Fundamental Principles of Public Finance
Case Study: Norway Norway is a welfare state, which was judged in 2009 to be the world’s most well-functioning and stable country. Very high tax rates keep the gap between the rich and the poor among the smallest in the world. Top earning Norwegians will pay 53% tax (compared to 40% in South Africa). However, the unemployment rate is very low at around 3.1%, and the standards of living are among the highest in the world. The Norwegian welfare state makes public healthcare free and parents have 46 weeks paid leave. Education is free, at all levels, meaning that people are highly encouraged to study beyond school.
3. Economic Welfare This is aimed at the development of the economic and material prosperity of the individual (every government wants its countrymen to become richer). The more socialist the ideology, the more the government will intervene – the more laissez-faire, the less the government will interfere in economic activities. Sometimes governments fluctuate (change) and adopt a more laissez-faire approach; at other times they might become slightly more socialist.
When the economy needs to be stimulated governments tend to relax monetary regulations. At other times when the economy needs to be restricted (such as when people spend too much, or borrow too much), the government may become more authoritarian and revise monetary policy (such as when they increase the bank rate and therefore make it more expensive for the citizen to borrow money). There are ways to regulate the economy. To regulate means to become involved. By now you will gather that a socialist government becomes very involved, and a more laissez-faire government will want to leave the economy alone.
According to Gildenhuys (1993:27) governments usually undertake the following economic functions:
3.1 Regulation of the Economy to Secure Stability: This is created by: • a stable balance of payments – making sure South Africa owes other countries less than they owe us;
• monetary policy – this is manipulation of interest rates in order to control the flow of money – see more in Mod 3 p.50;
• fiscal policy – this refers to controlling tax (the type of tax, the rate and the source) – see more in Module 5.
3.2 Stimulation of Economic Development: In order to create more welfare and prosperity for the individual by: • economic development planning to secure an increase in GDP (Gross Domestic Product); • helping new entrepreneurs for commercial development (not in a Socialist state); • stimulating export production and import replacement production; • creation of work opportunities; • promoting trade with foreign countries through official visits and trade conferences.
3.3 Maintaining Economic Order to Secure Economic Welfare and Prosperity: As well as equal opportunities for all to participate in economic activities by: • securing competition; • awarding economic rights (industrial, trade, mineral, etc.); • licensing of activities and professions; • awarding operational rights by permits/concessions; • regulating minimum employment conditions for workers.
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