EMA 756 Public Financial Management

Size of the
Government:
Its Implication of
Public Finance
Lecture 5.2

Dato Nik Azman Nik Abdul Majid

Outline: Size of the

1. Govt.
Role of govt.

2. How deep the govt.

should be involved
3. Impact on govt.
finance
4. Implications on the
economy
5. Conclusion
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Outline: Size of the

Govt.

1. Role of
govt.

Disagreement of the Size of

The role of the govt in the economy is
Govt.
(1/2)
important.

Wide disagreement on how the SIZE

much the govt. in the economy.
E.g. The 4 Nov. 2012 American
presidential election, President Barrack
Obama (Democratic) believes in a bigger
role of the government.
Republican challenger, Mitt Romney
thinks the American people will be better
off with a smaller govt.
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Outline

2. How deep the

govt.
should be
involved

Barrack Obama versus Mitt Romney

Mr. Obama argued for federal govt. spending
on education, new energy sources & health care

He said that Mr. Romneys proposal to cut

taxes for the wealthy & roll back regulations, had
failed to boost the economy in the past.
The differences was on the role of the govt.
was whether the govt. or the private sector can
best provide health care for Americans

That was in US four years ago

nearer to homeshould the
Malaysian Govt be in business?
At one time Malaysia corporaisedband then privatised
many govt. depts such as Telecoms Dept., Postal Dept.,
National Electricity Board, Malaysia Airlines
Many govt-owned companies are still in business, such
as PETRONAS, National Heart Institute Bhd., UDA
Holdings Bhd., MAS, 1MDB
Govt linked companies (GLC) such as TNB, TM,
PosMalaysia
Govt owned companies and GLCs played certain roles
bth business and social roles
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Outline

3. Impact on govt.
finance

Impact of Bigger Govt.

on Finance

The impact of a bigger govt. in

the economy, especially in
education, energy & health care in
relation to public financial
management in terms of:
Expenditure
Revenue
Government debt.
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Bigger Govt.: Impact on

Expenditure

Higher expenditure in education, energy &

health care (1/3)

Education
Investment in human capital
Economic return: productivity
Better jobs: higher income
Positive externalities of education
Positive economic impact
Well-educated population
Positive social impact less social problems
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Bigger Govt.: Impact on

Expenditure
Higher expenditure in education, energy &
health care (2/3)

Health care
Provide the poor with adequate health care
Basic role of the government
Positive externalities from health care
Economic returns from healthy population
Social returns from health population

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Bigger Govt.: Impact on

Expenditure

Higher expenditure in education, energy

& health care (3/3)

Energy
Energy source of development
Efficient energy use ensure sustainable
environment (using non-renewable energy
resources such as coal or petroleum resources)
For long term purpose, future generation

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Size of the Govt.: Impact on

Expenditure
Overall Expenditure
Higher expenditure means greater financial
burden to the govt.

If no change in revenue, higher deficit and

higher debt
Weaken fiscal position

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Impact of Bigger the Govt.:

Revenue
Revenue
Need to increase revenue to pay for
higher government expenditure
Higher tax will reduce supply of labour
and disincentive to investment
Affect disposable income on households
and firms, thus less money for
consumption (C) & investment (I). Lower
economic activities and GDP

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Impact of Bigger Govt.:

Debt
Debt

If no tax increase or tax increase

is insufficient to cover higher
expenditure,
higher expenditure
.
means higher deficit.
Higher deficit means higher
borrowing and hence higher debt
Higher debt worsen the govt.s
fiscal position.
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Impact of Bigger Govt.:

Increase in Contingent
Liabilities & Exposes Govt.
to Debt Burden

Govt. sometimes provide guarantees to GLCs

& GoCs so that these companies get loans at
lower interest rates.
If GLCs & GoCs couldnt pay the interest
rates & principal loans then the govt as the
guarantor has to pay for the loans.
Additional burden to the Govt. Higher debt
worsen the govt.s fiscal position.
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Outline

4. Implication
on the
economy
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Impact of Bigger Govt. on the

Economy
Crowding out effect (1/3)

When the govt and the private sector

compete for limited sources, such as land,
labour and capital
Push up rent, wages, interest rates
Push up prices : inflation but ultimately no
increase in output
Mere shift in resources (labour, land and
capital) from private sector to government
sector

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Impact of Bigger Govt. on the

Economy
Crowding out effect (2/3)
Welfare effect may increase through
government providing more service as
cheaper (welfare effect) but if later on
price increases the welfare effect will be
affected by the price effect. Top
universities & hospitals is US are private,
e.g. Harvard, Yale, MIT, Columbia; Johns
Hopkin Hospital

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Impact of Bigger Govt. on the

Economy
Crowding out effect (3/3)
Government may be less efficient than
the private sector in providing some of
education, health care & energy service
Government more on regulatory role
and certain role
Most innovation comes from private
sector (e.g. I-Phone, I-Pad from Apple)

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Outline

5. Conclusion

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Conclusion
Managing public finance not as
straight forward as managing
corporate finance
Political angle
Impact on the peoples well-being
Impact on the economy

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Thank You

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Quotations
The era of the Government knows
everything is over
- Dato Sri Mohd. Najib Tun Abdul Razak
Prime Minister
The Government has no business to be
in business
- Tun Daim Zainuddin,
former Finance Minister
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