monetary policy- friday class

8/6/2019 Monetary Policy- Friday Class

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MONETARY AND FISCAL POLICY ASMONETARY AND FISCAL POLICY AS

TOOLS FORTOOLS FOR

GOOD GOVERNANCEGOOD GOVERNANCE


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OUTLINEOUTLINE

Monetary PolicyMonetary Policy

-- DefinitionDefinition

-- ChangesChanges inin thethe internationalinternational policypolicy settingsetting-- TargetsTargets andand InstrumentsInstruments ofof MonetaryMonetary PolicyPolicy

-- TheThe linklink betweenbetween thethe moneymoney supplysupply andand policypolicy targetstargets

-- CONCLUSIONCONCLUSION MonetaryMonetary PolicyPolicy

FISCALFISCAL POLICYPOLICY-- DDefinitionefinition ofof FiscalFiscal PolicyPolicy


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OUTLINEOUTLINE

--Key fiscal objectivesKey fiscal objectives

GOVERNMENT REVENUEGOVERNMENT REVENUE

-- Issues on taxationIssues on taxation

-- Prerequisites for a Good Tax SystemPrerequisites for a Good Tax System

-- Tax ComplianceTax Compliance

1.1. TaxTax ComplianceCompliance IssuesIssues

2.2. DecisionDecision toto nonnon-- complycomply

3.3. MeasuresMeasures toto improveimprove TaxTax ComplianceCompliance


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Part I: MONETARY POLICY AS A TOOLPart I: MONETARY POLICY AS A TOOL

FORFOR



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MONETARY AND FISCAL POLICY ASMONETARY AND FISCAL POLICY AS

TOOLS FORTOOLS FOR

GOOD GOVERNANCEGOOD GOVERNANCEMONETARYMONETARY POLICYPOLICY

DefinitionDefinition

MonetaryMonetary policypolicy involvesinvolves allall thethe deliberatedeliberate decisionsdecisions andand

actionsactions byby thethe monetarymonetary authoritiesauthorities toto influenceinfluence thethe monetarymonetary aggregates,aggregates, thethe availabilityavailability ofof credit,credit,

interestinterest ratesrates andand

exchangeexchange rate,rate,

withwith aa viewview toto affectingaffecting monetarymonetary demand,demand, income,income,output,output, pricesprices andand thethe balancebalance ofof paymentspayments..


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Changes in the international policy settingChanges in the international policy setting

WorldWar 2 to 1971: DisciplineWorldWar 2 to 1971: Discipline

fixedfixed exchangeexchange ratesrates

smoothsmooth thethe businessbusiness cyclecycle

FromFrom 19711971 toto 19801980:: InstabilityInstability

LargeLarge deficitsdeficits onon thethe balancebalance ofof paymentspayments ExchangeExchange raterate depreciationdepreciation

inflationinflation acceleratedaccelerated

FromFrom 19801980 toto 19901990:: StabilityStability regainedregained

MoreMore marketmarket relatedrelated monetarymonetary policypolicy..

LowLow inflationinflation byby followingfollowing strictstrict macroeconomicmacroeconomic policiespolicies.. StabilityStability regainedregained inin spitespite ofof thethe monetarymonetary supplysupply targetstargets generallygenerally

notnot beingbeing veryvery successfulsuccessful..

FurthermoreFurthermore thethe CentralCentral BanksBanks independenceindependence inin manymany countriescountrieswaswas strengthenedstrengthened..


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19901990 -- 2005: transparency and increasing2005: transparency and increasing

global integrationglobal integration

StrictStrict monetarymonetary andand fiscalfiscal policiespolicies..

IncreasingIncreasing worldworld integrationintegration raisedraised crosscross-- borderborderfinancialfinancial flowsflows..

AA reductionreduction inin policypolicy freedomfreedom inin individualindividualcountriescountries..

VolatileVolatile capitalcapital flowsflows internationallyinternationally broughtbrought

problemsproblems ofof theirtheir ownown..


