assignment eco211 macroeconomic

5/25/2018 assignment eco211 macroeconomic

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ECO211 Macroeconomics

Economic Transformation Plan (ETP) has

attracted RM220b in investments

Prepared for: Mrs. Khaizie Sazima Binti Ahmad

Prepared by:

Name: Nur Ika

No. Matrix: **********

Class: MAC 110 (4C)


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Answers all the questions following:

1. Based on an article above, what are the investments has proven successful in EconomicTransformation Plan (ETP) 2010?

i. The investments from 195 projects launched under the National Economic Key Areas(NKEA).

ii. Set sights attracting 13 large multinationals to base their operations in Kuala Lumpur.iii. Six international trading companies, with a projected minimum total turnover of

US$600 million (RM2.1 billion) could establish their operations in the country.

2. From the above article, what the advantages from the investment RM220b has attracted byETP?

i. Created 435,000 jobsii. Contributed RM144 billion to the country's gross national income (GNI).

3. Investment is the second component of Aggregate Demand consists of two types ofinvestment.

From an article above, State type of investment and briefly explains?

i. The type of investment is induced investment- Induced investment is a kind of investment which has a positive relationship with

the level of national income. For an example of induced investment is expenditure on

developments in the pipeline to support the nation's pursuit to become the centre for

global operations, services and trading. When the level of income increases, induced

investment will also increase and vice versa.

4. As mentioned an article above, efficient tax collection that imposed by government asstronger revenue to narrowing the income disparity. What are other four (4) objectives of

taxation?

i. Income.


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-Taxes are the most important source of income for the government and the

government uses the taxes collected to finance its expenditure.

ii. Reduction of harmful consumption.- Taxation is imposed on goods such as cigarettes and alcohol in order to restrain

people from consuming these. Higher taxes are imposed on these goods to make them

expensive.

iii. Regulation of Foreign Trade.- Taxes are levied on imported goods to protect local industries or infant industries.

iv. Conservation of resources.- Taxes also imposed on goods such as coal and petroleum so as to increase their

prices and discourage exports.

5. Based on the above article, how fiscal policy control unemployment Malaysia in order totarget fiscal deficit through investment?

Measure to control by fiscal policy:

i. Control by decrease in taxes- To control unemployment, the government reduces the general burden of taxation

on the community. A reduction in excise duty, sales tax, service tax and other types oftaxes will increase the consumption expenses of the people. A reduction in business

and corporate tax will promote an increase in investment, and thus employment will

increase.

ii. Control increase in government expenditure.- Increase in government expenditure will directly affect aggregate demand. For

example, the salary of civil servants creates more development projects which may

reduce unemployment.


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Answers all the questions following:

1. Based on an article above, what are the investments has proven successful in EconomicTransformation Plan (ETP) 2010?

iv. The investments from 195 projects launched under the National Economic Key Areas(NKEA).

v. Set sights attracting 13 large multinationals to base their operations in Kuala Lumpur.vi. Six international trading companies, with a projected minimum total turnover of

US$600 million (RM2.1 billion) could establish their operations in the country.

2. From an article, what the advantages from the investment RM220b has attracted by ETP?

iii. Created 435,000 jobsiv. Contributed RM144 billion to the country's gross national income (GNI).

3. Investment is the second component of Aggregate Demand consists of two types ofinvestment. From an article, State type of investment and briefly explains?

ii. The type of investment is induced investment- Induced investment is a kind of investment which has a positive relationship with

the level of national income. For an example of induced investment is expenditure on

developments in the pipeline to support the nation's pursuit to become the centre for

global operations, services and trading. When the level of income increases, induced

investment will also increase and vice versa.

4. As mentioned an article above, efficient tax collection that imposed by government asstronger revenue to narrowing the income disparity. What are other four (4) objectives of

taxation?

v. Income.-Taxes are the most important source of income for the government and the

government uses the taxes collected to finance its expenditure.


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vi. Reduction of harmful consumption.

- Taxation is imposed on goods such as cigarettes and alcohol in order to restrain

people from consuming these. Higher taxes are imposed on these goods to make them

expensive.

vii. Regulation of Foreign Trade.- Taxes are levied on imported goods to protect local industries or infant industries.

viii. Conservation of resources.- Taxes also imposed on goods such as coal and petroleum so as to increase their

prices and discourage exports.

