Economics /Grade 12 TOPIC3 Notes Nkangala District/20221

ECONOMICS NOTES
TOPIC 3: PUBLIC SECTOR
GRADE 12
YEAR 2021

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 Economics /Grade 12 TOPIC3 Notes Nkangala District/20221

TOPIC 3: PUBLIC SECTOR

UNIT 1.1: COMPOSITION OF THE PUBLIC SECTOR

- Central government: concerned with issues which affect the country as a whole such
as education, health, defence and safety and security. It is led by the president who is
responsible for making strategic decisions
- Consist of legislative branch executive branch and judicial branch.
- It formulate policies (including economic policies) and make law which enables them
to implement such policies.
- Provincial government: they address national issues in their provinces e.g. provide
education, health, and housing. They are managed by the Premier
- Local government/ municipalities: responsible for issues that affect people at
community level e.g. water and electricity supply, roads, sewage
- State owned enterprises: are businesses that are owned by the government.
- They are largely funded from the national budget because they have strategic
importance to the country.
Examples of SOE are SABC, Eskom, DENEL, Transnet etc.

UNIT 1.2: NECESSITY OF THE PUBLIC SECTOR

 To supply public goods
- Public goods are mostly in the form of services
- Government use policies such as taxation and government spending to supply it
- Public goods and services consist of community and collective goods
- Community Goods: example, defence, police, street lights
- They are characterised by Non - excludability which means everyone can use it
irrespective of whether they are prepared to pay a price for it or not
- They are also characterised by Non rivalry which means the use by one does not
reduce availability to others.
- Collective goods: example, parks, beaches, toll gates
- Free Riders or people who do not want or cannot afford to pay can be excluded by
levying (charging) fees.
- merit goods: example, Health, Education
- Merit goods are goods that increase the welfare of the society (goods which have
positive effects on the society)
- They are often provided by the government because the market under supply them.
- They offer little profit that is why private sector under- supply them

 To discourage demerit goods e.g. Cigarettes, alcohol

- Demerit goods are goods which are regarded as harmful to the welfare of the
society. i.e. they are goods with negative effects to the society
- They are often over-supplied and over consumed.
- Government often impose taxes and regulations to discourage consumption of
demerit goods

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 Economics /Grade 12 TOPIC3 Notes Nkangala District/20221

 To manage the economy

- The government manage the collective interest of its people
- The government create the social and legislative environment in which businesses
and individuals peruse their own interests.
- Governments apply suitable and credible economic and other policies in order to
achieve its macroeconomic objectives.
- The government must be able to achieve its objectives of economic growth, full
employment, price stability, exchange rate stability and economic equity.

 To protect common resources (natural resources)

Governments must intervene to protect the environment that no one owns but
everyone can use it free of e.g. Oceans for fishing, Air that we breathe, the natural
scenery
Governments must intervene in the economy by making Laws and setting up legal
structures to protect the environment e.g. against poaching of rhinos, air pollution,
excessive fishing

UNIT 2: PROBLEMS OF PUBLIC SECTOR PROVISIONING

The public sector has a socio-economic responsibility to the citizens of the country.
The following problems often occur when the government tries to carry out its duties.
 (Lack of) Accountability
- Refers to the duty of an individual or organization to explain their decisions and actions
and accept responsibility for their behaviour.
- In South Africa, parliamentary questioning, treasury control and the rule of the auditor-
General reflect the government’s accountability.
- The Auditor-General produces audit reports annually on all government departments,
public entities and municipalities.
- It is important that government employees are also held individually accountable for
what they decide and what they do.
- Government employees must be accountable when dealing with the tax payers’
money and must not abuse their powers.
- Public accountability is important because the public need to be assured that public
sector delivers the quantity and quality of goods and services for which taxes are
raised.

 Assessing needs
- The government must provide goods and services according to the assessed needs
of the inhabitants of the country.
- It is very difficult for the public sector to assess needs because they do not have the
market prices to guide them.
- And that leads to an under or over supply of public goods and services

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 Economics /Grade 12 TOPIC3 Notes Nkangala District/20221

- The private sector on the other hand provides goods and services in response to the
price mechanism of supply and demand.
- The state can overcome this problem by, for example, conducting household surveys
and canvasing the opinions of the public.

