• Key concepts
• Composition and neccessity
• Problems of public sector provisioning
• Objectives of the public sector and its budgets
• Fiscal policy
• Public sector failure

The public sector, also known as the state or government, is responsible for providing certain goods and services to citizens. It also determines the policy regarding these goods and services at national, regional and local levels. The public sector is also involved in the delivery of social security, public facilities and policing.
Overview

3.1 Key concepts

These definitions will help you understand the meaning of key Economics concepts that are used in this study guide.

Make mobile notes to learn these terms and definitions. Instructions for how to make mobile notes are on page xiv.

3.2 Composition and neccessity

3.2.1 Composition

• National/central government
  Concerned with national issues e.g. health, defence, education safety and security.
  Also includes non-profit organisations, e.g. SABS and CSIR.
• Provincial/regional government
  Concerned with the administration of the nine provinces and economic issues specific to the region.
• Local government
  Concerned with local issues within a town for municipal area.
  E.g. electricity delivery, libraries, traffic control and refuse removal.
• Public corporations
  State-owned enterprises (SOEs) that provide public goods and services, such as Eskom, Transnet and SABS.

3.2.2 Necessity of the public sector

• To provide public goods
  Goods and services provided by the state for use by all the members of society. Three groups can be distinguished:
  
  • Community goods
    Goods of which there is a complete supply or none, e.g. defence, police.
  • Collective goods
    Differ from community goods as fees, charges or tolls can be levied to exclude free-riders, e.g. beaches, drainage, parks.
  • Merit goods
    Goods provided by the state, because it is believed that they would be under-supplied if their provision was left entirely to market forces.
    E.g. education, health care, research.
• To conserve resources
  
  • Government has to intervene to protect the environment if the environment is exposed to insensitive and even carless use it may be damaged.
  • E.g. the oceans for fishing, the air we breathe; natural scenery.
• To intervene in the economy
  
  • Ensures a social and legislative environment.
  • Apply suitable and credible economic and development policies.
  • Promote policies that ensure equal opportunity for all members of society.
  • Limit anti-competitive behaviour.

A mnemonic can help you remember these problems:

3.3 Problems of public sector provisioning

Learn these six problems of public sector provisioning:
3.3.1 Accountability

• Government is required to make and implement policies.
  Accountability is underpinned by ministerial responsibilities, parliamentary questioning, treasury control and the Auditor-general.
• Public servants are required to give an explanation of their decisions and actions.
• The public holds government accountable for the effective delivery of services and the implementation of policies.

3.3.2 Efficiency

• Efficient provisioning: Public servants provide the public with goods and services promptly and in the desired quantity and quality.
• Inefficient provisioning: Public servants fail to deliver services to the public because of bureaucracy, incompetence and corruption.

3.3.3 Assessing of needs

• Government provides goods and services according to the needs of people. Assessing these needs is difficult.
• Market forces determine the price of goods and services in the private sector.
• State enterprises are not subjected to the forces of demand and supply.

3.3.4 Pricing policy

• Free of charge: Certain services are provided free of charge from taxes, e.g. public health services. (Tax revenue is used to cover the costs.)
• Price value: It is difficult for government to establish the correct pricing.
• Paid services: People pay for some services, e.g. TV licences.
• Subsidised products: The public pay less for goods because government subsidises (pays towards) the cost, e.g. the price of bread is subsidised by government.

3.3.5 Parastatals

• State Owned Enterprises (SOEs) can be created as a result of nationalisation.
• Service provisioning: SOEs support service delivery, e.g. Eskom, SABC and Transnet. Can lead to monopolies, high prices and inefficiency.
• Infrastructure provisioning: SOEs provide essential infrastructure, especially when there are insufficient funds in the private sector, e.g. the road network.
• Limited liability: SOEs have limited liability in South Africa because they are financially supported by government.

3.3.6 Privatisation/Nationalisation

• Privatisation refers to the transfer of functions and ownership from the public to the private sector.
• The aim of privatisation is to reduce the relative size of the public sector.
• Advantages of privatisation:
  • Privatisation stimulates growth and improves the overall efficiency and performance of the economy.
  • Privatisation provides additional funds to the government.
  • Privatisation attracts foreign investment.
• Nationalisation is the opposite of privatisation.
  • It is the process whereby the state takes control and ownership of privately-owned assets and private enterprises.
  • Some argue that the state-owned enterprises e.g. ESKOM should be privatised.

3.4 Objectives of the public sector and its budgets

3.4.1 Objectives
Economic growth

• Refers to an increase in the production of goods and services.
• Measured in terms of Real GDP.
• For economic growth to occur, the Economic growth rate must be higher than Population growth.
• Growth and development in a country benefits its citizens because it often leads to a higher standard of living.