5. What types of fiscal policy practiced by a government and how to control by using fiscalpolicy?

i. The government may practice expansionary fiscal policies through taxation andpublic expenditure.

Measure to control by fiscal policy:

iii. Control by decrease in taxes- To control unemployment, the government reduces the general burden of taxationon the community. A reduction in excise duty, sales tax, service tax and other types of

taxes will increase the consumption expenses of the people. A reduction in business

and corporate tax will promote an increase in in investment, and thus employment

will increase.

iv. Control increase in government expenditure.- Increase in government expenditure will directly affect aggregate demand. For

example, the salary of civil servants creates more development projects which may

reduce unemployment.

6. In your opinion,


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The Economic Transformation Programme (ETP)is a program to propelMalaysia to the

level of other high-income nations by lifting Malaysia's per capita income from RM1,702 permonth (US$6,700) in2009 to at least RM3,810 (US$15,000) per month in2020.[3]It aims to do

this by growing the economy by an average of 6% during the period via private-sector-led

growth, with the government gradually playing a lesser, more catalytic, role. A key pillar

ofPrime MinisterNajib Tun Razak's strategy to hold ontoPutrajaya,[4]it is managed

byPEMANDU (Performance Management and Delivery Unit), an agency under thePrime

Minister's Department.To achieve the required GNI growth of 6% per annum, the government is

shifting Malaysia towards a service-based economy, with the services sector contribution

growing from 58% in 2009 to 65% by2020.

2. National Key Economic Areas (NKEAs): The Economic Transformation Programme

(ETP) focuses on 12 National Key Economic Areas (NKEAs), led by the private sector, with the

government primarily playing the role of a facilitator. The 12 NKEAs cover 11 industries and

one geographical territory:

1. Oil, gas, and energy;2. Palm oil;3. Financial services;4. Tourism;5. Business Services;6. Electronics and electrical;7. Wholesale and retail;

8. Education;9. Healthcare;10.Communications content and

infrastructure;

11.Agriculture;12.Greater Kuala Lumpur-Klang

Valley.

These NKEAs were identified by 350 participants from the private sector and 150 participants

from the government via an 8-week lab, following a "Thousand Person Workshop" held in

May2010.More than 600 syndication meetings were held during the lab period. 92% of the

funding will come from the private sector, with public sector investment being used as a catalystto spark private sector participation. 131 entry point projects (EPPs), as well as other other

business opportunities, have also been identified under each NKEA. A new ETP Unit

underPEMANDU has been tasked to monitor and report progress to government leaders, the

business community, and the public.
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3. Criticism: The Economic Transformation Programme (ETP) projected a total investment of

RM1.4 trillion (US$444 billion) for the 131 "transformative projects". Out of this amount:[5]

60% is expected to come from the private sector; 32% from government-linked companies (GLCs); and 8% from the government.

Based on this projection, the expected investment for the government-linked companies (GLCs)

alone would be RM454 billion (US$142 billion) over the period from2010 to2020.This works

out to about RM50 billion a year.Democratic Action Party (DAP) publicity chief,Tony Pua,

questioned whether the Economic Transformation Programme (ETP) has any remote chance of

success, given that the GLCs are in no position to do so. He said: "The combined market

capitalization of [the top 20 GLCs (G20)] is only RM266 billion, but we are actually expectingthem to invest an amount that is nearly double their current size over the next few years. It is

akin to a person attempting to digest food double his weight within a short period of time!"[5]On

top of that, many of these GLCs are having their own set of financial problems, e.g.:

Sime Darby's follies in the energy sector; Tenaga Nasional facing tricky cash flow issues; and Malaysia Airlines (MAS) andProton struggling wth their turnaround plans.

PEMANDU had counteredTony Pua's conclusion by claiming that the latter had not considered

the non-listed government-linked companies (GLCs). To this, Tony Pua pointed out that the only

unlisted GLCs of note arePetronas andFelda,and that even taking these 2 GLCs into

consideration, an RM50 million investment per year for 9 years is still inconceivable.

