Lecture Public economics (5th edition) - Chapter 15: Fiscal policy

This chapter define fiscal policy and describe fiscal goals and instruments at the macroeconomic, sectoral and microeconomic levels; discuss the evolution of views on the macroeconomic role of fiscal policy, focusing on the distinction between the Keynesian and structural approaches and the choice between discretionary and rulesbased fiscal regimes; distinguish between the various definitions of budget balance and explain the economic significance of each;...

• Define fiscal policy and describe fiscal goals and

instruments at the macroeconomic, sectoral and

microeconomic levels

• Discuss the evolution of views on the macroeconomic

role of fiscal policy, focusing on the distinction

between the Keynesian and structural approaches

and the choice between discretionary and

rules-based fiscal regimes

• Distinguish between the various definitions of

budget balance and explain the economic

significance of each

• Explain the importance of distinguishing between a

cyclical and a structural budget deficit and between active and passive fiscal policy

• Explain the fiscal consequences of the 2007–2009

international financial crisis and the ensuing Great Recession

• Describe salient features of fiscal policy in South

Africa with reference to theory, and against the

backdrop of international experience and aspects of the performance of the South African economy

• Describe some of the features of fiscal reform in

sub-Saharan Africa in recent years

Sectoral goals

• Development of particular economic sectors

• Pursuit of social goals

• Total government expenditure

• Financing the deficit

• Expenditure votes and programmes

• Mobilisation and allocation of public and private resources

• Allocation of public and private resources

• Different types of taxes and rates

• Different dimensions of public debt.

• Keynesian approach

– Fiscal activism/anti-cyclical fiscal policy

– Automatic or built-in stabilisers

– Passive fiscal policy

– Active fiscal policy.

• Lags or time delays

• Anticipation of systematic counter-cyclical policies

– Ricardian equivalence theorem.

• Political constraints

• Stagflation

• Numerical rules

– Expenditure-limiting rules

– Current-balance rules

– Overall-balance rules

– Public debt rules

• Rules as binding constraints

– Discretionary policy

• Rules as credibility-enhancing commitment devices

– Rational expectations hypothesis.

Fiscal transparency means being open to the public about

the structure and functions of government, fiscal-policy

intentions, the public-sector accounts, and fiscal projections

(Kopits and Craig, 1988).

Fiscal councils

• Objective analysis

• Independent projections and forecasts

• Normative assessments

• Medium Term Budget Policy Statement

• Multi-year fiscal/expenditure planning

• After WWII: Keynesian policies

• Late 1970’s: Focus on fiscal discipline

• Inflation targeting

• Constitutional protection of the independence of the

central bank

• Formal numerical fiscal rules

• Public Finance Management Act (1999)

• Fiscal discretion

• Improvement in budget balances

• Reduced dependence on international trade taxes

• Reductions in income tax rates

• Broadening of tax bases

• Reduced debt burdens due to

– Faster economic growth

– Accelerated debt relieve

– Smaller fiscal deficits.