ROLE OF

GOVERNMENT &
FISCAL POLICY
DPB2023
MACROECONOMICS
 Chapter Summary
Arrow Process

- Revenue (tax,
- Definition - Contractionary
non-tax & non-
- Important functions - Expansionary
revenue receipt)
- Borrowing
(internal &
external sources)
ECONOMIC GOVERNMENT’S
BUDGET GOVERNMENT’S FISCAL POLICY
FUNCTIONS OF REVENUE &
EXPENDITURE
GOVERNMENT BORROWING

- Types
- Operating
(Balanced,
Surplus & - Development
Deficit)

This illustration is a part of ”Building Plan”. See the whole presentation at slideshop.com/value-chain
THE ECONOMIC
FUNCTIONS OF
GOVERNMENT
 The Functions of Government
• To achieve economic stability by implementing
economic policy
• Create a business environment to encourage
competition among producers
• To control income disparity through taxation
and transfer of payment
• To promote private sector as the main engine of
economic growth
The Functions of Government
Malaysia’s Government
The Functions of Government
Malaysia’s Government
THE GOVERNMENT’S
BUDGET
 Government’s Budget
Definition
• Is a document contain a preliminary approval
plan of public/government’s revenue and
expenditure in a year
• The Finance Minister will announce the
National Budget in September or October at
the Parliament
 Government’s Budget
Types
• Balanced Budget
– Occurs when government’s total expenditure is
equal with total revenue
Tax
Tax Operating Development

Revenue Expenditure

Non-
Non-
revenue
revenue Non-Tax
Non-Tax
receipt
receipt
 Government’s Budget
Types
• Surplus Budget
– Occurs when government’s total revenue is more
than total expenditure
Tax Operating Development

Revenue Expenditure

Non-
revenue Non-Tax
receipt
 Government’s Budget
Types
• Deficit Budget
– Occurs when government’s total revenue is less
than total expenditure
Tax Operating Development

Revenue Expenditure

Non-
revenue Non-Tax
receipt
 Government’s Budget
Question
• Balanced, Surplus or Deficit

– Which one is good or bad?

– None of them good or bad

Why?
 Government’s Budget
Surplus
• Occurs when government implement during
inflation.
• Which is reduction in Government spending
(total expenditure) & increase taxes (total
revenue).
 Government’s Budget
Deficit
• Occurs when government implement during
deflation (unemployment & recession)
• Increase in Government spending (total
expenditure) and reduction in tax (total
revenue)
THE GOVERNMENT’S
REVENUE
 Government Revenues
• Is revenue received by government
• Is an important part of fiscal policy
• In Malaysia, the government revenues can be
various such as:
(1) Tax revenues –> Direct and Indirect Taxes
(2) Non-tax revenues
(3) Non-revenue receipt
 Government Revenues
(1) Taxes Revenue
Direct taxes
• Direct taxes are collected by the Inland Revenue
Board (IRB)
• Paid directly by whom it is levied
• Examples:
Income tax on individuals and corporation
Petroleum income tax
Stamp duty
Real property gains tax
 (1) Taxes Revenues
Direct taxes
Income tax on individual
• Residence in
Malaysia will pay
personal income tax
for every April at
respective year
 (1) Taxes Revenue
Direct taxes
Income tax on company
• Taxes levy on company
• The company has
capital paid up not more
than RM2.5 million, on
first RM 500,000 pay at
rate 20%.
 (1) Taxes Revenue
Direct taxes
Petroleum income tax
• Was introduced in
1967 to levy on
petroleum operations
• The rate imposed at
40% of chargeable
income
 (1) Taxes Revenue
Direct taxes
Stamp duty
• Stamp duty is tax
that impose on
services agreements
• Was introduced
from 1 Jan 2009 at
0.5%
 (1) Taxes Revenue
Direct taxes
Real Property Gains Tax
• Levied on all
property holdings
such as:
 Shops
 Factories
 Residential
 Housing
 Government Revenue
Taxes Revenue
Indirect taxes
• Indirect taxes are collected mainly by the
Royal Customs and Excise Department
• Paid by third parties
 Import duties
 Export duties
 Excise duties
 Sales tax
 Service tax
 (1) Taxes Revenue
Indirect taxes
Export duty
• Export duty is levy on
the certain goods to be
exported to other
country.
• Examples: crude palm
oil (CPO)
 (1) Taxes Revenue
Indirect taxes
Import duty
• Import duty is levy
on goods that
imported in to
Malaysia.
• Example: Imported
car
 (1) Taxes Revenue
Indirect taxes
Excise duty
• Excise duties are levied on selected products
manufactured in Malaysia namely:
 cigarettes
 tobacco products
 alcoholic beverages
 playing cards (10%)
 mahjong tiles (10%)
 motor vehicles
 (1) Taxes Revenue
Indirect taxes
Sales tax
• Also known as
manufacturer’s tax
• Levied on locally
manufactured goods
• Levied on goods that
sales/disposed by
manufacturer
• Sales Tax Act 1972
 (1) Taxes Revenue
Indirect taxes
Service tax
• Service tax is a
consumption tax levied and
charged on any taxable
service
• Services tax currently paid
on:
 Hotels
 Food in restaurant
 (1) Taxes Revenue
Indirect taxes
Service tax
• Effective from 1 Jan 2011, the service tax rate
was increase from 5% to 6%.
• The scope of this tax was expand by including
payments for television broadcasting services
(6% on ASTRO) and credit card about RM50
per year on principal card.
 (1) Taxes Revenue
Indirect taxes
Service tax
• Service tax on credit cards
generated RM270 million
in 2011
• Service tax paid on
ASTRO generated
RM148 million revenue
for the government
 Public revenues

