CHAPTER 3Public Sector

What you need to know (CAPS)

• Evaluation of the role of the public sector in the economy with special reference to its socio-economic responsibility in the South African context.

• The composition and necessity of the public sector• Problems of public sector provisioning• Objectives of the public sector and its budgets• Fiscal policy (including the Laffer curve)• Reasons for public sector failure

Necessity of the public sector

Assists the private sector when there is market failure.

Market failure: when free market unable to allocate resources and/or goods and services efficiently.

Gov. has socio-economic responsibility that it must fulfil.

Adam Smith (1723–1790) identified responsibilities of gov.:• To protect its citizens against foreign threats• To maintain law and order• To provide certain essential goods and services.

Other gov. responsibilities

Provide community (public) goods• Public goods are non-rival & non-excludable

Reduce demerit goods• Drugs, pollution etc.

Children's rights

Compensation for human rights abuses in the past• Redressing inequalities of apartheid, reduce poverty &

unemployment. Eg. BBBEE

Social security• Welfare grants to decrease poverty

Protection of the environment

Manage the economy• Fiscal & monetary policy

Encourage Competition• Regulate monopolies & promote competition

Public–private partnership (PPP): contract between gov. institution & private businesses where private organisation takes responsibility for some of the financial, technical and operational risks of the project.

DO Challenge – pg 64

• Answer Activity 1 - pg 64 Q 1.1 – 1.4

Problems of public sector provisioning

Accountability• Not driven by a profit motive • Monopolies in some cases• Leads to low productivity & lack of accountability

In SA, accountability underpinned by…• Ministerial responsibilities • Parliamentary questioning by opposition party &

regulators.• Treasury control –controls expenditure of gov.

departments

EfficiencyNecessities (health, education, policing etc) provided by public sector to even out social welfare imbalances.

Pareto efficiency: providing goods and services in a way that no one can be made better off without making someone else worse off.

Problems in achieving this…• Bureaucracy and red tape –procedure over individual

needs.• Lack of training – civil servants not adequately trained.• Corruption – lower-than-average wages make

corruption ‘acceptable’.

Assessing needs and correct planningPublic enterprises do not operate under market conditions – not responding to demand (money votes).

Problems…• undersupply of public goods • inefficient forecasting of future needs

Correct pricing• Lack of money should not exclude people

from public goods - provided under cost or free.

• Free services and goods are frequently abused• Eg, people employed in informal sector

claiming unemployment benefits.• Means testing can solve problemMeans test: investigation into finances of individuals/households to determine necessity of financial assistance

State-owned enterprises (parastatals)Inefficiency due to skills gap - private sector offer better pay and working conditions.

Parastatals are created in one of two ways:• government starts an enterprise• an existing enterprise is nationalised.

PrivatisationPrivatisation: sale of state-owned enterprises to private individuals.

Problem: free market economics takes over. Public interest → profit motive.

NationalisationNationalisation: government takes over privately owned enterprise.

Problem: Profit motive → public interest (can cause inefficiencies).

Objectives of the public sectorand its budgets

Objectives of the public sector…• Economic growth• Full employment• Price stability• Exchange rate stability• Economic equity

The budgets

National budget: a plan for raising and spending the money of the people of the country.

Receives from…• Taxation• state-owned enterprises • loans

Spends on…• Social services• economic growth • Government worker salaries (among other things).

Medium-term budget policy statement (MTBPS)• Info about how government expects economy

to perform over the next three years• How much tax is expected to be collected • Levels of government spending for next 3

years and government deficit• How revenue will be shared between national,

provincial and local government• Delivered by Minister of Finance in last week

of October.

Using the table below, answer Activity 4 on page 73

The main budget• Budget of central government• Presented second half of February by MOF. • Fiscal year = 1 April to 31 March.

Provinces/local authorities allocated revenue in 2 forms:• Equitable share: according to pop.• Conditional grants: paid for specific • Projects/infrastructure.

Provincial and Local BudgetsProvincial Budgets• Provinces raise some revenue - vehicle

licences, duties and taxes; most from national budget

• Provinces spending - education (40%), health (20%) & social welfare (18%).

Local government budgets• Municipal councils receive revenue through

property rates, service fees for water and electricity, and fines.

• Metros (largest municipalities) get portion of fuel levy.

• Smaller councils rely central government grants.

Please complete Activity 5 on pages 77 & 78

Fiscal policy (including Laffer curve)

Fiscal policy: how gov. raises money (forms of taxation) and spends money (expenditure).

Fiscal policy is…• goal-bound –budgetary process used to

determine economic and social goals• demand-based – main policy instrument in

demand-side policies.• cyclical –business cycle affects fiscal policy.

Types of taxation

Direct taxation• Person/organisation makes payment straight

to the tax authority. – Standard Income Tax on Employees (SITE) and Pay

As You Earn (PAYE)

Indirect taxation• Intermediary pays tax to authority. • Eg. VAT– customer pays their portion of VAT to shop– shop pays total VAT to SARS– shop serves as intermediary

Forms of indirect taxation are…• excise duties

• customs duties

• value-added tax – a 14% spending tax on value of most goods

• capital gains tax –tax on gain from sale of certain assets

• inheritance tax – tax on transfer of wealth at death or on gifts during lifetime

What makes a good tax?

Taxes should be:• fair: treat those in same circumstances equally• easy to understand: easy to calculate and pay• easy and cheap to collect• an encouragement to work: mustn’t

disincentivize work

Types of taxes

Proportional: % same regardless of income.

Progressive: % increases as income increases

Regressive: lower incomes pay higher % of income in taxes than do the rich, for example excise duties and VAT.

The Laffer curve

Laffer curve: shows the relationship between possible tax rates and the resulting government revenue at each rate.

Reasons for Public Sector Failure

Public sector failure: country’s resources mismanaged - welfare people not maximised & delivery of services ineffective and inefficient.

Lack of capacityInability to perform services efficiently. • Lack of school facilities• Hospitals running out of medicines• Lack of proper sanitation

Funds often not spent even when needed.

Corruption

Exhibit A

Rapid urbanisationPoverty in rural areas led to rapid rate of urbanisationDifficult to keep up with social services.

Lack of management and accountability

Lack of leadership – lack of skilled leaders due to lower pay.Not directly accountable to taxpayers – little motivation.No incentives for efficient service delivery.

Lack of pricing and market forces

• No market mechanism to guide allocation of resources.

Short-term solutions for long-term problems

Political cycle = 5 years. Spending/taxation plans geared around re-election, not around best interests of citizens.

Unrealistic/unattainable objectives

Macroeconomic objectives VERY difficult for government to influence with little tax collected and HUGE demands for state provision.

How much of Chapter 3 do

you remember???