FISCAL POLICY

FISCAL POLICY

is a policy to influence the performance of the

economy by using and for regulating the
aggregate level of economic activities.

by changing the Government Expenditure (G)

and the
Government income (T) to regulate
the Aggregate Demand (AD) and Output (Y)
level.
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TOOLS
FOR
FISCAL POLICY

Government
Expenditure, G

2 TOOLS

Tax Revenue, T

G and T are used to regulate the aggregate

level of the economic activities, AD.
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OBJECTIVES

Government tend to implement fiscal policy for the

purpose to:

maintain the stability of the economy - solve

all macroeconomic problems, thus without
inflation or recession

reach an efficient economy at full-employment.

have steady rate of economic growth.

stabilise prices and interest rate in the economy.

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COMPOSITION OF
GOVERNMENT
EXPENDITURE
1. Operating Expenditure
2. Development Expenditure

1. OPERATING EXPENDITURE

includes expenditure for maintaining government

services and facilities and its department:

includes the payments for:

emoluments, pension and gratuities, debt
service charges, aid to states government,
subsidies, maintenance, repairs and
supplies to improve the provision of public
services.
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2. DEVELOPMENT EXPENDITURE
is meant to support governments projects to boost-up
economic growth.
three
(3) main components of development
expenditure:
1. social services: (education, research and
development, retraining programs)
2. economic sectors development: road &
transport infrastructure, free trade zone, etc;
3. security sector: Ministry of Defense
expenditure, military equipments purchase.
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SOURCES OF GOVERNMENT REVENUE

Tax Revenue

consist of:

1) Direct tax: where the burden

(incidence) of tax is paid by the person
being imposed by tax, i.e. the taxpayer
& the burden of tax cannot be shifted to
others.
e.g: income tax, petroleum income tax,
profit tax, stamp duty, road tax and real
property gains tax.
2) Indirect tax: where burden of
tax is shifted to the third party.
e.g: expenditure tax, sales tax, service
tax, consumption tax, export duty, import
duty, custom duty, excise duty and tariff.
Taxes are the most important
source of
government revenue.

Non-tax Revenue

consist of:
1) Revenue receipts
such as from licenses,
permits, service fees,
regulation fees, interest and
returns(income) from
investment.
2) Non-revenue
receipts include refunds of
overpayment, grants and aid,
contribution from the federal
government .

CASE STUDY
QUESTION:
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ECONOMY REPORT MALAYSIA: FISCAL POLICY

Prior to the financial crisis in 1997, the federal government achieved five consecutive
years (1993-1997) on budgetary surplus. From 1998 to 2000, the federal government
budgetary position incurred deficit, largely because of expansionary fiscal policy
designed to support economic recovery. For 2001, there were downside risks
associated with external developments that could pose a threat to Malaysias
economic recovery process. In view of this development, the focus of the 2001
budget was to continue the recovery process to a level consistent with Malaysias
growth potential. The budgetary operations of the government continued to be
expansionary to stimulate economic activities through higher allocations for both
operating and development expenditures. In addition, the annual budgets contained
both tax and non-tax fiscal incentives focused on expanding domestic demand while
strengthening the nations competitiveness and resilience through promoting new
sources of growth, developing skilled manpower and technological competence, and
expediting the restructuring of the financial and corporate sectors.
Extracted from 2001 economic outlook.

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QUESTION 1:
What

is fiscal policy and what are the

main sources of government revenues?

- Fiscal Policy is the management of government
Budget (Government Expenditure and Revenue) to
influence economic activities and to achieve
economic goals
-Sources of government revenue:
i) Taxes
ii) Non-taxes
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QUESTION 2:
What

is meant by a budgetary surplus?

How does it differ with a budgetary

deficit?
-Budget

surplus

is

when

Government

Expenditure less than its Revenue, normally

budget surplus is used to overcome inflation
-It differs with Budget deficit, since budget deficit
is when Government Expenditure greater than
its revenue, normally budget deficit is used
to overcome recession

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QUESTION 3:

What are the two types or government

expenditure discussed in the article? Give one
example each for both types of government
expenditure.
- Two types of government Expenditure are:
a. Operating expenditure
b. Development expenditure

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QUESTION 4:

Explain how expansionary fiscal policy can stimulate

economic activities and increase economic growth.
- When government expenditure more than its revenue, for
example when government adopt budget deficit.
-

It

can

stimulate

economic

activities

since

large

government spending will increase aggregate demand, AD.

Similarly, low tax collection means higher disposable
income which will also increase AD. Higher AD means more
economic activities and production taking places to meet
the increased demand.
-Eventually, when production rises, economic growth is
expected to increase.

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THE END
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