Non-revenue
Tax Non-Tax
receipt
Direct taxes

Indirect
taxes
 Government Revenue
(2) Non – tax revenue
• Non-tax revenues or non-tax receipts are
revenues NOT generated from tax.
• Revenues that accordance with law and act.
• Include:
 Fees for issue of license and permit
 Sale of government property
 Rental of government property
 Fines
Services that government offers
 (2) Non-Taxes Revenue
Fees for license and permit

How much?
RM30 for 1 year
(2) Non-Taxes Revenue
Sales of government assets
(2) Non-Taxes Revenue
Fines

Traffic fees
 (2) Non-Taxes Revenue
Services offers from government
 Government Revenue
(3) Non-revenue receipt

• The revenue that not accordance with any law

• Consist of:
 Receipt from government agencies
 Payback salary
 Repayment/reimbursement
 (3) Non-Revenue Receipt
Receipt from government agencies

Maps selling
Seized goods
 (3) Non-Revenue Receipt
Repayment/reimbursement

Repayment of
PTPTN
THE TYPES OF TAX
STRUCTURE
 Tax structures

Proportional Progressive Regressive

Tax Tax Tax

Tax that imposed at The tax rate which Tax rate that
the same rate for all increasing as income decreasing as income
income levels increase increase

Tax rate remains

constant regardless Higher the income, Higher the income,
whether income higher the rate of tax lower the rate of tax
increase or decrease
 Tax Structure
Proportional tax

Income 500 1000 1500 2000 2500

Total taxes 25 50 75 100 125
Tax rate (total tax/income) 5% 5% 5% 5% 5%

Tax rate

5%

Income
 Tax Structure
Progressive tax
Income 500 1000 1500 2000 2500
Total taxes 25 80 150 240 375
Tax Rate (total 5% 8% 10% 12% 15%
tax/income)

Tax rate

10%
8%

5%

Income
 Progressive Tax
Malaysian Income Tax Rate 2011
Chargeable Income Tax Rate Cumulative Tax
From RM0 – RM2,500 0% RM0

From RM2,501 – RM5,000 1% RM25

From RM5,001 – RM10,000 3% RM175

From RM10,001 – RM20,000 3% RM475

From RM20,001 – RM35,000 7% RM1,525

From RM35,001 – RM50,000 12% RM3,325

From RM50,001 – RM70,000 19% RM7,125

From RM70,001 – RM100,000 24% RM14,325

RM100,001 and Above 26%

 Tax Structure
Regressive tax

Income 500 1000 1500 2000 2500

Total taxes 50 80 90 80 50
Tax Rate (total 10% 8% 6% 4% 2%
tax/income)
Tax rate

10%

8%
5%

Income
 BULETIN UTAMA NEWS
• “ Pinjaman kerajaan adalah dalam bentuk
pelaburan, dan ianya bukan pinjaman hangus”
– Tun Dr. Mahathir Mohamad: 19 Februari
2013
 Government Debt
• Also known as ‘Public Debt’ or ‘Public
Borrowing’.
• Occurs when government revenue does not
meet the government expenditure.
 Public Debt

Internal External
sources sources

Central bank International financial

Citizens
institution

Financial
institutions Foreign Currency/
government FDI
 Government Debt (Internal)
How it works?