Full employment

• It is when all the people who want to work, who are looking for work must be able to get work.
• A high level of employment is the most important economic objective of the government.
• The unemployment rate increased over the past few years.
• Informal sector activities must be promoted because it is an area where employment increases.
• GEAR as a strategy was implemented to create a positive climate that was conducive to employment creation by the private sector.

Exchange rate stability

• Effective Fiscal and Monetary policy can be used to keep the exchange rate relatively stable.
• Depreciation and appreciation of the currency creates uncertainties for producers and traders and should be limited.
• The SARB changed the Exchange rate from a Managed floating to a
  Free floating exchange rate.

Price stability

• Stable prices lead to better results in terms of job creation and economic growth.
• The SARB inflation target is 3% – 6% and have been successful in keeping inflation within this target.
• Interest Rates, based on the Repo Rate are the main instruments used to achieve price stability.
• A stable budget deficit also has a stabilizing effect on the inflation rate.

Economic equity

• Redistribution of income and wealth is essential.
• South Africa uses a progressive income tax system – taxation on profits, taxation on wealth, capital gains tax and taxation on spending, are used to finance free services.
• Free social services are basic education; primary health and to finance basic economic services. E.g. Cash Grant to the poor, e.g. child grants and cash grants to vulnerable people, e.g. disability grants.
• Progressive taxation means that the higher income earners pay higher/more tax.

3.4.2 Budgets
Definition

• It is a document with expected income and projected expenditure.
• The budget is the most important item on the economic calendar.
• The main budget is read in Parliament during February by the
• Minister of Finance.
• It is authorised in Parliament and signed by the President, and it becomes law.
• The financial year of the government runs from 1 April to 31 March the following year.
• The main source of income for the State is Revenue Tax.

Different types of budgets

• Medium Term Expenditure Framework (MTEF)
• The Minister of Finance delivers it in the last week of October.
• The Medium Term Budget Policy Statement (MTBPS) – the Minister of Finance informs Parliament of any changes that have occurred since February.
• The Medium Term Expenditure framework (MTEF) requires that the state sets budgets over a three-year period, consisting of rolling expenditure and revenue projections.
• This is set against the backdrop of economic and fiscal goals and prospects for the economy.

The Main (national) Budget

• Is the statement of government’s planned expenditure and anticipated income for the fiscal year.
• Minister of Finance finalises the budget.
• There are three considerations when setting up the budget:
  
  • Financial – Cabinet decides whether taxes have to be increased or decreased.
  • Economic – Cabinet must know the needs or requirements in the economy.
  • Political – Political parties use the budget to implement their policy.

The Provincial Budget

• They are the main beneficiaries from tax income collected by the government.
• Money paid to Provinces is based on equitable share and conditional grants.
• Each province set up its own budget and presents it to the provincial legislator.
• Financial year of provinces runs from 1 April – 31 March the following year.
• Equitable share formula is used to distribute revenue to the provinces:
  
  • Education (51%) – based on size of the school age population and the number of learners enrolled for the last 3 years.
  • Health (19%) – based on the portion of population who do not have access to basic medical services.
  • Basic Share (15%) based on each province’s share of total population of the country.
  • Institutional component (5%) – divided equally amongst provinces.
  • Poverty component (3%) – based on the number of people who are poor in the province.
  • Economic output component (1%) – determined by the
    Province’s contribution to GDP of the country.
• Provinces may levy taxes, duties, grants, fines and surcharges.
• Conditional grants: these are given to the provinces to promote national priority spending and to assist them in complying with national norms and standards.

3.5 Fiscal policy

Fiscal policy can be defined as the action taken by government in respect of taxation, government spending and borrowing in order to influence economic activity.
3.5.1 Features

• Goal bound
  
  • Central government determines economic and social goals during the budgetary process.
  • The budget is used to realise these economic and social goals.
• Demand biased
  
  • Fiscal policy is the main demand-side policy.
  • The government improves infrastructure to support fiscal policy.
• Cyclical
  
  • Business cycles have an effect on fiscal policy decisions.
  • During an upswing profits increase, and as a result government income increases.

3.5.2 Composition

• Instruments of fiscal policy are taxation and government spending
• When Income and expenditure are equal = a balanced budget
• When Income is more than expenditure there will be a budget surplus
• When expenditure is more than income there will be a budget deficit

Expenditure
Government spending is classified in 2 main ways:

• Functional classification: Social; Protection; Economic; Interest; General.
• Economic classification: Current payments; Transfers and subsidies; Payment for capital assets.

Government spends money to provide public and merit goods and services free of charge or at a subsidised price.

• To pay interest on government debt.
• To redistribute income.
• To influence aggregate demand and supply.

