LECTURE 21

ROLE OF GOVERNMENT IN AN ECONOMY

Responsibilities of a Government in an Economy

Governments are appointed by citizens to manage the affairs of their country. Their
responsibilities include:

 Ensuring the security of a state- Government must maintain law and order internally. This
is realized through legislation, the court of justice and the police force. Externally the armed
forces protect citizens against external threats.
 Protection and general welfare of citizens - Government is responsible for the general
health and education of citizens. Welfare programmes must be provided for those who are
very poor and vulnerable.
 As a major employer, the government is responsible for job security of workers and
ensuring that severance benefits are paid to workers should they become redundant. The
government is also responsible for employment legislation to meet the needs of the
workforce eg. Health and safety, equal opportunities, maternity benefits, severance benefits
and general labour laws.
 Management of the economy – Governments are appointed by citizens to efficiently
manage the economy to bring about growth and development. This includes: encouraging
local and foreign investment, controlling inflation, maintaining the foreign reserve (NIR),
curbing balance of payments deficits and achieving high levels of employment.
 Protecting the environment – Sustaining the environment is important to the well-being of
citizens. Ways of protecting the environment include: legislation to prevent further
degradation, zoning to protect wildlife areas from disruption by development of factories,
shopping and residential areas and taxation to reduce the level of pollution by firms.
 Infrastructural Development eg. Creation and maintenance of road networks, bridges,
ports, airports, water and electricity.
 Provision of regulations for business activity – Providing guidelines for the setting up and
operations of a business.

Why protect the environment?

 Preservation of the living conditions of people (Health)

 To protect against global warming and climate change
 To ensure that resources are not depleted (fisheries and forestry)
 To protect against disasters (landslides, hurricanes, flooding)

Ways in which Businesses Protect the Environment

 Business owners must adhere to the various legislation set out by government and reduce
pollution in rivers, seas and the atmosphere.

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  Establish business in the zones legally allocated to reduce the impact of noise and air
pollution in residential areas.
 Being part or initiating environmental projects such as beach clean-up and planting trees.
 Use of renewable sources of energy (solar, wind, thermal)
 Use of non-hazardous materials in the production process.

Ways by which Government Regulates Business Activities

Businesses operate within a legislative framework. Some of the laws that govern businesses are:

 Statutory Deductions eg. National Insurance, health surcharge, income tax (PAYE)
corporation taxes.
 Labour laws eg. Occupational Safety and Health, Equal Opportunities, Minimum wage,
Maternity Benefits.
 Environmental Laws eg. Certificate of Environmental clearance and zoning laws.

Consumers must be protected from business owners who are eager to sell without taking into
consideration the well-being of customers. Consumers must be protected from overcharging,
poor quality goods and services and short measurements and weights.

Consumers are protected by legislation delegated to various government agencies. These

agencies include:

1. The Consumer Affairs Commission- aids consumers with redress

2. The Fair Trading Commission- investigates cases of tied selling and misleading advertising.

3. The Bureau of standards – set standards for goods and services to be sold on the market.

4. The Ombudsman- investigates injustices suffered by citizens from dealing with a

government agency or official.

Consumer Protection Laws

 The Food and drugs Act

 The Standards Act
 The Public Health Act
 The Weights and Measures Act
 The Processed Food Act
 The Hire Purchase Act

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Hire Purchase Law

Buyers and sellers must sign the hire purchase contract. The seller must state the cash price,
down payment and monthly instalments and total to be paid. Goods cannot be repossessed by the
seller once the buyer pays up to three quarters of the hire purchase price.

Price controls

Price controls are levied on certain good and services to prevent suppliers from increasing prices.
For example basic food items such as corn meal, flour, rice and sugar.

Zoning Laws

These laws protect the environment by identifying certain wildlife areas that should not be
disrupted by development. Therefore, areas are designated for factories, shopping centres and
residential, away from protected wildlife.

Taxation

Firms that pollute the atmosphere, rivers and seas are charged a tax for the harm caused to the
environment. This forces firms to find methods to reduce pollution to avoid this penalty.

Waste Disposal

This refers to the disposal of hazardous substances, packaging and recycling.

Taxation

A tax is on the individual or business entity. It is a compulsory payment made by individuals and
businesses to the government.

Taxes must be:

 Fair and equitable

 Economical in terms of administrative costs
 At convenient times so as not to interrupt the individual or business functioning
 Implemented with the full knowledge of persons being affected.

