Directorate: Curriculum FET

SUBJECT and ECONOMICS GRADE 12

GRADE

TERM 1 Week 6
TOPIC MACROECONOMICS: Public Sector
AIMS OF LESSON YOU MUST BE ABLE TO SUCCESSFULLY:
Evaluate the role of the public sector in the economy with special reference to its socio-economic responsibility in the South African context.

RESOURCES Paper based resources Digital resources

Grade 12 Core notes: Topic 3 https://wcedeportal.co.za/
Any approved Economics CAPS textbook https://www.education.gov.za/

Bright Ideas Revision Booklet (pg. 17 – 22)

https://wcedeportal.co.za/eresource/122631

Examination Prep Questions on the Public sector

https://www.youtube.com/watch?v=ihewKAmPX7k

PREKNOWLEDGE Circular flow; Participants in an economy; Formation of government structures; Fiscal Policy – government spending, taxes and transfer
payments.
Concepts and LESSON 1: ARE YOU ABLE TO?
Skills
FISCAL POLICY
Fiscal policies are implemented through the Budget
Description: It is any attempt by the State to influence the economy with changes in government expenditure
and taxes to achieve economic and social goals.
INSTRUCTION:
Features: ALL THE ACTIVITIES IN THIS
It is goal bound It is demand biased It is cyclical COLUMN MUST BE COMPLETED
Central government determine the Fiscal policy is the main demand-side Businesses have a direct IN YOUR NOTEBOOK.
economic and social goals. policy that is used. effect on fiscal policy.
It takes place through the budgetary Elements of fiscal are also used to realise
process. supply-side objectives. Activity 1:
The budget is used to realise these e.g.: The government improve 1.1 Briefly discuss the following:
goals. infrastructure. - The main variables (tax and
Provincial and local governments Taxation is used as an incentive. government expenditure)
execute the approved budget. Human resource development is - Features of fiscal policy: goal-
subsidised. bound, demand-based, cyclical

During an upswing: 1.2 Discuss the effects of fiscal policy.

Profits increase. - Income distribution
Aggregate demand and expenditure increase. - Consumption
- Price level
Income tax and profits increase.
Taxation on goods and services increase.
Government income increases.
Government has more money to spend.

Main variables and state debt:

Instruments of fiscal policy are taxation and government spending.
When income and expenditure are equal = a balanced budget. Main Budget must always balance:
When income is more than expenditure you will get a budget surplus. Surplus money is used to pay off state debt.
When expenditure is more than income you will get a deficit. Loans are then made to balance the budget.
Loans add to loan debt also known as public debt.
 Government Spending: Taxation:
Government spending are classified in 2 formats: Governments impose tax for the following reasons:
Functional: Social Services, Defence, Economic • To raise income to cover expenditure.
services, Interest • To discourage the use of demerit goods.
• To convert external cost into private cost.
Economic: Current Payments, Transfers and
• To prevent pollution.
Subsidies, Payment for capital assets.
• To discourage imports.
Government spends money to provide public and merit • To redistribute income.
goods and services free of charge or at a subsidised • To influence the level of aggregate demand
price. and aggregate supply.
Pays interest on government debt.
To redistribute income.
To influence aggregate demand and supply.
Effects of Fiscal policy:
• During an upswing fiscal policy contract. During a downswing fiscal policy expands.
Income Redistribution:
Progressive taxation Regressive taxation Proportional taxation
Ensures a more even Causes an uneven Income distribution is unchanged.
distribution of income. distribution of income. Everybody pays the same tax rate.
Higher income groups pay Lower income groups pay Spending on social goods, security goods and
more taxation than lower more taxes than higher welfare payments supplement income of poor
income groups. income groups. more than the rich.

Consumption:
Direct and Indirect tax influence peoples spending patterns. Direct tax decreases disposable income.
The real effect on consumption will depend on the marginal propensity to consume and the level of savings. Very
little savings as direct taxes will decrease consumption.
The income multiplier kicks in when government spending increases due to higher levels of employment, higher
income and consumption spending.

