Debt Service
Cost to maintain debt, measured in interest.
Crowding Out
Occurs when borrowing by the government
reduces borrowing by households and
businesses.
NATIONAL DEBT

24. REVIEW
 Identify the budget type most likely invoked during:
Recession -
Inflation -
 Explain the relationship between the budget type and
its fiscal policy.
• Budget deficit indicate expansionary policy -
increase government expenditure, transfer payment
and/or decrease the tax.
• Budget surplus indicate contractionary policy -
decrease government expenditure, transfer payment
and/or increase the tax.
budget deficit (enlarge deficit/ reduce surplus).
budget surplus (enlarge surplus/ reduce deficit).