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Since 2005: More volatility in economicSince 2005: More volatility in economic

variables with more pressure on monetaryvariables with more pressure on monetary

policypolicy RisingRising foodfood pricesprices..

RisingRising fuelfuel pricesprices..

RisingRising inflationaryinflationary pressurespressures..

IncreasedIncreased interestinterest ratesrates..

MoreMore volatilityvolatility inin exchangeexchange ratesrates..

PressurePressure onon FiscalFiscal policypolicy -- moremore intervention?intervention?


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Targets and Instruments of Monetary PolicyTargets and Instruments of Monetary Policy

PolicyPolicy targetstargets PricePrice stabilitystability

EconomicEconomic growthgrowth

ExchangeExchange raterate stabilitystabilityMonetaryMonetary policypolicy instrumentsinstruments

OpenOpen marketmarket operationsoperations

TheThe settingsetting ofof thethe bank/discount/repobank/discount/repo raterate

ReserveReserve requirementsrequirements SelectiveSelective creditcredit controlscontrols

PublicPublic debtdebt managementmanagement


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The link between the money supply and policyThe link between the money supply and policy

targetstargets

Monetary policy can achieve either a price level target orMonetary policy can achieve either a price level target oran output target, but not both.an output target, but not both.

With instruments that directly only affects the moneyWith instruments that directly only affects the money

supply, the central bank can only achieve one target.supply, the central bank can only achieve one target. The flows between monetary policy instruments andThe flows between monetary policy instruments and

targets can be illustrated as follows:targets can be illustrated as follows:


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The link between the money supply and policyThe link between the money supply and policy

targetstargets

PP

Policyinstrumentsy Open market

operationsy

Accomodationpolicy - Repo

y Reserverequirements

y Public debtmanagement

Operatingtargetsy Repo ratey Borrowed

reservesy Non-

Borrowedreserves

Intermediatetargetsy Money

stocky

Interestratesy Price levely Nominal

GDP

Final Targetsy Inflation ratey Unemployment

ratey Real GDP


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CONCLUSIONCONCLUSION Monetary PolicyMonetary Policy

GoodGood governancegovernance throughthrough monetarymonetary policypolicy couldcould implyimplythatthat certaincertain targetstargets areare setset forfor variablesvariables suchsuch asasinflation,inflation, thethe growthgrowth inin thethe moneymoney supply,supply, oror thetheexchangeexchange raterate..

InIn SouthSouth AfricaAfrica todaytoday thethe policypolicy targettarget isis thethe inflationinflationraterate throughthrough thethe processprocess ofof inflationinflation targetingtargeting..

GoodGood governancegovernance inin thisthis countrycountry impliesimplies thatthat thetheinflationinflation raterate asas measuredmeasured byby CPIXCPIX (i(i..ee.. consumerconsumerpricesprices minusminus bondbond rates),rates), isis setset betweenbetween 33%% andand 66%%..

ThisThis hashas becomebecome importantimportant inin thethe globalisedglobalised worldworldandand thethe difficultydifficulty toto competecompete inin internationalinternational marketsmarkets..


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Part II: FISCAL POLICY AS A TOOLPart II: FISCAL POLICY AS A TOOL

FORFOR


Revenue and expenditure policiesRevenue and expenditure policies


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DDefinition of Fiscal Policyefinition of Fiscal Policy

FiscalFiscal policypolicy entailsentails thethe waysways inin whichwhich governmentgovernment intervenesintervenesinin thethe economiceconomic activityactivity ofof aa countrycountry

throughthrough itsits expenditureexpenditure priorities,priorities, andand also,also, thethe wayway inin whichwhichsuchsuch expendituresexpenditures areare financedfinanced throughthrough taxestaxes andand borrowingborrowing..

FiscalFiscal policypolicy asas aa tooltool inin goodgood governancegovernance hashas bothboth anan activeactive--andand passivepassive elementelement..

TheThe activeactive elementelement impliesimplies thatthat thethe governmentgovernment takestakes aadeliberatedeliberate stepstep toto dodo somethingsomething,, forfor exampleexample toto decreasedecrease

thethe budgetbudget deficitdeficit.. TheThe passivepassive elementelement impliesimplies thatthat thethe governmentgovernment isis notnot

doingdoing somethingsomething,, forfor example,example, nono taxtax raterate changeschanges areareannouncedannounced inin aa particularparticular budgetbudget..


