- 5 Marks
Question
The government budget is a plan of government revenues and expenditures for a specified period, usually a year. When budgeted expenditures exceed projected tax revenues, the budget is projected to be in deficit. This will lead to deficit financing.
Required:
Describe briefly FIVE (5) causes of deficit financing.
(5 marks)
Answer
Causes of Deficit Financing:
- During a Period of Depression: Deficit financing becomes important during major depressions or when traditional monetary policies fail, stimulating economic stability.
- During Wars: Governments may resort to deficit financing to raise resources for tribal or other conflicts, despite potential inflationary effects.
- During a Process of Economic Development: In developing countries, deficit financing helps overcome low investment rates to achieve rapid development.
- Ineffective Financial Management: Poor budgetary projections and management lead to demand for loans, grants, and aid to finance ineffective programs.
- Weak Expenditure Control and Monitoring: Arrears in annual accounts and unpredictable economic environments often lead to unplanned expenditures, requiring deficit financing.
(5 points @ 1 mark each = 5 marks)
- Tags: Deficit Financing, Fiscal Policy, Government Budget
- Level: Level 2
- Topic: Overview of the Ghanaian Tax System and Fiscal Policy
- Series: MAY 2020
- Uploader: Cheoli