 Pricing policy
- The government has to make a decision about what to charge for the public goods it
provides.
- The government has three pricing options.
- Free of charge: the state may choose to offer a public good free of charge to the
consumer. These are community goods such as police services.
- Charging a small fee: the state may decide to levy a fee for the use of collective
goods such as public swimming pools etc. However, if the cost of collecting such a
charge is higher than the revenue raised, it is of no worth to levy such a charge.
- Subsidies: Government can pay subsidies to promote the production of certain
products for the prices to be affordable.
- The difficulty with using subsidies arise when relatively fixed cost are involved.

 Parastatals
- They are State-Owned Enterprises established to be profit making businesses.
- They receive exclusive rights from the government.
- This can lead to monopolies and inefficiency.
- They can be created when the government begins a new enterprise or through the
process of nationalization.

 Privatisation
- It refers to a process whereby state-owned enterprises are sold to the private sector.
- It implies that the government sells more than 50% of its shares to the private sector.
- The income generated through privatization becomes additional funds for the
government.
- The problem with privatisation is that it often leads to higher prices since the private
sector motive is profit.

 (Lack of) Efficiency

- Efficiency means goods and services are provided in the desired quantity.
- Public goods are provided efficiently if Pareto efficiency is achieved.
- Pareto efficiency is when resources are allocated in a way that no one can be made
better off without making another person worse off.
- There is often lack of efficiency in the public sector due to bureaucracy, incompetence
and corruption.

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 Economics /Grade 12 TOPIC3 Notes Nkangala District/20221

UNIT 3: MACROECONOMIC OBJECTIVES OF THE STATE (POSSIBLE ESSAY)

To improve Economic growth
- Economic growth is an increase in production of goods and services by a country in a
year
- Economic growth is measured by real GDP. Real GPD is the value of all finished
products produced in the country after the effects of inflation has been considered
- Economic growth rate must be higher than population growth rate for people‘s lives to
improve

To achieve full employment or to reduce unemployment.

- Full employment is when all people who are looking for job get employed
- It is therefore the aim of government to create decent jobs
- Steps that the government can take to achieve full employment include:
- In the short run- employment can be increased by using direct employment scheme,
subsidies such as youth wage subsidies
- In the medium-term government can support labour intensive activities especially in
the agricultural sector
- Government can provide incentives to businesses to invest in these industries which
employ a lot of people
- In the long term-the government can support knowledge intensive and capital-
intensive sectors in order to remain competitive

 To maintain price stability

- Price stability occurs when prices of good changes by smaller percentage.
- In South Africa prices are stable when inflation rate is within the 3 – 6%.
- If inflation exceeds the 6%, interest rates are increased. Increased interest rate
reduces the over- spending.
- If inflation decreases below the 3%, interest rates are reduced. This server to increase
spending and production.

 To maintain exchange rate stability

- The government should manage the economy (through fiscal and monetary policies)
in a way that the exchange rate becomes stable.
- Too much depreciation and appreciation of the rand create uncertainty and should
be limited.

 To achieve economic equity

- The distribution of income in the economy is not fair, as some people earn a large
amount of money while others earn very little
- Through taxation, government can redistribute income
- Some of the ways in which government can help the poor are: free education, free
basic health, grants, and subsidies.

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UNIT 4: BUDGETS

- A budget is a plan of government income and expenditures for a particular period.

TYPES OF BUDGETS
 The main budget
- Main Budget is presented in Parliament during February by the Minister of finance.
- The minister announce the planned expenditure, income and borrowing.
- Financial year of the Government is from 1 April to 31 March of the following year
- Preparation of the main start in April of every year and continue where various
departments submit their budget proposals to the treasury.

 Medium Term Budget Policy Statements (MTBPS)

- The Minister of Finance deliver it in the last week of October of each year.
- The Minister of Finance informs Parliament of any changes that occurred in the
economy since the main budget in February.
- It provides the government’s assessment of the state of the economy, the budget
priorities and the division of revenue.
- It is based on the information contained in the Medium Term Expenditure Framework
- It is also known as the mid –term budget.
- Medium Term Expenditure framework (MTEF)
- A plan of estimated government expenditure which covers a period of three years
- It serves to increase the level of transparency on matters of the government budget
- It facilitates long term planning as departments can be certain of policy and funding
issues for every three years

 Provincial budget
- They show the expected income and revenue for a particular year
- The provincial governments implement legislation and plans of the national
government
- They are often delivered few weeks after the main budget.

