ACJC Government Budget Notes

ACJC 2024 H2/H1 Economics Government Finance & Expenditure 1 ANGLO-CHINESE JUNIOR COLLEGE JC2 Economics 2024 H1 H2 GOVERNMENT BUDGET Government Revenue & Expenditure Section Content Page 1 Government Revenue 1.1 Sources of Government Revenue 1.2 Types of Taxes 1.3 Structure of Tax Rates 1.4 Impact of Taxes on the Economy 5 6 6 8 2 Government Expenditure 2.1 Types of Government Expenditure 2.2 Impact of Government Expenditure on the Economy 10 11 3 Using the Budget 3.1 Goals of Using the Budget / Fiscal Policy 3.2 Financing a Budget Deficit and Public Debt 3.3 Singapore: Fiscal Sustainability 12 14 15 4 Annex Reference Texts: • Singapore Budget 2024 (https://www.mof.gov.sg/singaporebudget) • Inland Revenue Authority of Singapore (https://www.iras.gov.sg/irashome/default.aspx)

ACJC 2024 H2/H1 Economics Government Finance & Expenditure 2 UNIT SUMMARY In microeconomics, we have learnt about the active role of the government in correcting market failure, such as in the provision of public and merit goods, regulating competition, and redistributing incomes in order to maximise welfare in the economy. We have learnt that government expenditure (G) forms part of the aggregate demand of the economy: increasing G will increase aggregate demand and expand the economy. On the other hand, taxation (T) is a withdrawal out of the circular flow of income, leading to a decrease in aggregate demand and a contractionary effect on the economy. In this topic on the government budget, you will learn about the types of government expenditure and taxes which a government adopts to achieve the country’s microeconomic and macroeconomic goals. A government’s budget is the financial plan of a government for a given period, usually for a fiscal year, which shows how the government generates its revenue to finance its various types of expenditure. The budget balance, whether in surplus or deficit, and its composition, in terms of the revenue sources and expenditure patterns, reflect the areas and aims of intervention that the government is focusing on for the year. This knowledge will enable you to understand and appreciate the objectives and workings of the fiscal policy in macroeconomic management. LEARNING OUTCOMES Enduring Understanding: The types and levels of government expenditure and taxes and the overall budget balance will have consequences on the macroeconomic performance of an economy. Knowledge Objectives: Students will be able to understand: • The types of expenditure and taxation in the annual budget • The types of budget balance • The relationship between the budget balance and the change in the level of aggregate demand Skills Objectives: Students will be able to explain the role of the budget balance (deficit, surplus or balanced) and the types of expenditure and taxes in the attainment of both micro and macroeconomic goals. The Overarching Essential Question: How may the government’s budget impact the attainment of economic goals for the government?

ACJC 2024 H2/H1 Economics Government Finance & Expenditure 3 Introduction: The Budget Process How are Singapore’s finances budgeted a nd managed? The Singapore Government manages a ‘Budget’ on behalf of the nation. The Budget is prepared for every financial year which begins on 1 April. Information that you will find in the Budget include the revised revenue and expenditure projections for the financial year ending, and the planned revenue and expenditures for the next financial year. Like a good family budget, the Government goes through a rigorous process to design a Budget that addresses Singapore’s current and future needs , while remaining fiscally sustainable (this means that the gov ernment only spends what it can earn in their term of government and doesn’t burden future generations with debts). The following shows the budget feedback process through which the government plans its revenue and spending each year: Facebook https://www.facebook.com/MO Fsg/ Email reach@reach.gov.sg REACH Singapore https://www.reach.gov.sg/Parti cipate/budget-2024 WhatsApp https://go.gov.sg/reachwa Ministry of Finance (MOF), other ministries and agencies Businesses Unions Individual households Collect various suggestions and ideas, providing an overall glimpse of current concerns. What are the national priorities? How are finite resources to be allocated? Are the plans sustainable? What trade-offs need to be made? Meetings, discussions and dialogues The Budget To be presented by Minister of Finance to the Parliament before the start of each financial year. (Parliament convenes a week later for the Budget Debate) The Budget Approval Process 1. Parliament next sits as a Committee of Supply to examine the plans for each ministry and vote on the estimates for each ministry. 2. It reports its decision to the Parliament, which will then debate and vote on the Supply Bill. 3. The Supply Bill is subsequently sent to the President for approval. 4. The bill is then enacted into a law called the Supply Act when the President approved it. The Budget Feedback Process Information gathering from different perspectives Did you know? Singapore is required under the Constitution to keep to a balanced budget over each term of Government. Unlike many other countries, Singapore does not borrow money to fund government expenditure, and the Singapore government does not have any external debt. This practice of fiscal discipline ensures that government funds can b e put into good use for Singapore’s development in all sectors.

ACJC 2024 H2/H1 Economics Government Finance & Expenditure 4 Overview of the Government Budget: Sources of Revenue Areas of Expenditure Micro-economy Macro-economy Ultimate aim: to maximise society’s welfare and increase standard of living of all Singaporeans. Surplus? Deficit? Balanced GOAL: SLS Lesson: Fill in this table as you go through the SLS lessons on “The Gov. Budget”

ACJC 2024 H2/H1 Economics Government Finance & Expenditure 5 1. PUBLIC / GOVERNMENT REVENUE 1.1 Sources of Government Revenue There are many sources of public/government revenue to finance go vernment expenditure. The Singapore Government’s overall revenue comprises: • the Government Operating Revenue and • Net Investment Returns Contribution (NIRC). This refers to the returns on the government’s investment returns on our reserves. The government’s Operating Revenue, which includes tax and non-tax revenues (shown below) contributes to 80.7% of the overall government revenue in FY2022. The NIRC contributes to the remaining 19.3%. Source: Singapore Budget 2023 Taxes are compulsory payments to the government by private individuals and corporations. They are usually based on a proportion of income of private individuals (income tax), a proportion of profits of corporations (corporate tax), and on consumption of goods and services (GST). • In relatively low-income countries, the amount of taxable income is very low. Thus, taxes may not contribute much revenue to the government. • In structuring its tax system, the government has to be careful not to discourage work effort, savings and investment incentives of firms. The Inland Revenue Authority of Singapore (IRAS) is the main tax administrator to the Government. IRAS collects taxes that account for more than 70% of th