ECS 1601 Nationalisation & Privatisation Fiscal policy & budget

Nationalisation: • What the Gov spend (Gov has its own

• Gov. takes ownership of private companies budget)
- State owned companies (ESKOM) = not • What they borrow
The role of Gov. nationalisation. • How they tax the public
- Nationalisation = transfer of private to EXPANSIONARY FISCAL POLICY:
4 reasons for G in the economy: public ownership • If economy is in recession, Gov need to
1. Private sector and market forces can
Privatisation arguments
- Nationalisation leads to economic failure spend more or decrease income taxes
produce goods & services much more Privatisation: For Against CONTRACTIONARY FISCAL POLICY:
effective than G • Private companies take ownership of • If economy have high growth rates, Gov
2. G helps private sector to do business public enterprises Gov = good in politics; bad There will not should spend less or increase taxes
by upholding law, property rights, etc. Reason: in business necessarily be
3. G should try to correct market failures. 1. If G expense decrease, income tax competition resulting Gov spending
4. G should force equity in society decrease in monopoly
(helping the poor) when markets are 2. Private ownership = more efficient Reasons for Gov spending more:
Privatisation attracts Direct G take stock of external
not fair. 3. Relieves G from some expenditures • Changing consumer preferences
Foreign investments costs, Private firms do
(improve budget deficits) • Political & other shocks
not (pollution, etc)
Gov intervention • Redistribution of income
Taxation – Adam Smith Gov will have less Private firms not • Misconception and entitlement
5 ways in which G can intervene expenditures and private concerned with society • Population growth and urbanisation
1. Neutrality: company will pay taxes. at large (reducing
1. Delivery of public goods &
Tax should disturb prices & allocation of poverty)
Service resources as little as possible
• Public owned and financed 2. Equity Private companies can Financing Gov Spending
• G pays private firm to deliver public good Tax should be spread fairly across society change and adopt easily to
or service • Horizontal equity: people in same economic circumstances
• G teams up with private firm called PPP position pay the same tax Gov will have more to
(Public Private Partnership) • Vertical equity: people in different spend on education,
2. Participate in the market. positions pay differently service delivery, etc
• G buys goods & service and employs 3. Admin simplicity
people Should not be difficult or costly to collect tax Instrument for BEE (black
3. G spending economic empowerment)
• G influences economy when they decide Gov Failure
to buy, G can make transfer payments
(make payment without receiving Politicians can fail:
anything in return) • Goal = to be re-elected
4. Taxation = powerful instrument. E.g. (Popularity vs what is right)
if G wants more equal distribution they tax • Long term goals vs short term (want votes – now!)
rich more and poor less. Bureaucrats can fail:
5. Regulations and laws that affect the • G is not in constant competition and no competition = inefficiency
economy Other failures:
• Rent-seeking – Influence G behaviour to own advantage and society’s
disadvantage.
 Different type of taxes TAX IN SA

MAJOR CATEGORIES: Progressive PIT (Personal income tax)

Continued.. Direct tax (Levied per person)
Indirect Tax (taxes on goods and service)
- VAT
- Selective (sin tax on alcohol)
NOTE!
Its about the % not the amount in R
* Rich pay larger % of income on tax than poor
Proportional
* Rich and poor pay same % of income on tax
Regressive:
* Rich pay smaller % of income on tax than poor
• Largest source of income for Gov
• Tax brackets are used to calculate how much tax should be
paid per person
• If you get R1 more, the tax rate is marginal tax rate.
• Overall tax rate = average tax of effective tax ratio
CT (Company tax)
• Example of proportional tax rate

Who really pays tax? VAT (Value added tax)

• Example of regressive tax rate

Rise in overall tax burden

• Crowding out (increase in gov spending causes decrease in
consumption)

Example:
Suppose Cigarettes cost R12, R4 sin tax is levied.
Draw curve
1. Demand curve
2. Supply curve
3. Equilibrium
4. Supply curve will shift back by R4
5. Show new equilibrium
(demand is less when sin tax is levied, Consumer & supplier
share tax and affect of it)