CHAPTER 5 : Public Sector

Government Expenditure Government expenditure is divided into 2 categories; 1. Operating Expenditure Consist of payment for the emoluments, pensions, any debt services charges and other maintenance expenditure. 2. Development Expenditure Comprises of the expenditure of defence and internal security, social responsibility that includes education and health, and the expenditure to run the economics policy like granting subsidy and train workers Sources of Government Revenue There are 2 major sources of government revenues: 1. Non-taxes Selling of goods and services, grant from other countries (example: donations for tsunami victims), domestic loans (example: government bonds) and loan from overseas (example: IMF) 2. Taxes a) Direct tax - Where the burden of tax cannot be transferred to other parties. - Collected by Department of Inland Revenue Main direct tax:I. Personal income tax The tax is levied on gross income II. Corporate Tax Imposed on companys profit whether it is earned at home or abroad. III. Petroleum Revenue Tax Tax is levied on all petroleum companies operating in Malaysia. IV. Capital Gain Tax Levied on the increase in the value of capital asset between the time of purchase and the time of sale (sale of shares, factories etc.) V. Other tax Stamp duties (agreements), motor vehicles duties b) Indirect Tax - Where the burden of tax can be passed on to other parties. - Collected by the customs and excise department

Main direct tax:I. Customs duty Levied on the value and volume of the important commodities. II. Excise duty Levied on domestic and imported goods with the aim of raising revenue to the government and to discourage people from consuming them.

Structure of Tax 1. Progressive Tax - Rate of tax increases as income increases. - It imposes a greater portion of tax on higher income group than the lower income group. - This form of tax structure is practiced in personal income tax. 2. Proportional Tax - Rate of tax remains constant as income change. - Example: corporation tax - If the government announced the corporate tax as 28%, then it will take a fixed proportion of the companies profit, regardless of the amount of profit stated by the companies. 3. Regressive Tax - This tax will make lower income group bear a higher proportion of tax than the higher income group does. - Example: Payment of toll - A toll of RM5 may be small charge only to a person whose income is RM5000 per month, but it can be great burden to an individual whose income is RM900 per month. Types of Budget 1. Surplus Budget - When government expenditure is less than tax revenue - This budget is normally implemented during high inflation or when the economy is overheating 2. Deficit Budget - When government expenditure exceeds tax revenue. - This budget is normally implemented during high unemployment and recession. 3. Balanced Budget - When government expenditure equals tax revenue. - Balanced budget is implemented during a period where there is no high unemployment or inflation.