FISCAL POLICY

Fiscal Policy

FP is one of the 3 main macroeconomic policies used by govt to manage the economy Basically it is a demand-side policy to influence AD of an economy Also called the budgetary policy Annually the Msian govt (Sep/Oct) presents the budget on G (govt expenditure) and T (govt revenue mainly from Taxation) for the following year FP is a planned budget for the Msian economy

Fiscal Policy
Influencing the level of economic activity though manipulation of government income and expenditure Associated with Keynesian Demand Management Policies

Fiscal Policy
Influence Aggregate Demand
Tax regime influences consumption (C) and investment (I) Government Spending (G) influences C, I

Influences key economic objectives FP is used to manage macroeconomic objectives:

To control inflation i.e. maintain price stability To influence employment level To influence growth

Acts as an automatic stabiliser Discretionary FP govt deliberate action to influence G and T directly:
Expansionary FP budget deficit (G>T) Contractionary FP budget surplus (G <T)

FISCAL POLICY
For full report of Budget 2013 go to Treasury of Malaysian government at http://www.treasury.gov.my/index.php?lang= en

Sources of Government Income

Tax Revenue Sale of Government Services e.g. prescriptions, passports, etc. Govt Borrowing ( public sector borrowings)

Sources of funds for the budget

Government budget consists of expenses such as: government servants salaries (emoluments), subsidies, pensions and gratuities, supplies and services, grants and transfers debt service charges.

Revenue consists of: taxes, indirect taxes non-tax revenue. If the revenue is insufficient to meet government expenses, there is a budget deficit. The government then has to borrow money, either domestically or internationally, to meet its expenses for the year. Malaysia has been experiencing a budget deficit for 15 years since 1997.

Public Sector Spending

Source:

Government Expenditure (G)

Two components of G: Operating expenditure - consists largely of fixed obligatory payments as allocated by the government and Constitution such as emoluments and grants and transfers to the state and statutory bodies Development expenditure - allocated to domestic social agendas, such as economic services (transport, public utilities), social services (education, health, housing) and security and defense allocation for development expenditure was decided in the 10th Malaysia Plan, a five-year economic plan for 2011 to 2015. In 2013 budget, RM201.9bil will be allocated for the operating expenditure and RM47.8bil for the developing expenditure, totalling RM249.7bil

Government Revenue
The Federal Government's revenue for 2013 is expected to be marginally higher by 0.7% to RM208.70bil, partly due to high-base effect in 2012, supported by higher tax revenue with increases seen in sales taxes and individual tax collection. Revenue is forecast to be RM207.24bil (up 11.8% from 2011).

For 2013, the government expects all components of tax revenue comprising of direct tax (RM122bil) and indirect tax (RM37.2bil) -- to grow 4.4% and 4.3% respectively -- supported by steady corporate earnings, continued access to financing, stable labour market and income and income growth.

Malaysian Government Revenue

Direct tax Direct tax from companies Receipts from petroleum income tax Individual income tax

Indirect tax Excise duties Sales tax Non-tax revenue: Returns on investment income and proceeds from petroleum royalties and the Malaysia-Thailand Joint Authority. Revenue from licences and permits

Fiscal Policy In Action

Fiscal Policy influences AD in the short term but can be used to affect AS in the long run depending on the nature of the policy.

Discretionary Fiscal Policy

The deliberate manipulation of T and G by government for the purpose of altering real GDP and employment, controlling inflation and stimulating economic growth Not all fiscal policy is deliberate, a range of automatic stabilisers

9-13

Expansionary Fiscal Policy

Increased G or lower T or increased transfer payments (social security payments) to reduce the effects of recession, i.e. boost GDP and reduce unemployment

9-14

Expansionary Fiscal Policy

ASLS AD1

AS1

Price level

P2 P1

AD2

Q2

Q1

Qp

Real gross domestic product

Increase G and or reduce T can increase AD (shift of AD curve to the right) and this causes real GDP to increase Increase AD = increase Y = stimulate consumption9-15 ( C ) and investment spending (i) by firms = increase O/P = take in more workers (increase employment) = long term bolster economic growth

Contractionary Fiscal Policy

Decreased government spending or higher taxes or a reduction in transfer payments in order to reduce inflation during a boom

9-16

Contractionary Fiscal Policy

ASLS AD2

AS1

Price level

P2 P1

AD1

Q1

Qp

Contractionary FP to reduce inflation Increase T and reduce G will bring about fall in AD AD curve shifts to the left Fall in real GDP and Y = people cut back on spending (fall in C) & firms cut I and price 9-17 level starts to fall

Real gross domestic product

Fiscal Policy and Economic Growth

FP also used to influence non-economic objectives and provide framework for supply side policy e.g. Increase G on education and health, poverty reduction, welfare reforms, investment, regional policies, promotion of enterprise can generate growth via increase in AS = generate ec grwoth E.g. Tax incentives to firms and lower tax rates on employment can increase firm and labor productively and bring about increase in real GDP via an increase in AS = promote growth