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Key fiscal objectivesKey fiscal objectives

1.1. Economic growthEconomic growth -- synchronize policiessynchronize policies2.2. Ensure fiscal stabilityEnsure fiscal stability3.3. Address the deepening of povertyAddress the deepening of poverty4.4. Progressively raise the ratio of capital formation to GDPProgressively raise the ratio of capital formation to GDP5.5. Address the saving catastropheAddress the saving catastrophe6.6. Ensure continuous productivity growthEnsure continuous productivity growth

Address high costs of power, transport, regulatoryAddress high costs of power, transport, regulatoryrequirements, security and other indirect costs that depressrequirements, security and other indirect costs that depressthe productivity of firmsthe productivity of firms

Upgrade deteriorating infrastructureUpgrade deteriorating infrastructure7.7. Promote enterprise development and deregulationPromote enterprise development and deregulation especiallyespecially

small businessessmall businesses8.8. Eliminate bottlenecks that prevent more effective delivery ofEliminate bottlenecks that prevent more effective delivery of

social servicessocial services9.9. Strengthen local and provincial government service deliveryStrengthen local and provincial government service delivery


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WhyWhy dodo governmentsgovernments useuse taxestaxes toto interveneintervene inin thetheeconomy?economy?

RaiseRaise revenuerevenue

RedistributionRedistribution ofof incomeincome

Encourage/discourageEncourage/discourage certaincertain behaviourbehaviour

(sumptuary(sumptuary taxes)taxes)


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RevenueRevenue derivedderived fromfrom variousvarious sourcessources:: taxation,taxation, loansloans andandincomeincome fromfrom propertyproperty..

SomeSome ofof thesethese taxestaxes areare visiblevisible (for(for exampleexample incomeincome tax)tax);;othersothers areare lessless visiblevisible toto thethe consumerconsumer becausebecause theythey areare

leviedlevied onon thethe producersproducers ofof rawraw materialsmaterials andand intermediateintermediategoodsgoods suchsuch asas VATVAT..

TaxesTaxes cancan bebe classifiedclassified asas beingbeing directdirect oror indirectindirect..

AA directdirect taxtax isis paidpaid directlydirectly byby thethe taxpayertaxpayer toto thetheRevenueRevenue ServiceService egeg.. IncomeIncome taxtax..

IndirectIndirect taxtax isis paidpaid onon goodsgoods andand services,services, andand isis paidpaid totothethe RevenueRevenue ServiceService byby aa thirdthird partyparty..

EgEg.. VATVAT andand customscustoms taxestaxes..


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Issues on taxationIssues on taxation

ProgressiveProgressive taxtax

ProgressiveProgressive taxtax indicatesindicates thatthat thethe percentagepercentage ofof thethe taxtax paidpaid ononincomeincome willwill increaseincrease asas incomeincome increasesincreases..

EgEg.. IncomeIncome taxestaxes

ProportionalProportional taxtax

TheThe taxpayertaxpayer payspays aa fixedfixed percentagepercentage ofof taxtax forfor differentdifferent levelslevels ofofincomeincome.. ThisThis impliesimplies thatthat thethe averageaverage taxtax raterate isis unchangedunchanged forfor allallthethe taxpayerstaxpayers (independent(independent ofof levelslevels ifif incomeincome earnedearned..

RegressiveRegressive taxtax

TheThe percentagepercentage taxtax decreasesdecreases asas incomeincome increasesincreases..

EgEg.. VATVAT


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Prerequisites for a Good Tax SystemPrerequisites for a Good Tax System

EquityEquity (Fairness)(Fairness)

EfficiencyEfficiency (Neutrality)(Neutrality)

AdministrativeAdministrative feasibilityfeasibility (Simplicity)(Simplicity)

FlexibilityFlexibility


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AnAn equitableequitable taxtax systemsystem shouldshould bebe inin lineline withwith thethe:: BenefitBenefit principleprinciple

AbilityAbility--toto--paypay principleprinciple TheThe taxtax burdenburden shouldshould bebe spreadspread fairlyfairly acrossacross thethe taxtax

basebase..