Thus far, Prime MinisterNajib Tun Razak andPEMANDU has yet to explain how the GLCs are

expected to invest a whopping RM454 billion, or how the private sector is going to pour out

RM850 billion, over the specified period.Tony Pua added that the best way to convince

Malaysians that the projected figures are indeed viable would be to provide a breakdown of the

investment commitments by individual GLCs on the 131 projects.

4. REFSA statement on 20 March 2013: Research for Social Advancement (REFSA), a not-

for-profit research institute, released the following statement on 20 March2013,in response to

Prime MinisterNajib Tun Razak's announcement of his administration's achievements, ahead of

the13th general elections:[6]
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We are dismayed to find perception manipulation and deception still surrounds the

Economic Transformation Programme (ETP). The mainstream media today is full of praise

and claims of excellent performance and transformation. This is exactly the opposite of the

true picture. Today, REFSA draws attention to 3 points:

1. Real national income growth has been pedestrian at under 5% per year, well below the6% targeted by the ETP.PEMANDU is manipulating perception by trumpeting nominal

GNI (Gross National Income) numbers, which include inflation, and in US$, which are

irrelevant to the vast majority of Malaysians;

2. PEMANDU still cannot get its basic math and data right. It said (nominal) GNI percapita hit US$9,970 in2012,but also said it was RM30,809 and the exchange rate was

RM3.058:US$1. However, at that exchange rate, RM30,809 is equivalent to

US$10,075. It is shocking that this high-powered unit cannot even get the basics

correct;

3. Based onDepartment of Statistics data, nominal GNI per capita grew an average of just7.4% per year from2009 to2012,which is less than the 8.2% per year average growth

rate registered from2001 to2010.PEMANDU and the ETP came into force in2010.In

short, the ETP and PEMANDU have failed to increase our GNI per capita above its

long term growth trajectory.

Failed: Reaching the target to grow national income by 6% per year

"Propelling Malaysia towards becoming a high-income developed nation" as promised bythe ETP requires Gross National Income (GNI) to grow by 6% per year. PEMANDU gave

much prominence to this 6% per year growth target in its "A Roadmap for Malaysia" report

that launched the ETP with much fanfare in2010.

However, the just published2012 Annual Report of the ETP makes not a single reference to

the fact that the ETP failed to meet this crucial 6% per year growth target last year. The fact

is, real GNI grew by a pedestrian 4.3% in2012,well below PEMANDU's aspirations and

even lower than the 4.9% recorded in2011.

Whatever happened to the 6% growth target trumpeted by the ETP on its launch?

Research for Social Advancement (REFSA)
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Fiscal policy, government spending

The public sector, which involves government spending, revenue raising, and borrowing, has acrucial role to play in any mixed economy.

The purpose of government expenditure

Government spends money for a variety of reasons, including:

1. To supply goods and services that the private sector would fail to do, suchaspublic goods,including defence, roads and bridges;merit goods,such as hospitalsand schools; and welfare payments and benefits, including unemployment and disabilitybenefit.

2. To achieve supply-side improvements in the macro-economy, such as spendingoneducationand training to improve labour productivity.3. To reduce the negative effects ofexternalities,such as pollution controls.4. To subsidise industries which may need financial support, and which is notavailable from the private sector. For example, transport infrastructure projects areunlikely to attract private finance, unless the public sector provides some of the high-riskfinance, as in the case of the UKsPrivate Finance InitiativePFI. During 2009, the UKgovernment provided huge subsidies to the UK banking sector to help deal withthefinancial crisis.Agriculture is also an industry which receives large governmentsubsidies. See:CAP.

5. To help redistribute income and achieve more equity.6. To inject extra spending into the macro-economy, to help achieve increasesinaggregate demandand economic activity. Such a stimulus is part of discretionaryfiscal policy.

Local government is extremely important in terms of the administration of spending. Forexample, spending on theNHS and oneducationare administered locally, though localauthorities. Approximately 75% of all public spending is by central government, and 25% is bylocal government.
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Video

Central and local government (public sector) spending

Using public spending to stimulate economic activity has been a key option for successivegovernments since the 1930s when British economist, John MaynardKeynes,argued that publicspending should be increased when private spending and investment were inadequate. There aretwo types of spending:

1. Current spending, which is expenditure on wages and raw materials. Currentspending is short term and has to be renewed each year.

