Question Tag: Economic Impact

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  • 4 Marks

TX – May 2019 – L3 – Q1e – International Taxation

Evaluate the negative consequences of public debt on the economy of Ghana.

Public debt is an important source of revenue for a government to finance public spending where taxation capacity may be limited, or when the alternative would be to print money and compromise macroeconomic stability. There are, however, negative consequences of high public debt on the economy.

Required:

Evaluate FOUR (4) of such negative consequences of public debt on the economy of Ghana.
(4 marks)

  • Tax Burden: Higher public debt results in the need to impose additional taxes to service the debt, which can reduce incentives to work and save. This tax burden can also lead to income redistribution from the poor to the rich, as bondholders (often wealthier individuals) receive interest payments funded by taxes.
  • Higher Interest Rates: Increased public debt can lead to higher interest rates as the government competes with the private sector for borrowed funds. This makes borrowing more expensive for everyone, stifling private investment and economic growth.
  • Stifling Economic Growth: Public debt diverts capital from the private sector to the public sector, reducing the funds available for productive investment. This can slow down economic growth and lower the overall standard of living.
  • Negative Impact on Long-Term Investment: High public debt can discourage long-term investment due to the uncertainty it creates. Investors may demand higher returns to compensate for the perceived risk, leading to higher long-term interest rates and further slowing economic growth.
  • 4 Marks

AT – Nov 2017 – L3 – Q1c – Tax administration in Ghana

Evaluating the impact of government borrowing on production capacity, consumption, distribution of wealth, and income levels.

Evaluate the impact of government borrowing (i.e., public debts) on:

  1. production capacity of the government,
  2. consumption,
  3. distribution of wealth
  4. level of income in an economy. (4 marks)
  • Effects on Production: Public debts are raised to finance productive enterprises such as steel works, cement plants, multipurpose projects, ship construction, railway lines, highways, electrical engineering works, and mining operations.
  • Effects on Consumption: Borrowing typically leads to reduced consumption as people subscribing to government loans cut back on spending. However, employment created by the investments raises income and eventually increases consumption.
  • Effects on Distribution of Wealth: Public loans shift money from wealthy individuals to the government. Through public fiscal operations, the government primarily benefits lower-income individuals, either directly via increased employment or indirectly through expanded social services.
  • Effects on Income and Employment: Government borrowing leads to higher employment opportunities in sectors such as agriculture, industry, mining, and infrastructure. This borrowing results in higher income levels and improved living standards.
  • 15 Marks

AT – May 2017 – L3 – Q1b – Tax administration in Ghana

Define public debt and discuss its general meaning in the context of government financing.

i)  What is public debt?

ii)  Critically examine public debt as an alternative to taxation and its effect on the economy.

i)

Public debt is defined as how much a country owes to lenders outside of itself. These lenders can include individuals, businesses, and even other governments. The term “public debt” is used interchangeably with the term “sovereign debt.” Public debt is the accumulation of annual budget deficits and results from years of government spending exceeding tax revenues. It includes Treasury bills, notes, and bonds, which are typically purchased by large investors.

In the short run, public debt is a good way for countries to acquire additional funds to invest in economic growth. It also serves as a safe investment for foreigners in a country’s growth by purchasing government bonds.

ii)

When public debt is used as an alternative to taxation, it offers several advantages:

  • Public borrowing has an advantage over taxation because taxation beyond a certain limit can negatively affect economic activity by creating disincentives. Public borrowing, however, does not carry the same risk as it is voluntary and carries the expectation of return and repayment.
  • Public debt allows governments to invest in infrastructure and social sectors where tax revenues may be insufficient. Debt-financed investments can create additional productive capacity in the economy that would not otherwise have been possible.
  • Public debt also supports tax smoothing and counter-cyclical fiscal policies, which help reduce output volatility. It allows governments to align benefits and costs for long-term projects by shifting the tax burden away from current generations.
  • Foreign investment through government bonds, which form part of public debt, is a safer alternative to direct foreign investments in domestic businesses.