Price Level
Direct taxation reduces inflationary pressures because aggregate demand declines.
Results in Cost Push Inflation because workers demand higher wages.
An increase in indirect taxation cause an increase in the general price level.
Inflationary and deflationary spending depends on the availability of production factors.

Incentives/Disincentives:
Direct taxation (income and company tax) reduce incentives to work, save, invest and take risks.
High and progressive income tax rates discourage people to enter the labour market, to accept promotions and to
work long hours.
LESSON 2: ARE YOU ABLE TO?

LAFFER CURVE

Interpretation of the graph:

Shows the relationship between tax rates and INSTRUCTION:
tax income collected by the government. ALL THE ACTIVITIES IN THIS
The average Tax rate is 0 and the Income is 0. COLUMN MUST BE COMPLETED IN
If the tax rate increase above 0 then the tax
revenue of the State will also increase to a YOUR NOTEBOOK.
certain point
The curve has an upward slope: The curve
slopes upward then peaks at (t) Activity 2:
At the peak tax revenue is R and Tax rate is t: At 2.1 Discuss the effects of fiscal policy.
this point the State earn maximum revenue from - Incentives/Disincentives in relation
taxation. to the Laffer curve
If the Tax rate increases from t to t1: Production - Discretion
decreases and Tax revenue decreases from R to
R1 2.2 Draw and interpret the Laffer curve.

Reasons:
• Less people want to work because of high taxation.
• Some people will evade, and others will avoid the payment of taxation.
• If taxation is 100% then nobody will want to work, because ALL income goes to the State.
• If Taxation decreases to t2:
Leads to less tax evasion
Leads to less tax avoidances
Encourages people to work harder / Save more / Invest more
• Economist use this to justify a reduction in the level of taxation
• The turning point of the Laffer curve is the same for all countries
• There is evidence that the turning point for all countries are below t.

Discretion:
The Minister of Finance uses his discretion on fiscal decisions e.g. by 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.
LESSON 3: ARE YOU ABLE TO?

PUBLIC SECTOR FAILURE:

Description INSTRUCTION:
It is when the public sector fails to manage an economy and the resources under its control optimally. ALL THE ACTIVITIES IN THIS
COLUMN MUST BE COMPLETED
Key features: IN YOUR NOTEBOOK.

Ineffectiveness: Inefficiencies: Activity 3.

Public sector is failing when the following are Wasting resources, such as taxpayers’ money.
3.1 Briefly explain the features of public
prevalent: These may occur in relation to protection and social,
sector failure:
Missing targets, example regarding inflation, growth economic and administrative services for which
- Ineffectiveness
and employment. money is voted in the budget.
- inefficiency
Incompetence in using monetary and fiscal policy and
harmonising them. 3.2 Discuss in detail the reason(s) for
public sector failure and link them to
REASONS FOR PUBLIC SECTOR FAILURES: typical problems experienced through
public sector provisioning:
Management Failures: - Management failure
Politicians tend to promote policies and continue to spend money on projects if they can get votes in return. - Apathy
These policies might involve the inefficient allocation of resources. - Lack of motivation
Many Public-sector entities lack capacity because of a lack of skills. - Bureaucracy
- Politicians
This means that funds are often not spent and must be returned to the treasury. - Structural weaknesses
- Special interest groups
Apathy:
Successful public production relies on long-term accountability.
If not addressed properly, then it could lead to inefficiency / corruption / violence and poor service delivery. NOTE: The above is recognized as
a possible essay type question.
Lack of Motivation: Make sure you know the content
Frontline workers rarely receive incentives for successful service delivery. well. Practice writing the essay.
There are little or no stipulations for quality and quantity, effective and productive service delivery and this leads
to limited service delivery, low quality and high costs. 3.3 Briefly explain the following effects
of public sector failure:
Bureaucracy: - Allocation of resources
Individuals and enterprises influence government to act in their interest. e.g. Profitable contracts, favourable - Economic instability
regulations, ignorance, personal and hidden agendas. - Distribution of income
These are questionable motives and promote the welfare of certain groups at the expense of the others. - Social instability
Politicians:
Those who aim to be re-elected and who pursue vote-maximising strategies to secure or retain their political
offices.
Such politicians have a short-term horizon which is limited to the date of the next election.

