Topic 4: Role of Government

Sophian bin Sout

Part 1: Economic Function
Economic Function

Providing legal and social FRAMEWORK

Sets legal status of business enterprise, ensure
rights to private ownership and allows the making
and enforcement on contracts.

Creating BUSINESS ENVIRONMENT

Healthy business environment has to be created in
the market to promote the competition
Economic Function

Redistribute & Reallocate INCOME & WEALTH

Government to reallocate the income and wealth in
a fair way trough a variety of policies and
programmes.

Increase the allocation of RESOURCES

Countrys economics resources should be utilised
efficiency to increase output.
Economic Function

Creating a stable ECONOMIC INVIRONTMENT

Stable economic environment is important to
encourage investment. Peaceful environment and
political stability are important to the
livelihood of the citizen.

Controlling the PRICE

Inflation affect the economics growth and also
reduce the purchasing power of the consumers.
Government control by monitoring the price
movement.
Economic Function

Increasing Government WELFARE ACTIVITIES

Responsible of providing public facilities for the
low income consumers. Government to subsidise the
medical costs so the publics has to pay only low
charges.
Part 2: National Budget
Balanced Budget
 Which estimated revenue of
government during the year is
equal to anticipated
expenditure

Balanced Budget
 Government
Surplus Budget expenditures
exceed government
tax revenue in a
given year.
Which estimated (running a budget
revenue of deficit)
government during
the year is Deficit Budget
greater than
anticipated
expenditure
Government Expenditure and Revenue

Surplus
Budget
Balanced
Budget
Government Expenditure
Deficit
Budget

National Income
Part 3: Sources of Government Revenue
 Tax
R
evenue

NonR Tax
evenue
Tax
R
evenue
Direct Taxes
Tax
R
evenue
Indirect Taxes
Direct Taxes
Tax
R
evenue
Indirect Taxes
 Personal Income Taxes

Direct Taxes Company Income Taxes

Petroleum Income Taxes

- Collected mainly by the
Royal Customs and Excise
Department.

- Where part or all of the

Indirect Taxes
burden tax can be
transferred to another
party

- Examples: export duty,

import duty, excise duty,
sales tax and service tax
- Revenue from non-tax source
- Revenue from government service, fees for
issue of license and permit, sales on
government asset, rental of government
property, interest and returns on
government investment, fines, fees and
penalties, contributions from foreign
governments and international agencies
and cash royalty from petroleum and gas

NonR Tax evenue

Part 4: Government Expenditure
Operating or Management Expenditure
Operating or management expenditure is a current
expenditure for the purpose of government
administration.

Include government spending in various government

departments to maintain services such as payment of
government salaries and purchase of office
equipment and motor vehicles for government use.
Government Development Expenditure
Development expenditure is the investment
expenditure by the government which involves
expansion in the physical capital of a country for
example government expenditure in development
project that are able to increase economic growth
such as construction of road, school and hospitals.
Part 5: National Debt
Internal Sources
1. Borrowing from citizen through the sale of
securities, bond and saving certificates to citizens.
2. Borrowing from financial institution such as
insurance companies by investing their resources
in the purchase of government securities
3. Loans from the central bank, where he central
bank purchase government securities, bond and
debentures from the government.
4. Loan from commercial banks, where the
commercial banks invest a part of their deposits in
government bond and securities to fulfil the
liquidity requirement.
External Sources
1. International money markets, such as some
foreign exchange banks in Paris, London and New
York, which have big deposits to lend any
government requesting loans.
2. Currency loans from foreign governments, such as
the USA, UK, Germany and Japan, for the supply
of needed goods. The loan are documented in
contracts.
3. Loan from international monetary financial
institutions, such as the International Monetary
Fund (IMF).
Break Quiz
Quiz 1: List the advantages and disadvantages of National Debt,
Domestic Loan and Foreign Loan
Advantages Disadvantages
National Debt

Domestic Loan

Foreign Loan
Answer for Quiz 1
Advantages Disadvantages
National Debt Economic growth Higher taxes
Economic recovery from Unequal distribution of
recession income
Channelling domestic Negative impact of
savings to produce currency outflow during
activities debt repayment
Domestic Loan Alternative secure storage Limited loan resources
device for the community
Easier to obtain loans Reduce consumption and
investment
Flow of money out of the Reduces the money supply
country does not occur in the economy
Foreign Loan Wider loan resource Higher loan cost
Reduce competition with Outflow of fund abroad
the private sector
Capital flow to the country Exposed to the risk of
exchange rate change
Part 6: Government Policy
 Fiscal Policy
Objectives Types
Instrument of Fiscal Policy

GOVERNMENT
EXPENDITURE
TAXES
Monetary Policy
Objectives Types
Instrument of Monetary Policy
(Quantitative)
Need for Min.
statutory Liquidity
reserves Req.

Discount
instrument OMO
Operation

Interest
Funding Rate
Instrument of Monetary Policy
(Qualitative)

Selective
Credit
Controls

Moral
Persuasion

Instruments