Consequences of Public Debt on the Economy:

  • High public debt leads to large interest payments, which are ultimately borne by taxpayers. This can result in future taxation increases without corresponding economic growth.
  • Public borrowing increases demand for credit in the economy, driving up borrowing costs, making it more expensive for businesses to invest in equipment and other capital goods, increasing the cost of doing business.
  • Excessive public debt can lead to currency collapse or depreciation if governments resort to printing money to finance the debt.
  • 6 Marks

AT – Nov 2016 – L3 – Q2a – Tax administration in Ghana

Evaluate the effects of government borrowing on Ghana's economy and discuss how taxation serves as a fiscal tool in fiscal policy.

a) The current level of government borrowing has become a topical issue for discussion, causing observers to wonder whether borrowing is good or bad. In the light of this, you are required to:

i) Evaluate the effect of government borrowing on the economy of Ghana. (4 marks)
ii) Discuss how taxation can be used as a fiscal tool in fiscal policy. (6 marks)

i) Effects of Public Debt on the Economy of Ghana:

  • Effects on Production: Public debts are raised to finance productive enterprises of various kinds, such as steel works, cement, multipurpose projects, construction of ships, railway lines, highways, heavy electrical and engineering works, mining, and oil refining.
  • Effects on Consumption: When people subscribe to government loans, they generally have to curtail consumption. Since investment of funds raised by borrowing raises the level of employment, it consequently raises the level of consumption.
  • Effects on Distribution of Wealth: Public loans transfer money from the rich to the government. The fiscal operations of the government are primarily to benefit the poor. The incomes of the poor increase directly through increased employment or benefit them indirectly through the enlargement of social services.
  • Effects on the Level of Income and Employment: Public borrowing is used to raise funds for financing agriculture, industry, mining, transportation, communication, etc. It increases employment opportunities, the level of income, and the standard of living.

ii) Fiscal Policy and Taxation:

  • Revenue Generation: The primary function of a tax system is to raise revenue for the government for its public expenditure. Ensuring this function is discharged adequately is the first goal in the development strategy concerning taxation policy.
  • Reduction of Inequalities: Taxes are used to reduce inequalities through a policy of redistribution of income and wealth. Higher rates of income taxes, capital transfer taxes, and wealth taxes are some means adopted for achieving these ends.
  • Social Purposes: Taxes are used to discourage certain activities considered undesirable. Excise taxes on liquor and tobacco, special excise duties on luxury goods, and Betting and Gaming Levy are examples of such taxes, which, apart from being lucrative revenue sources, also have social goals.
  • Impact on Growth: Taxes affect growth in two ways: by influencing the aggregate supply of the main factors of production by raising or lowering their net (after-tax) returns; and by influencing the efficiency of resource utilization (total productivity).
  • 10 Marks

AAA – May 2021 – L3 – Q5a – Current issues | Professional responsibility and liability

Assess the global threat of money laundering and discuss Ghana’s efforts to combat money laundering.

a) Money laundering has become a significant threat to the world’s political and economic order. World leaders are collaborating and cooperating in fighting money laundering. However, criminals are maliciously clever and, in some cases, ahead of law enforcement agencies. Every human being has to contribute to the fight against money laundering.

Required:

i) Assess why money laundering poses a big threat to the world’s political and economic order. (5 marks)

ii) Discuss FIVE (5) ways in which Ghana is contributing towards fighting money laundering globally. (5 marks)

i) Why Money Laundering Poses a Big Threat to the World’s Political and Economic Order:

  • Destabilization of Economies: Money laundering puts large sums of illegal money into the hands of criminals, which can destabilize economies. When these funds are introduced into the economy without a corresponding rise in goods and services, it can lead to hyperinflation. Weak economies, particularly in developing countries, may not be able to absorb such shocks, leading to economic collapse.
  • Undermining Financial Systems: Money launderers often set up fraudulent schemes, such as Ponzi schemes, which entice people to withdraw their savings from legitimate financial institutions and invest in these illegal operations. This can undermine the official financial and banking systems of the countries in which they operate, leading to loss of public confidence in financial institutions.
  • Funding of Terrorism: Money laundering has been identified as a significant source of funds for international terrorist organizations. These funds are used to finance terrorist activities that lead to the destruction of human lives and property, creating political instability and insecurity in affected regions.
  • Political Corruption: Money launderers may use their illicit funds to influence political processes, such as financing coups or corrupting public officials. This can lead to the erosion of democratic institutions and the rule of law, particularly in countries with weak governance structures.
  • Global Financial Crime: Money laundering is a transnational crime that affects multiple countries. It enables criminals to operate across borders, making it difficult for individual countries to combat it effectively. This global threat requires international cooperation and collaboration to address, and failure to do so can lead to significant geopolitical tensions.