Purpose of Taxation

Taxes are mainly used to finance the expenses incurred by government to manage an economy.
These expenses include: health care, education, garbage collection and operating government
business entities. Taxation is also used by government for several other purposes.

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  To reduce pollution by taxing offending firms
 To discourage unhealthy lifestyle e.g. a tax on cigarettes
 To protect local and infant industries by taxing imports
 To achieve greater equality of wealth and income. Revenue from taxation is used to help
the very poor e.g. providing food stamps.
 To improve the balance of payments (BOP) by increasing the duties charged on imported
goods.
 To control spending in an economy thus reduce inflation
 To redistribute income through expenditure on social welfare programmes.

Direct and Indirect Taxes

Direct taxes are paid by individuals directly from income earned or on the value assets owned to
the income tax department.

Types of Direct Taxes

Income Tax

This is a tax on earned income- individuals pay a percentage of their income.

Corporate Tax

This is a tax on the profits of companies

Capital Gains Tax

This is a tax on the proceeds resulting from the sale of assets, e.g. houses, land etc.

Capital Transfer and Estate Duties

This is a tax on the transfer of property (gifts) and on legacies (death duties)

Other Direct Taxes

These include: stamp duties, motor vehicle duties land taxes, etc.

Indirect taxes are paid to the income tax department through the suppliers of goods and
services. These taxes are levied on consumption and therefore are paid by individuals when
purchasing commodities.

Value Added Tax (Ad Valorem Tax)

This is the tax levied on goods as each stage of production. This tax generally is known as a
General Consumption Tax (G.C.T.).

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Purchase Tax

This tax is placed on specific goods at retail outlets. These include gasoline, tobacco, rum etc.

Excise Duties

A tax placed on goods manufactured within a country. This tax is paid by the manufacturer of the
product.

Customs Duties

This is a tax on imports i.e. goods entering the country.

Regressive, Progressive and Proportional taxation

Progressive Taxation
A progressive tax system levies a higher percentage of tax on high income earners compared to
lower income earners. This ensures that higher income earners pay a larger proportion of their
income than lower income earners.

Regressive Taxes
A regressive tax system levies a smaller percentage of tax on higher income earners compared to
lower income earners. This results in higher income earners paying a smaller proportion of their
income in taxes than lower income earners. For example, a purchase tax of 10% charged on a
commodity which values $100 is bought by a high income earner who receives $10,000 weekly
and also by low income earner who receives $1000 weekly. Both income earners will pay
$10.00 in taxes. This $10 represents a much higher percentage of the lower income earner’s pay
which is .01% than the higher income earner which is only .001% of his income

Proportional Taxation

Under this system all taxpayers pays the same proportion of their income in taxes. The same
percentage tax is levied on both high and low income earners. Therefore if the percentage tax
charged is 10% of income then each person will pay that proportion of their income.

Government Assistance Offered to Businesses

The survival and growth of the business sector will reduce unemployment, increase GDP and
foreign exchange earnings. This sector must therefore be supported and encouraged by
government.

 Financing - Government assists local businesses by providing loans at low interest rates.
 Protecting local industries - Custom duties charged on imported goods to protect local
producers

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  Tax concessions - Reduced tax rates or tax holidays offered to industries will encourage
production.
 Subsidies - The cost of production is subsidised to reduce this cost to producers. For
example, a subsidy offered on fertilizer to farmers.
 Promotion - Local and international trade shows as well as general advertisements
promoting business locally and overseas, for example, advertisements encouraging tourist
to visit the region.
 Training - Government agencies set up to provide technical and managerial training.

Research and information centres

Government departments usually conduct market research and are able to provide information to
businesses in terms of potential markets, new technologies, trade agreements business
registration process and the legal framework.

Impact of Social Services Provided by Governments

These services are provided by government to ensure the well-being of all citizens.

Education

An effective national education plan will ensure that the innate skills, talents and abilities of
individuals are harnessed and developed to their fullest potential. High levels of literacy and
numeracy will increase productivity.

Health

The economic development of any nation is dependent upon its population being physically and
mentally healthy. For someone to be productive he or she must be in good health.

Roads and Transportation

Proper Infrastructure such as roads, railways, sea and airports coupled with an efficient
transportation system are important to a country’s economic activities. Roads and transportation
facilitate trade of goods and services.

National Insurance Scheme

National Insurance Schemes protect the elderly and other categories of vulnerable persons within
a society. The elderly have contributed to the development of a nation and must be adequately
provided for when they no longer a part of the labour force.