SOURCES OF STATE REVENUE

 Taxation
- Personal income tax is direct tax on the incomes of individuals or households.
- It includes incomes such as salaries, wages, bonuses received from employment
- Corporate tax is paid by businesses on their profits and on capital gained from their
shares
- Indirect taxes
- These are taxes levied on goods and services
- Value added tax is levied on the majority of goods and services consumed within the
country.
- Custom duties are tax imposed on imported goods.

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- Excise duties are taxes on goods that are regarded as harmful to the society (demerit
goods) e.g. cigarettes and alcohol
- Fuel levy is a tax levied on each litre of processed petrol and diesel.
 Loans
- When government revenue is lower than the planned expenditure, government can
borrow money, therefore creating government debt.
- Government can borrow money from other governments ,banks and other financial
institutions
 Administrative incomes
- This include money collected as traffic fines, payments for licences, permits etc.
- Government property
- Government can earn income from renting its properties such as buildings
 Donations
- This are amounts given to government either by an individual, organisation or another
country for specific purposes e.g. HIV research, corona virus vaccine

UNIT 5: FISCAL POLICY

- Fiscal policy is concerned with the usage of government spending and taxation in
an any attempt by the State to influence the economy

- Features of fiscal policy

 It is goal bound
- All different levels of government, national, provincial and local government use
fiscal policy to achieve their socio- economic goals (objectives)

 It is demand biased
- Fiscal policy is used mostly to influence aggregate demand e.g. decrease in
personal income tax often lead to an increase in aggregate demand
- Sometimes fiscal policy can be used to achieve supply-side objectives e.g. The
government spending to improve infrastructure, reduction of corporate tax to
encourage production

 It is cyclical
- Business cycle has a direct effect on fiscal policy.
- During upswing period tax revenue tend to increase as employment and profits
increase.
- At the same time government expenditure on social and economic projects often
increase
- During downswing period, tax revenue often decrease and this result in a decrease
in government spending

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COMPONENTS OF FISCAL POLICY

- The Instruments (variables) of fiscal policy are taxation, government spending and
government borrowing (state debt)
- When Income and expenditure is equal = a balanced budget
- When Income is more than expenditure then you will get a budget surplus
- When expenditure is more than income you will get a deficit

 Government Spending
- Government spending are classified in 2 formats:
- Functional: Social Services e.g. defence, Economic services, interest.
- Economic: Current Payments e.g. transfers and Subsidies, Payment for capital
assets
- Government spend money to provide public and merit goods and services
- free of charge or at a subsidies price
- Pay interest on government debt
- To redistribute income
- To influence aggregate demand and supply

 Taxation
Government impose tax for the following reasons:
- To raise income to cover expenditure planned projects
- To discourage the use of demerit goods
- To convert external cost into private cost i.e.to reduce pollution
- To discourage imports
- To redistribute income (so that the gap between the rich and the poor can decrease)
- To influence the level of aggregate demand and Aggregate supply.

 State Debt /state borrowing:

- Main Budget must always balance (income must cover all expenditures)
- If there is a deficit, government often make loans to balance the budget
- If there is a surplus, then the money is used to pay off state debt
- Loans create public debt / government debt

EFFECTS OF FISCAL POLICY

 Distribution of income
 Taxes: progressive tax rate makes income distribution more balanced.
- This is because the higher income earners pay more and the lower income earners
pay less.
- Regressive tax rate takes more money from the poor in relation to their income e.g.
VAT. This makes income distribution unfair.
- Proportional tax make income distribution the same as everyone pay a flat tax rate.
- Subsidies: a form of financial assistance by government with the aim of making prices
affordable to consumers or to promote growth in a particular industry.

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- Subsidies redistribute income because it enables poor people to afford basic food
goods.
- Subsidies can be direct e.g. money or indirect rebates to cover some of the producer’s
expenses.
- Social grants: A sum of money given to a person who is unable to care for themselves
financially. Example old age, disability and child support grant.