IfIf notnot itit willwill createcreate incentivesincentives forfor peoplepeople toto avoidavoid oror evenevenevadeevade taxestaxes..


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TheThe benefitbenefit principleprinciple PeoplePeople shouldshould bebe taxedtaxed ifif theythey directlydirectly benefitbenefit fromfrom thethe

availabilityavailability ofof certaincertain goodsgoods andand servicesservices thatthat thethe governmentgovernment

providesprovides.. KnownKnown asas useruser chargescharges..

CanCan bebe implementedimplemented wherewhere exclusionexclusion isis possiblepossible..

AbilityAbility toto paypay principleprinciple PeoplePeople paypay taxtax accordingaccording toto theirtheir economiceconomic abilityability (may(may bebe eithereither

income/wealthincome/wealth oror bothboth.. horizontalhorizontal equityequity

verticalvertical equityequity


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EfficiencyEfficiency (Neutrality)(Neutrality)

TaxesTaxes maymay distortdistort pricesprices andand thereforetherefore distortdistort thetheallocationallocation ofof resourcesresources andand causecause economiceconomic instabilityinstability..

CreatesCreates deadweightdeadweight--losseslosses..

EconomistsEconomists alwaysalways conductconduct incidenceincidence analysesanalyses totodeterminedetermine truetrue taxtax burdenburden..

HighHigh taxtax percentagespercentages maymay affectaffect thethe behaviourbehaviour ofoftaxpayerstaxpayers inin thethe economyeconomy..

TheThe costcost ofof taxationtaxation (i(i..tt..oo economyeconomy--widewide resourceresourceallocation)allocation) shouldshould bebe keptkept asas lowlow asas possiblepossible..


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EfficiencyEfficiency (Neutrality)(Neutrality) IncidenceIncidence AnalysisAnalysis

TheThe personperson whowho payspays thethe taxtax toto thethe authoritiesauthorities maymay notnotbebe samesame thethe samesame personperson whowho carriescarries thethe eventualeventual taxtaxburdenburden..

SinceSince taxestaxes imposeimpose anan additionaladditional costcost onon people,people, theytheywillwill trytry toto shiftshift thethe burdenburden ofof taxtax ontoonto someonesomeone elseelse..

TaxTax evasionevasion isis aa deliberatedeliberate andand deceitfuldeceitful efforteffort byby thethetaxpayerstaxpayers toto avoidavoid theirtheir taxtax obligationsobligations.. ThisThis isis aa

criminalcriminal offenceoffence -- punishablepunishable byby lawlaw.. TaxTax avoidanceavoidance impliesimplies thatthat aa taxpayertaxpayer changeschanges his/herhis/her

behaviourbehaviour soso thatthat thethe personalpersonal taxtax liabilityliability isis minimisedminimised..


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AdministrativeAdministrative feasibilityfeasibility (Simplicity)(Simplicity)

TheThe taxtax systemsystem hashas toto bebe simplesimple enough,enough, soso thatthat everyeverypersonperson knowsknows exactlyexactly howhow muchmuch taxtax he/shehe/she hashas toto paypay..

TaxesTaxes createcreate costscosts forfor thethe taxpayerstaxpayers.. ThisThis costcost doesdoes notnot onlyonly

includeinclude thethe taxtax payments,payments, butbut alsoalso thethe costcost ofof keepingkeeping taxtaxrecordsrecords andand thethe expendituresexpenditures onon financialfinancial advisersadvisers..

ThisThis typetype ofof costcost isis calledcalled compliancecompliance costcost..

OnOn thethe administrationadministrationss sideside therethere alsoalso existsexists enforcementenforcementcostscosts..

AAgoodgood taxtax systemsystem shouldshould trytry toto minimiseminimise bothboth thesethese costscosts..