Taxation
Government imposes tax for the following reasons:

• To raise income to cover expenditure
• To discourage the use of demerit goods
• To convert external cost into private cost
• To discourage imports
• To redistribute income
• To influence the level of aggregate demand and aggregate supply

Borrowing (State debt)

• The main budget must always balance. If there is a deficit, loans are made to balance it.
• If there is a surplus, the money is used to pay off state debt.
• Loans add to loan debt, also known as public debt.

3.5.3 Effects

• Income distribution
  
  • Progressive tax system: Fiscal policy aims to achieve a more even distribution of income.
  • Regressive tax system: Fiscal policy causes an uneven distribution of income.
  • Proportional tax system: Fiscal policy uses this when it does not wish to disturb the existing distribution of income.
• Consumption
  
  • Direct and indirect taxes influence people’s disposable income and spending patterns.
  • An increase in taxes will cause spending to decrease especially when savings are low.
• Price level
  
  • Direct tax reduces inflationary pressure.
  • A rise in indirect taxes will raise the general price level.
• Disincentives/incentives
  
  • High and progressive income tax rates discourage people from entering the labour market, from accepting promotions, and from working longer hours.

Laffer Curve
Figure 3.1 shows the relationship between tax rates and income tax in what is called the Laffer Curve.

Figure 3.1 The Laffer Curve
The Laffer Curve shows the relationship between (income) tax rates and tax revenue.

• At point 0, average tax rate is 0 and tax revenue is 0.
• As the tax rate increases, the tax revenue will also increase up to a certain point. The curve will slope upward then peak at T.
• Maximum tax revenue is at point R (the peak) and the best tax rate is at point T.
• The state earns maximum revenue at point B.
• If the tax rate increases from T to T1 then the tax revenue will decrease from R to R1.
• People work less as a result of the higher tax rate.
• If taxation decreases to T2, the government may receive less revenue, but people may have more money to save and spend.

Discretion
The Minister of Finance use his discretion on fiscal decisions e.g. how much to reduce income tax. Rules are:

• deficit rule: not to exceed 3% of GDP
• borrowing rule: only for capital expenditure
• debt rule: not to exceed 60% of nominal GDP.

3.6 Public sector failure

3.6.1 Characteristics/features
Ineffectiveness

• Public sector is failing when the following are prevalent:
  
  • Missing targets, example regarding inflation, growth and employment.
  • Incompetence in using monetary and fiscal policy and harmonising them.

Inefficiencies

• Wasting resources, such as taxpayers’ money.
• These may occur in relation to protection and social, economic and administrative services for which money is voted in the budget.

3.6.2 Reasons
Public sector failure occurs when the public sector fails to provide goods and services to the people. There are many reasons for public sector failure. Some of these are:
Management failure
Ignorance, e.g. lack of leadership, experience and training, might result in the improvement of the welfare of someone at the expense of someone else.

Apathy
Government officials show little or no interest in delivering an efficient service to the public. There is no accountability. Corruption and poor service delivery are some of the symptoms of apathy.

Lack of motivation
Workers rarely receive incentives for successful service delivery, but are only monitored on inputs and correctly following procedures and processes. This might lead to limited services, high cost and low quality.

Bureaucracy
Bureaucrats tend to obey rules and regulations without judgement. They tend to be more interested in obeying the rules than the efficient delivery of goods and services to the people.

Structural weaknesses
Objectives are not met. Some objectives may work against each other, e.g. government redistributes income and wealth too aggressively.

Special interest groups Attempts by interest groups such as farmers or organised labour to influence
government to their own advantage.

3.6.3 Effects
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. Government is unable to use fiscal policy effectively.

Distribution of income
If government fails to use the tax system effectively then there will be an unfair distribution of income in the economy.

Social instability
When the public sector fails to deliver the required social services to the poor, the economy can be destabilised.

Activity 1
Figure 3.2 below is a news article on the National Budget 2012. Study the information and answer the questions that follow.

Figure 3.2: A news article on the National Budget 2012

1. To which economic concept does “Improving the quality of life…” refer to? (2)
2. From the extract, name TWO macroeconomic aims (objectives) reflected in the 2011/12 Budget. (2 × 2) (4)
3. Which THREE departments received the largest allocation according to the graph? (3 × 2) (6)
4. Give TWO reasons why government spent more on education in 2012 than last year. (4)
5. Name TWO priorities that are included in the money allocated for social protection. (2 × 2) (4)
   [20]

Activity 2
Classify each of the following activities according to CENTRAL/NATIONAL; PROVINCIAL; LOCAL GOVERNMENT and PUBLIC CORPORATIONS.

1. Traffic control (1)
2. Denel (1)
3. SABS (1)
4. Inflation target (1)
5. Telkom (1)
6. RDP housing (1)
7. Education (1)
   [7]