Citizens

Central bank
Government sells
the securities
(bond & saving
certificate) to:
Financial
institutions
 Government Debt (Citizen)
How it works?
Government sells
the securities
(bond & saving
Government buy certificate) to:
the securities and
pays to citizens
plus dividen

Citizens buy the

securities and sell
at maturities of 2
years to 10 years
 Government Debt (Central Bank)
How it works?
Government sells
the securities
(bond, treasury
Government buy bills, debentures)
the securities and to:
pays to BNM
plus profit

BNM buy the

securities and
sell at
maturities of 2 Central bank
years to 10
years
 Government Debt (FI)
How it works?
Government sells
the securities
(bond, treasury
Government buy bills, debentures)
the securities and to:
pays to FI plus
profit

FI buy the
securities and
sell at
Financial
maturities of 2 institutions
years to 10
years
 Government Debt (External)
How it works?
International
Financial
Institution

Loans /
Government Foreign Foreign
government Direct
sells the
securities Investment
(bond/treasury (FDI)
International
bills) Money Market
OR borrow loan
from Short term loan
 Malaysia’s Debt
Articles/Academic Research
• 1971 – 1983: debt growing by 19.6%
• 1984 – 1987: 12.4% debt as the government
embarked on expansionary fiscal policy and major
public project/investment [1]
• The highest federal government debt recorded in year
2000 was RM470,759 mil
• Almost 96% of debt was due to domestic borrowing,
while 4% was from external borrowing [2]
[1] CIMB Report. The Edge (2012)

[2] Nur Hayati Abd Rahman. How Federal Government’s Debt

Affect the Level of Economic Growth? (2012)
Malaysia’s Debt
The star, 11 Oct 2014
Government Expenditure
 Public Expenditure

Operating Development

Defense and security

Emoluments

Economic sector
Subsidies Grants
Services sector

Debt Pensions General

administration
 Government Expenditure
Operating expenditure

• To cover the expenses of operating and

administering government departments

Grants, Funding and Debt financing under

Incentives Technopreneur

To encourage the MSC Research and

development and ICT Development Grant Scheme
industry in Malaysia
www.malaysia.gov.my
 Government Expenditure
Operating expenditure

Salary
Emoluments

Bonuses

The monthly allowance for KAFA

teachers increased to RM800
(Budget 2011)
Malaysia’s Operating Expenditure
The star, 11 Oct 2014
 Government Expenditure
Development expenditure

• To improve facilities in the basic physical

infrastructure
• Focused on development projects to boost
economic growth

Defense and security

www.malaysia.gov.my
 Government Expenditure
Development expenditure

Economic sector Agriculture

Transportation

Communications

In agriculture sector,
government allocate RM3.8bil
to increase productivity and www.malaysia.gov.my
higher returns (Budget 2011)
Government Expenditure 2012
Fiscal Policy
 Fiscal Policy
Definition

• Fiscal policy is a federal government policy

where policy makers manipulate the federal
government budget to attain price stability, full
employment and economic growth.
• There are TWO tools government use in fiscal
policy:
– Taxes
– Government expenditure
 Fiscal Policy

Expansionary
Contractionary

During inflation
During recessions

Cut tax
Decrease
Increase taxes Government
Increase Spending
Government
Spending
 Expansionary Fiscal Policy

How it works?
• Loosen the policy
• To combat
recession
• Cut in tax
• Increase
Government
Expenditure
 Contractionary Fiscal Policy

How it works? Increase tax rate

• Tighten the policy
• To combat inflation
• Increase tax rate
• Decrease
government
spending
 Preview
• 1980 – 1982: Government implemented
expansionary fiscal policy to combat
recession
• Early stages of Asian Crisis: Government
tightened the budget to reduce inflationary
resulted from the depreciation of RM
• 1998: Fiscal policy turned expansionary to
support economic activity