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Tax Evasion Vs Tax AvoidanceTax Evasion Vs Tax Avoidance The classic distinction between avoidance and evasion is due to Oliver Wendell Holmes, whoThe classic distinction between avoidance and evasion is due to Oliver Wendell Holmes, who

wrotewrote

""When the law draws a line, a case is on one side of it or the other, and if on the safe side isWhen the law draws a line, a case is on one side of it or the other, and if on the safe side is

none the worse legally that a party has availed himself to the full of what the law permits.none the worse legally that a party has availed himself to the full of what the law permits.

When an act is condemned as evasion, what is meant is that it is on the wrong side of theWhen an act is condemned as evasion, what is meant is that it is on the wrong side of theline..." (Bullen v. Wisconsin (1916), 240. U.S. 625 at p.630).line..." (Bullen v. Wisconsin (1916), 240. U.S. 625 at p.630).

Thus, the distinguishing characteristic of evasion is illegality.Thus, the distinguishing characteristic of evasion is illegality.

Tax evasion is the illegal manipulation of ones affairs with the intention to escape taxes. TaxTax evasion is the illegal manipulation of ones affairs with the intention to escape taxes. Tax

evasion is illegalevasion is illegal Tax avoidance is the rearrangement of a taxpayers affairs, within the law, in order to reduceTax avoidance is the rearrangement of a taxpayers affairs, within the law, in order to reduce

tax liability. Tax avoidance is legaltax liability. Tax avoidance is legal


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Tax Evasion Vs Tax AvoidanceTax Evasion Vs Tax Avoidance TaxTax avoidanceavoidance hashas gotgot toto dodo withwith substitutionsubstitution effecteffect ofof taxationtaxation.. WheneverWhenever oneone

activityactivity isis taxedtaxed moremore highlyhighly thanthan others,others, peoplepeople willwill switchswitch toto thethe lightlylightly taxedtaxed ororuntaxeduntaxed activityactivity ee..gg increaseincrease inin taxtax onon labourlabour incomeincome resultsresults inin thethe followingfollowing::

PuttingPutting inin moremore hourshours toto compensatecompensate

MoreMore leisureleisure (untaxed)(untaxed)

HomeHome productionproduction increasesincreases-- youyou keepkeep onon workingworking thethe samesame hours,hours, butbut youyou dividedividethemthem betweenbetween marketmarket workwork andand untaxeduntaxed homehome--productionproduction..

However,However, IfIf twotwo neighboursneighbours bothboth decidedecide toto increaseincrease theirtheir homehome production,production, andand atat

thethe samesame timetime theythey exchangeexchange goodsgoods inin kind,kind, theythey shouldshould bebe taxedtaxed ifif not,not, theythey arearesaidsaid toto bebe operatingoperating inin thethe undergroundunderground economyeconomy..


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Reasons for honestyReasons for honesty

PeoplePeople maymay tendtend toto overestimateoverestimate bothboth thethe probabilityprobability andandmagnitudemagnitude ofof penaltiespenalties;;

TheThe fearfear ofof socialsocial stigmastigma oror damagedamage toto theirtheir reputationreputation ifif theythey areare

exposedexposed asas cheaterscheaters..

PeoplePeople paypay taxtax becausebecause itit isis linkedlinked toto governancegovernance.. InIn thethe wordswords ofofFriedmanFriedman ((20032003::11)) wewe obeyobey thethe rulesrules whenwhen thethe governmentgovernment doesdoesitsits jobjob andand ensuresensures thatthat thethe systemssystems areare inin placeplace toto forceforce usus toto

complycomply


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Reasons for NonReasons for Non--compliancecompliance NegativeNegative attitudeattitude ofof citizenscitizens towardtoward thethe governmentgovernment

InadequateInadequate servicesservices fromfrom thethe GovernmentGovernment-- taxpayerstaxpayers believebelieve thatthat theythey dodo notnot receivereceivevaluevalue forfor moneymoney whenwhen comparingcomparing thethe servicesservices