Serious structural weaknesses in the economy / Privatisation:

This can result in social goals not been attained.

Special interest groups:

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

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. 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.
LESSONS 4 and 5 2. Give ONE concept for each of the following 5. Data response questions:
SELF-ASSESSMENT ACTIVITIES: descriptions: (1 mark Study the graph below and answer the questions that follow.
each)
1. Multiple choice:
2.1 A situation where individuals still benefit from a
Various options are provided as possible
good or service even if they do not pay for it.
answers to the following questions.
2.2 Social security payments that are made by the
1.1 The government’s financial year ends on this government.
date. 2.3 The public sector provides parks, beaches, etc.
A. 28 February where fees are charged to exclude free riders
B. 31 March government estimates of income and
C. 01 April
expenditure
D. 30 April
for a three-year period
2.4 The strategy used by the finance department that
1.2 …was created to supply specific goods or
focuses on tax collection and the spending of
services that the private sector was not
money
willing or able to provide.
in the economy.
A. Business sector
B. Private sector
C. Parastatals 3. Answer the following questions: (2 x 1)
5.1 Identify the curve in the graph above. (1)
D. Enterprises
3.1 Give any TWO reasons for public sector failure
5.2 At what tax rate will government revenue be
1.3 South African Defense Force services are maximised? (1)
provided by ... government. 3.2 Give any TWO examples of indirect tax.
A district
5.3 How much revenue will the government receive
B local
C provincial if the tax rate is 100%? (2)
4. Answer the following questions (1 x 2)
D central
5.4 What effect will a decrease in the tax rate from 65% to
4.1 How will the decentralisation of industries
1.4 The Laffer curve shows the relationship 45% have on tax revenue? (2)
contribute
between
towards employment creation in the country?
… 5.5 What consequences could a 1% VAT increase have on
A tax revenue and tax rate. the different role players in the South African economy?
B income and expenditure. 4.2 Why is it important that the government aims to
(2x2) (4)
C nominal and real figures. promote a stable economy?
D tax revenue and wages.
6. Paragraph questions (8) 7. Data response questions

6.1 Briefly discuss pricing policy and parastatals as Study the table below and answer the questions that follow.
problems of public sector provisioning.

6.2 How can inefficiencies that contributed towards

public sector failure be solved?

6.3 Evaluate taxation as part of the government's

strategy to grow the economy.

6.4 Briefly discuss distribution of income (economic

equity) and price stability as macroeconomic
objectives.
7.1 Which ministry (department) is responsible for the presentation of the national budget speech to the
parliament? (1)

7.2 Name ONE form of direct tax payable to the state. (1)

7.3 Briefly describe the term budget. (2)

7.4 How will the increase in carbon tax on plastic bags benefit the economy? (2)

7.5 Briefly describe the extent to which the government addresses economic equity. (4)
8. Study the information below and answer the questions that follow. 9. Study the information below and answer the questions that follow.

THE MORE YOU EARN, THE MORE YOU PAY

During the budget speech the minister of finance announced the new tax rates for
individuals. Generally, if you earn less than R79,000 annually (or less than R122,300 if
you're older than 65), you don't have to pay income tax. Nov 23, 2020
Fewer than 3m people in a country with a population of 56m paid 97% of all personal
income tax collected in the 2019 tax year.
Image: Moneyweb

9.1 Identify ONE form of an indirect tax in the information above. (1)

9.2 What type of tax will contribute most to state revenue during the 2018/19
financial year? (1)

8.1 What tax scale is referred to in the heading of the extract? (1) 9.3 Briefly describe the term budget. (2)

8.2 What important element of redress is found in the extract? (1) 9.4 Give ONE reason why the government increased taxation (excise duties) on
demerit goods during the 2018/19 year (2)
8.3 Explain the negative impact of high tax rates. (2)
9.5 How will an increase in corporate income tax impact negatively on economic
8.4 In what way can government ensure more revenue? (2) growth? (4)

8.5 Calculate the tax payable by a person whose taxable income is R200 000 per
year.
Show ALL calculations. (4)