GOVERNMENT EXPENDITURE

AND TAXATION

GOVERNMENT CONTROL OF
ECONOMY

We often hear in talk shows, suggesting

Devote more resources in improving
public health.
More resources should be devoted in
education of youth.
Unemployment in deep recession should
be reduced.
But who will do this?
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TOOLS OF GOVERNMENT POLICY

Three major tools that government uses to

influence private economic activity are:
Taxes
Expenditures
Regulations

TAXES

Tax reduce Private income, thereby reducing

private expenditures like automobiles and
restaurants food.
Provide resources for public expenditures like
Defense Budget, Schools and colleges, roads.
Discourage certain activities by taxing them
heavily like Tobacco, Cigarettes; and
encourage other activities by taxing them
lightly or even subsidizing them like health
care programs, Projects by NGOs.
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EXPENDITURES

Increasing expenditures on certain goods

and services like roads, education or
Security of Public.
Transfer Payments
Increase spending that provides resources
to individuals.

REGULATIONS

Rules and Regulations that direct people

to perform or refrain from certain
economics activities.
Rules that limit the amount firms can
pollute, Freedom of Speech or Protest up
to certain limit and area

FUNCTIONS OF GOVERNMENT

Four major functions

are:

of a government

Improving economic efficiency

Reducing economic inequality
Stabilizing
the
economy
through
macroeconomic policies
Conducting international economic Policy

IMPROVING ECONOMIC
EFFICIENCY

A Central economic purpose of government is to

assist in the socially desirable allocation of
resources.
Government concentrates on What and How of
economic life.
Some countries emphasize a hands-off, laissezfare approach, leaving most decisions to market.
Other countries lean toward heavy government
regulation.
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INVISIBLE HAND APPROACH

If all idealized conditions are met like:

Consumers and firms must be fully informed
about the prices and characteristics of the
goods they buy and sell.
There are no externalities like air pollution.

The invisible hand could provide perfectly

efficient production and distribution of
national output, and there would be no
need for government intervention to
promote efficiency
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INVISIBLE HAND APPROACH

But there are certain limits of invisible hand

approach.
No government can take hands off of the
economy
Courts and police forces would be needed to
ensure fulfillment of contracts, nonfraudulent
and nonviolent behavior, freedom from theft
and external aggression
Government regulates all the activities of
market economy
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REDUCING ECONOMIC
INEQUALITY

It deals with income redistribution, so that

rich should not become richer and poor
become poorer.
Best example is Benazir income support
Programme
Other examples can be Free education in
Pakistan, Scholarships

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STABILIZING THE ECONOMY

Government has the responsibility of

preventing calamitous business depressions by
the proper use of monetary and fiscal policy, as
well as regulation of the financial system.
Government tries to smooth out the ups and
downs of the business cycle, in order to avoid
either large-scale unemployment at the bottom
of the cycle or high inflation at the top of the
cycle.
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CONDUCTING INTERNATIONAL
ECONOMIC POLICY

Government plays a critical role representing

interests of the nation on the international stage
and negotiating beneficial agreements with
other countries on a wide range of issues.
International issues of economics policy are:
Reducing Trade Barriers
Conducting Assistance Programs
Coordinating macrorconomic Policies
Protecting the Global Environment

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The total outlay of budget 2011-12 is

Rs 2,767 billion.
14.2% higher than the size of budget
estimates 2010-11.
The total outlay of budget 2010-11 was
estimated at Rs 2,423 billion

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PRINCIPLES OF TAXATION

Once the Government has decided to

collect some amount of taxes, It has many
taxes available to it.
Income
Profits
Sales
Rich or poor
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BENEFIT vs. ABILITY-TO-PAY

PRINCIPLE

Individuals are taxed in proportion to the

benefit they receive from government
programs.

Toll Tax

Parks
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ABILITY-TO-PAY PRINCIPLE

Amount of taxes that people pay should

relate to their income or wealth.

This is a redistributive tax system, that

means raising funds from higher-income
people and distributing among poor and
needy people.

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HORIZONTAL AND VERTICAL EQUITY

Horizontal Equity states that those who are

essentially equal should be taxed equally
Those who have equal incomes should be
imposed same tax rates.
Parks are enjoyed by both Rich and Poor
but that doesnt mean that rich should pay
more; If benefit is equal than tax should be
equal
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VERTICAL EQUITY

Tax treatment of people with different

levels of income.
Imagine S/L ABC taking 50,000 Pay and
F/L XYZ taking 30,000, S/L enjoying more
privileges than F/L.
Does that mean that S/L and F/L should
pay tax at same rate?
No, It will be fair if S/L pays more tax.
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