CommunityCommunity standardsstandards-- whenwhen thethe generalgeneral levellevel ofof honestyhonesty inin thethe communitycommunity isis lowlow thethecompliancecompliance levellevel isis usuallyusually veryvery lowlow

TheThe levellevel ofof corruptioncorruption-- highhigh levelslevels ofof corruptioncorruption byby officialsofficials leadlead toto dishonestdishonesttaxpayerstaxpayers;;

InadequateInadequate interest/penaltyinterest/penalty regimes,regimes, whichwhich encourageencourage taxpayerstaxpayers toto evadeevade fillingfillingreturnsreturns andand payingpaying taxtax oror borrowborrow fromfrom thethe governmentgovernment..


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Reasons for NonReasons for Non--compliancecompliance LowLow riskrisk ofof discoverydiscovery--thethe perceptionperception thatthat thethe taxtax administrationadministration isis

weakweak andand thethe chanceschances ofof beingbeing caughtcaught areare lowlow enoughenough toto taketake thetheriskrisk

IgnoranceIgnorance andand confusionconfusion

PoorPoor serviceservice byby thethe taxtax administrationadministration

HighHigh compliancecompliance costscosts

DefectiveDefective lawlaw


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Creating Tax ComplianceCreating Tax ComplianceIntroduce selfIntroduce self--assessmentassessment

Administrative assessment is not compatible with modern taxAdministrative assessment is not compatible with modern taxadministrationadministration

SelfSelf--assessment helps improve effectiveness by focusing resourcesassessment helps improve effectiveness by focusing resourceson (1) tax services and (2) compliance enforcement (instead ofon (1) tax services and (2) compliance enforcement (instead ofpaperwork)paperwork)

SelfSelf--assessment helps reduce compliance and administrative costsassessment helps reduce compliance and administrative costs

SelfSelf--assessment helps reduce corruptionassessment helps reduce corruption


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Creating Tax ComplianceCreating Tax Compliance

AdequateAdequate servicesservices fromfrom thethe GovernmentGovernment-- taxpayerstaxpayers shouldshould receivereceive valuevalue forformoneymoney whenwhen comparingcomparing thethe servicesservices providedprovided byby GovtGovt..

KeepKeep thethe ratesrates lowlow;; fightfight taxtax basebase erosionerosion-- inin mostmost countriescountries taxtax basebase erosionerosionhashas ledled toto highhigh marginalmarginal (effective)(effective) taxtax ratesrates.. FollowingFollowing Allingham/SandmoAllingham/Sandmo--model,model, thethe lowerlower thethe marginalmarginal rate,rate, thethe lowerlower taxtax evasionevasion..

Focus on the probability of getting caught (ignoring risk seekers)Focus on the probability of getting caught (ignoring risk seekers)-- more effectivemore effectivethan increasing the penaltiesthan increasing the penalties-- increasing only the penalty without increasing theincreasing only the penalty without increasing theprobability, is inequitable.probability, is inequitable.

Make sure penalties are quickly applied (deterrent taxes should deter)Make sure penalties are quickly applied (deterrent taxes should deter)


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Creating Tax ComplianceCreating Tax Compliance Educate citizensEducate citizens-- Politicians should set the standard.Politicians should set the standard.

Identify main sources of underground activity and incorporate themIdentify main sources of underground activity and incorporate theminto the tax systeminto the tax system

Reduce compliance costReduce compliance cost-- simple and transparent proceduressimple and transparent procedures i.ei.esimplified tax regimes.simplified tax regimes.

Electronise the economy (making cash transaction limited)Electronise the economy (making cash transaction limited)


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GOVERNMENT EXPENDITUREGOVERNMENT EXPENDITURE

TheThe governmentgovernment participatesparticipates inin thethe economyeconomy byby producingproducinggoodsgoods andand servicesservices..

GovernmentGovernment providesprovides thethe communitycommunity withwith collectivecollective

goods,goods, suchsuch asas education,education, defence,defence, infrastructureinfrastructure andandhealthhealth servicesservices..