2. Capital spending, which is spending on physical assets like roads, bridges,hospital buildings and equipment. Capital spending is long term as it does not have to berenewed each year - it is also called spending on social capital.

Where does the spending go?

The main areas of UK government spending in 2008, which totalled 575b, were:

1. Social protection2. Health3. Education4. Public order and safety5. Defence

UK Public Spending by DepartmentSource: ONS 2012Debt interest, 31.3Health, 118.3Socialprotection, 223.4Education, 88.6Housing, 16.2Environment, 10.9Transport, 22.7Public order,96.5Defence, 37.7Debt interestHealthSocialprotectionEducationHousingEnvironmentTransportPublic orderDefence

Types of fiscal policy

Fiscal policy is the deliberate adjustment of government spending, borrowing or taxation to helpachieve desirable economic objectives. It works by changing the level or compositionofaggregate demand(AD).

There are two types of fiscal policy, discretionary and automatic.

1. Discretionary policy refers to policies that are implemented through one-offpolicy changes.

2. Automatic stabilisation, where the economy can be stabilised by processes calledfiscal drag and fiscal boost.

Central government borrowing

Government must borrow if its revenue is insufficient to pay for expenditure - a situation calledafiscal deficit. Borrowing, which can be short term or long term, involves sellinggovernmentbondsor bills. Bonds are long term securities that pay a fixed rate of return over along period until maturity, and are bought by financial institutions looking for a safe return.Treasury bills are issued into the money markets to help raise short term cash, and last only 90days, whereupon they are repaid.

Local government borrowing
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If the revenue from the council taxand central government support is insufficient to meetspending commitments, local authorities can also borrow by issuingbonds.Only around 25% oflocal authority spending is financed by local revenue raising, 75% coming from centralgovernment and by borrowing. (Source:Local Government Association)

Public Sector Net Borrowing

If the borrowing requirements of both central and local government is combined, the amount ofborrowing required is called thepublic sector net borrowing(PSNB). The need to borrow variesconsiderably with the business cycle.

During periods of economic growth, tax yields rise and spending on welfare payments fall,pushing the public finances towards a surplus. During periods of economic slowdown, tax yieldsfall and welfare payments rise, pushing the economy towards a fiscal deficit.

In 2009, the government introduced a new measure of public sector borrowing, calledPublicSector Net Borrowing Ex(PSNBEx). This measure excludes payments to the financial sector toease the credit crisis.

See:Public Sector Net Borrowing Ex(www.statistics.gov.uk)See:The 2010 Budget

The Chancellorsgolden rulesfor borrowing

The Chancellorsgolden rules for sustainable investment are firstly, to balance the books over atrade cycle, and secondly, only to borrow to fund capital projects, such as road building.

Borrowing, and the financial crisis

According to theInstitute for Fiscal Studies(IFS), the central government net borrowingrequirement in 2009, of approximately 150b, was almost double initial estimates. The mainreason for this overshoot was the rescue package for the banking sector, following theglobalfinancial crisis.

This package included:

1. 37b for recapitalisation of the main banks, RBS, Lloyds and HBOS.2. 21b to the Bank of England to help refinance the financial services sector.

Source:I FS,2009

Fiscal deficits and the National Debt

Fiscal deficits occur when the revenue received by a government is less than spending during afinancial year. These deficits will create the need to borrow by selling government securities -bills and bonds.

What is the national debt?The national debtis the cumulative amount of annual borrowing that occurs when governmentspending is greater than revenue.