 Consumption
- The level of taxation influences both the pattern and the level of aggregate consumer
spending.
- Consumption spending often increases when taxes decrease, and it decreases when
taxes increase.
- Essential products such as basic food stuffs are less affected by changes in taxation
than luxury goods.

 Price level
- If there is demand pull inflation increase in taxes can lower aggregate demand and
prices.
- Increase income tax can increase cost push inflation as workers unions often will
demand higher increase in wages.

 Incentives
- Taxes are sometimes criticised for reducing incentive to work, this means it is regarded
as a reason why some people are discouraged from working extra hours or taking
promotional positions or even not declaring some of their income.
- This principle is illustrated using the Laffer curve below.

THE LAFFER CURVE

R50m
Tax revenue

R35m

0 25 50 75 100
Tax rate (percentage)

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 Economics /Grade 12 TOPIC3 Notes Nkangala District/20221

- At the rate of 0% government revenue is zero since no one pays tax.

- As the rate increases to 25% the revenue of the state also increases to R35 millions.
- At 50% the state income also increases to R50m. this is the highest point on the curve
meaning this is the highest amount possible for the government to collect as revenue.
- If the state increases the rate further to 75%, the effect will be a reduction in state
revenue by R15m. the tax revenue collected will fall back to R35m.
- This is the same amount the state collected when charging 25% tax rate.
- At 100% there will be no income for the state as no one will be willing to work.

UNIT 6: PUBLIC SECTOR FAILURE

- Refers to when the government intervention in the economy results in more inefficient
and ineffective allocation of resources

Features of public sector failure

 Ineffectiveness
- When the public sector is being unable to achieve its objective of intervening in the
economy ( e.g. hospitals being unable to make people healthy, Eskom being unable
to provide enough electricity)

 Inefficiency
- When the public sector is more wasteful in the usage of its resources e.g. spending
excessively large amount of money on a tender to do patchwork (potholes) on road.
- This means the public sector tend to be less productive.

CAUSES OF (REASONS FOR) PUBLIC SECTOR FAILURE (POSSIBLE ESSAY)

 Poor management/ management failure
- The public sector entities may have leaders with poor management skill.
- Some of these managers may be lacking proper experience and training while others
may be having hidden agendas.
- This may affect how they apply various policies or may get the timing of such policies
right

 Lack of motivation
- Government employees often do not receive incentives for successful service delivery.
- There are no systems to evaluate service quality provided by the employees.
- Even those who do outstanding work are not recognized therefore they end up being
demotivated.

 Apathy
- Some employees are apathetic (uninterested/ indifferent) about their work. They lack
accountability about their actions. This means they often lack responsibility for their
decisions. These result in poor service delivery.

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 Bureaucracy
- Refers to excessively complex administrative procedure that are often followed in
government sector
- Bureaucrats (government officials) are criticised for being too rigid and inefficient
- A simple request end up entangled in endless processes, paperwork that slows
down an otherwise simple task
- Application for a particular project having to go from one administrative level to
another, taking very long period before an answer can be given.

 Politicians
- Politicians are often interested in being re-elected to their positions rather than
serving the public.
- Therefore they often pursue vote-maximising strategies to secure or retain their
political offices.
- The pressure of looming election often can make many politicians make decisions to
appease the voting public
- Some projects can be undertaken even if they were not budgeted for or no proper
cost benefit analysis was conducted.

 Special interest groups (rent seeking groups)

- Rent seeking refers to when people spend money on lobbying in order to increase
their wealth without actually creating any more wealth.
- Special interest groups such as farmers or organised labour often attempt to
influence government to their own advantage.
- They make use of the law, lobbying, bribes and other favours to influence the
government officials to act in their interest.

EFFECTS OF PUBLIC SECTOR FAILURE

 Allocation of resources
- When the government fails an optimal allocation of resources is not achieved and
consequently resources are wasted.
 Economic instability
- Government failure can lead to macroeconomic instability. This means government is
unable to use fiscal policy effectively.
- The country can experience macro-economic problems such as low economic
growth, high inflation and unemployment.
 Social instability
- When the public sector fails to provide social services sanitation, clean water,
electricity etc., human lives are destabilised and their human rights are compromised.
 Distribution of income
- If the government fails to use the progressive income tax system effectively, there will
be unbalanced distribution of income in the country.

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