TheThe compositioncomposition ofof governmentgovernment spendingspending reflectsreflects changeschangesinin thethe economy,economy, socialsocial conditionsconditions andand thethe prioritiespriorities ii..ee..

consumerconsumer preferencespreferences politicalpolitical andand otherother shocksshocks

redistributionredistribution ofof incomeincome

governmentgovernment failurefailure

populationpopulation growthgrowth andand urbanisationurbanisation


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GOVERNMENT EXPENDITUREGOVERNMENT EXPENDITURE

FunctionalFunctional classificationclassification ofof governmentgovernment spendingspending..

defencedefence andand onon healthhealth servicesservices..

BudgetBudget deficitdeficit

expendituresexpenditures exceedexceed revenuesrevenues..

ThisThis deficitdeficit hashas toto bebe financedfinanced toto getget thethe budgetbudget totobalancebalance..

DeficitsDeficits areare usuallyusually expressedexpressed asas aa percentagepercentage ofof thethe GDPGDP..

GoodGood governancegovernance wouldwould implyimply thatthat thethe ratioratio staysstays withinwithin limitslimitsthatthat areare acceptableacceptable forfor sustainablesustainable economiceconomic growthgrowth..

AA rulerule ofof thumbthumb isis thatthat thethe ratioratio inin anyany particularparticular fiscalfiscal yearyearshouldshould notnot exceedexceed thethe threethree perper centcent ((33%%)) levellevel..


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DEFICIT FINANCINGDEFICIT FINANCING

AffectsAffects levelslevels ofof nationalnational saving,saving, investmentinvestment andand thethecurrentcurrent accountaccount onon thethe balancebalance ofof paymentspayments..

SourcesSources ofof financefinance:: L

oansLoans

DomesticDomestic

ForeignForeign

LoanLoan levieslevies

TreasuryTreasury billsbills


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GOVERNMENT DEBTGOVERNMENT DEBT

DifferenceDifference betweenbetween thethe governmentgovernment debtdebt andand thethe deficitdeficit..

TheThe goalsgoals ofof debtdebt managementmanagement areare:: FinancialFinancial certaintycertainty

DebtDebt serviceservice minimisationminimisation

MacroeconomicMacroeconomic stabilisationstabilisation andand timetime consistencyconsistency

TheThe significancesignificance ofof publicpublic debtdebt cancan bebe expressedexpressed asas aapercentagepercentage ofofGDPGDP..

AccordingAccording toto thethe MaastrichtMaastricht TreatyTreaty thisthis ratioratio shouldshould notnot

exceedexceed thethe sixtysixty perper centcent ((6060%%)) levellevel..


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GoodGood governancegovernance inin fiscalfiscal policypolicy impliesimplies aa governmentgovernmentthatthat isis committedcommitted toto increasingincreasing thethe levellevel ofof welfarewelfare ofof allallthethe citizenscitizens ofof thethe particularparticular countrycountry..

Welfare

Welfare levelslevels couldcould bebe raisedraised byby bothboth governmentgovernmentrevenuerevenue programmes,programmes, oror directdirect oror indirectindirect expenditureexpenditure

programmesprogrammes..

CONCLUSIONCONCLUSION Fiscal PolicyFiscal Policy


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ReadingsReadings Harvey S. Rosen/ Ted Gayer: Public Finance (8Harvey S. Rosen/ Ted Gayer: Public Finance (8thth Ed)Ed)

Libanior Gilberto (2005): Good Governance in Monetary Policy andLibanior Gilberto (2005): Good Governance in Monetary Policy andthe negative effects of Inflation Targeting; available atthe negative effects of Inflation Targeting; available at

www.policyinnovations.org/ideas/policy_library/data/01191www.policyinnovations.org/ideas/policy_library/data/01191

Silvani CA (1992): improving tax Compliance in Bird R. andSilvani CA (1992): improving tax Compliance in Bird R. andCasanegra de Jantscher M (eds) Improving Tax Administration inCasanegra de Jantscher M (eds) Improving Tax Administration indeveloping Countries (IMF: Washington DC, pp 276developing Countries (IMF: Washington DC, pp 276--287, 293287, 293--297.297.

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