National debt

Hypothetical

example to

illustrate how the

b 2005 2006 2007 2008
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/ManagingMoney/SavingsAndInvestments/DG_10013986http://www.direct.gov.uk/en/MoneyTaxAndBenefits/ManagingMoney/SavingsAndInvestments/DG_10013986http://www.direct.gov.uk/en/MoneyTaxAndBenefits/ManagingMoney/SavingsAndInvestments/DG_10013986http://www.lga.gov.uk/lga/core/page.do?pageId=18330http://www.lga.gov.uk/lga/core/page.do?pageId=18330http://www.lga.gov.uk/lga/core/page.do?pageId=18330http://www.lga.gov.uk/lga/core/page.do?pageId=18330http://www.statistics.gov.uk/pdfdir/psnbex1209.pdfhttp://www.statistics.gov.uk/pdfdir/psnbex1209.pdfhttp://www.statistics.gov.uk/pdfdir/psnbex1209.pdfhttp://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Budget_2010.htmlhttp://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Budget_2010.htmlhttp://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Budget_2010.htmlhttp://www.ifs.org.uk/http://www.ifs.org.uk/http://www.ifs.org.uk/http://www.economicsonline.co.uk/Global_economics/Financial_crisis.htmlhttp://www.economicsonline.co.uk/Global_economics/Financial_crisis.htmlhttp://www.economicsonline.co.uk/Global_economics/Financial_crisis.htmlhttp://www.ifs.org.uk/http://www.ifs.org.uk/http://www.ifs.org.uk/http://www.ifs.org.uk/http://www.economicsonline.co.uk/Global_economics/Financial_crisis.htmlhttp://www.ifs.org.uk/http://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Budget_2010.htmlhttp://www.statistics.gov.uk/pdfdir/psnbex1209.pdfhttp://www.lga.gov.uk/lga/core/page.do?pageId=18330http://www.lga.gov.uk/lga/core/page.do?pageId=18330http://www.direct.gov.uk/en/MoneyTaxAndBenefits/ManagingMoney/SavingsAndInvestments/DG_10013986


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national debt is

calculated. Government

Spending500 550 600 650

Revenues 480 520 560 600

Borrowing 20 30 40 50

National

Debt20 50 90 140

What causes a rising national debt?

A rising national debt can happen when tax revenues fall and government spending rises as theeconomy slows down or goes into recession, or when householders and firms spend less, so less

VAT is collected, and householders and firm receive less income, so revenues from income taxesfall.

UK debt

198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012UK Public Debt as a % ofGDP1980 - 2012 - Source: Treasury-2%0%2%4%6%8%10%3%-1%-1%0%1%2%2%1%3%3%3%6%5%5%4%3%1%0%0%-1%-1%0%2%3%3%3%2%3%6%9%8%5%Years

The advantages of discretionary public spending as a fiscal tool

Public spending can stimulate the macro-economyPublic expenditure can be used to help stimulate the macro-economy at times of low andnegative growth. This works by increasing the level ofaggregate demand,and can compensatefor failings in other components of aggregate demand, such as a fall inhousehold spendingonconsumer goods and firms spending on capital goods. It can also be used tocomplementmonetary policyor when monetary policy has proved ineffective. This could be thecase when interest rates are already low, but the economy still needs stimulating, as occurredthroughout the advanced economies following thefinancial crisis and consequent globalrecession.

Public spending can improve the infrastructure of an economyIf the spending is on capital items, then infrastructure can be developed, which can help improve

competitiveness and economic growth. Infrastructure projects are usually far too expensive forthe private sector to tackle on its own.

Public spending can generate positive externalitiesSpending on infrastructure, healthcare, and education also provides an external benefit to the restof the economy which can have long run effects in comparison with reductions in interest rates,which are often short-term.
http://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Aggregate_demand.htmlhttp://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Aggregate_demand.htmlhttp://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Aggregate_demand.htmlhttp://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Household_spending.htmlhttp://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Household_spending.htmlhttp://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Household_spending.htmlhttp://www.economicsonline.co.uk/Global_economics/Monetary_policy.htmlhttp://www.economicsonline.co.uk/Global_economics/Monetary_policy.htmlhttp://www.economicsonline.co.uk/Global_economics/Monetary_policy.htmlhttp://www.economicsonline.co.uk/Global_economics/Financial_crisis.htmlhttp://www.economicsonline.co.uk/Global_economics/Financial_crisis.htmlhttp://www.economicsonline.co.uk/Global_economics/Financial_crisis.htmlhttp://www.economicsonline.co.uk/Global_economics/Monetary_policy.htmlhttp://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Household_spending.htmlhttp://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Aggregate_demand.html


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Public spending can be targetedPublic spending can be targeted to achieve a wide range of specific economic objectives, such asreducingunemployment,achieving more equity, road building,action against poverty, and re-building city centres.

The disadvantages of public spending

Time lags

There may be a considerable time-lag between spending and the benefits that arise. For example,a decision to increase spending on education will take many months and maybe years toimplement, and many years or decades to see the full benefits. Indeed, the full benefits maynever be measured and recorded because of information failure.

Public spending can be inflationaryIn trying to promote growth or reduceunemploymentgovernment spending can be inflationary,especially if the government has to borrow from the financial markets or if the spending is risingtoo quickly, as might occur if public sector pay increases without an efficiency gains. Monetaristeconomists, such asMilton Friedman,are anti-fiscalin their approach to demand management,preferring to regulateaggregate demandby controlling the quantity of money in circulation.Government spending, they argue, in inherently inflationary, so the best role for government,also suggested by the New-classical economists, is to improve supply-side performance,especially labour productivity. New-classical economists, such asRobert Lucas,highlight whatsee as the general failure of government to influence consumer behaviour. Markets tend to cleareffectively if left alone, hence a government should not interfere in the working of markets. Ifgovernment does interference, say by increasing spending, and this is expected, then people willexpect an inflationary effect, and will bargain for higher wages. The increase in wages shifts theAS curve to the left, with no gain in aggregate output. If people understand how policy operates,its effect on the real economy will be much weaker.In what often appears a rather odd assertion, new-Classical economists argue that demandmanagement only works when it is unanticipated by firms and households. The New-classicalapproach is highly critical of relying on past events to predict the future. If policy-makers relyexclusively on gathering and using past statistics, they are unlikely to make very accuratepredictions. They argue that the only way to influence economic performance in the long run isby improving the conditions of supply rather than trying to create economic growth by increasingdemand.

Public spending can generate a debt burdenBorrowing to fund spending will add to thenational debtand can create an excessive debtburden for future generations.Trade-offs

There is a potential trade offbetween unemployment and inflation, first analysed byA.W.Phillipsin the 1950s. If the aim of public spending is to create jobs, there is the strong possibilitythat prices will be driven-up, and any growth in jobs will only be temporary as the economyquickly readjusts to the previous level of unemployment.

Crowding outCrowding-out theoryis closely associated with the economists Bacon and Eltis, who looked atthe apparent de-industrialisation of the UK economy during the 1960s and 1970s. Crowding outcan be defined at the process of squeezing out the privately owned manufacturing sector by theexpansion of the public sector. It is argued that crowding out occurs because of the inherent
http://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Employment_and_unemployment.htmlhttp://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Employment_and_unemployment.htmlhttp://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Employment_and_unemployment.htmlhttp://www.economicsonline.co.uk/Market_failures/Road_congestion.htmlhttp://www.economicsonline.co.uk/Market_failures/Road_congestion.htmlhttp://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Employment_and_unemployment.htmlhttp://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Employment_and_unemployment.htmlhttp://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Employment_and_unemployment.htmlhttp://nobelprize.org/nobel_prizes/economics/laureates/1976/friedman-lecture.htmlhttp://nobelprize.org/nobel_prizes/economics/laureates/1976/friedman-lecture.htmlhttp://nobelprize.org/nobel_prizes/economics/laureates/1976/friedman-lecture.htmlhttp://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Aggregate_demand.htmlhttp://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Aggregate_demand.htmlhttp://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Aggregate_demand.htmlhttp://nobelprize.org/nobel_prizes/economics/laureates/1995/lucas-autobio.htmlhttp://nobelprize.org/nobel_prizes/economics/laureates/1995/lucas-autobio.htmlhttp://nobelprize.org/nobel_prizes/economics/laureates/1995/lucas-autobio.htmlhttp://www.economicsonline.co.uk/Global_economics/Fiscal_policy_government_spending.html#national_debt_http://www.economicsonline.co.uk/Global_economics/Fiscal_policy_government_spending.html#national_debt_http://www.economicsonline.co.uk/Global_economics/Fiscal_policy_government_spending.html#national_debt_http://www.economicsonline.co.uk/Global_economics/Phillips_curve.htmlhttp://www.economicsonline.co.uk/Global_economics/Phillips_curve.htmlhttp://www.economicsonline.co.uk/Global_economics/Phillips_curve.htmlhttp://www.economicsonline.co.uk/Global_economics/Phillips_curve.htmlhttp://www.economicsonline.co.uk/Global_economics/Phillips_curve.htmlhttp://www.economicsonline.co.uk/Global_economics/Phillips_curve.htmlhttp://www.economicsonline.co.uk/Global_economics/Fiscal_policy_government_spending.html#national_debt_http://nobelprize.org/nobel_prizes/economics/laureates/1995/lucas-autobio.htmlhttp://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Aggregate_demand.htmlhttp://nobelprize.org/nobel_prizes/economics/laureates/1976/friedman-lecture.htmlhttp://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Employment_and_unemployment.htmlhttp://www.economicsonline.co.uk/Market_failures/Road_congestion.htmlhttp://www.economicsonline.co.uk/Managing_the_economy/Introduction_to_managing_the_economy.html/Employment_and_unemployment.html


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scarcity of financial and real resources. The more the (inefficient) public sector uses scarceresources, the less resources are available for the more efficient and productive private sector.

Bacon and Eltis identified two types of crowding out.

Financial crowding out- if the public sector expands and needs to borrow fromthe financial sector interest rates may be driven up. This leads to a reduction in privatesector investment.

Resource , or physical, crowding out- in a similar way, as the public sectorexpands there is an increase in the demand for other resources which drives up theirprice, including wages and rentshence the private sector suffers.

Source: Bacon, R, and Elt is, W, 1976: Britain's Economic Problem - too few producers,McMillan

Political constraints

A major constraint to government spending across the EU is membership of the Stability and

Growth Pactwhich limits government borrowing to no more than 3% of national income in anyone year, and accumulated public debt should not exceed 60% of the value of national income.The purpose of the Stability Pact was to prevent euro area countries weakening the value of theEuro byprinting money, which occurs when governments borrow from the money markets. Inthe late 1990s, the UK Chancellor imposed a different constraint that borrowing is acceptable ifit funds capital, rather than current public sector spendingthe so-called golden rules. However,by 2006 a large number of EU countries had exceeded the debt limits laid down in the StabilityPact.

Greek debtsIn 2011, Greece needed a massive bail-out from other members of the euro area to cope withdebts which the IMF estimated were some 165% of GDP (for 2011).

AustraliaSwedenDenmarkFinlandNorwaySpainAustriaUKGermanyFranceUSAPortugalIrelandItalyGreeceJapanInternational Central Government DebtSource:IMF20110%60%120%180%240%300%23%36%44%50%55%67%72%81%83%87%100%106%109%121%166%233%

See:Fiscal stabilisers and discretionary tax policy
http://www.economicsonline.co.uk/Global_economics/Fiscal_stabilisers_discretionary_tax_policy.htmlhttp://www.economicsonline.co.uk/Global_economics/Fiscal_stabilisers_discretionary_tax_policy.htmlhttp://www.economicsonline.co.uk/Global_economics/Fiscal_stabilisers_discretionary_tax_policy.htmlhttp://www.economicsonline.co.uk/Global_economics/Fiscal_stabilisers_discretionary_tax_policy.html


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7. Based on an article, increase in government revenue of 14% from 2010 to 2012. What is thesource government revenue and classified the type of revenue?

i. Tax Revenue.- Tax is compulsory contribution on by an individual or a firm to the government to

be used in the common interest of all. Tax is a contribution to the revenue of the

government so that the government can provide the necessary administrative services

to govern the country.

Direct tax revenue includes individual income tax, companies income tax, petroleum

income tax, stamp duties, real property gains tax and other income taxes. Next,

indirect tax includes import duties, exercise duties, sales tax, gaming tax and etc.

ii. Progressive taxes.- A progressive tax is a kind of tax whose rate increases as income increases. The

higher the taxable income, the higher the tax rate charged.

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