ii) Ghana’s Contribution to Fighting Money Laundering Globally:

  1. Legislation and Regulation: Ghana has enacted comprehensive anti-money laundering laws, including the Anti-Money Laundering Act, 2008 (Act 749) and its amendments. These laws provide a legal framework for combating money laundering and financing of terrorism.
  2. Membership in International Bodies: Ghana is a member of the Financial Action Task Force (FATF) and the Inter-Governmental Action Group against Money Laundering in West Africa (GIABA). These memberships ensure that Ghana adheres to international standards and collaborates with other nations in the fight against money laundering.
  3. Establishment of the Financial Intelligence Centre (FIC): Ghana’s FIC is responsible for analyzing financial transactions and identifying suspicious activities related to money laundering and terrorism financing. The FIC works closely with financial institutions and law enforcement agencies to track and report illegal financial activities.
  4. Cross-Border Cooperation: Ghana has entered into treaties and agreements with other countries to facilitate the exchange of information, joint investigations, and the prosecution of money laundering offenses. This international collaboration helps to tackle money laundering on a global scale.
  5. Public Awareness and Training: Ghana has implemented public awareness campaigns and training programs for financial institutions, law enforcement agencies, and the judiciary. These initiatives aim to increase understanding of money laundering risks and strengthen the capacity to detect and prevent such activities.
  • 5 Marks

BMIS – Dec 2023 – L1 – Q2b – The external environment

Outlines five effects that inflation can have on an economy.

The global economic challenges have largely been fueled by demand-pull inflation or cost-push inflation. Many governments have initiated measures to mitigate the associated effects.

Required:

Outline FIVE (5) effects inflation have on an economy.

Effects of Inflation on an Economy:

  1. Reduction in Consumer Purchasing Power:
    Inflation decreases the purchasing power of consumers as the value of money declines, leading to higher prices for goods and services.
    (1 mark)
  2. Reduction in Investor Confidence:
    High inflation can reduce investor confidence in the economy, leading to lower levels of investment and economic growth.
    (1 mark)
  3. Economic Growth Slows Down:
    Persistent inflation can slow down economic growth as rising costs reduce consumption and investment.
    (1 mark)
  4. Uncertainty in Business and Financial Planning:
    Inflation creates uncertainty for businesses and individuals in planning their finances, as the real value of income and expenses becomes unpredictable.
    (1 mark)
  5. Rise in Unemployment Levels:
    As businesses struggle with rising costs, they may reduce their workforce, leading to higher unemployment levels.
    (1 mark)
  • 15 Marks

BMIS – Dec 2023 – L1 – Q2a – The external environment

Differentiates between cyclical and structural unemployment and explains the economic and non-economic costs associated with them.

The economic uncertainties associated with declining Gross Domestic Product may result in a country experiencing either cyclical or structural types of unemployment.

Required:

i) Differentiate between these two types of unemployment.

ii) Explain FIVE (5) economic and non-economic costs associated with these two types of unemployment in a country.

i) Cyclical vs. Structural Unemployment:

  • Cyclical Unemployment:
    Cyclical unemployment is caused by short-term economic fluctuations. When a country’s GDP slows down, there is a negative effect on the economy, which may cause businesses to make employees redundant until GDP begins to grow again.
    (2.5 marks)
  • Structural Unemployment:
    Structural unemployment occurs when the skills possessed by workers are not demanded by employers. It may also occur when technological inventions make many employees redundant because they do not have the immediate skills employers require to work in the new technological environment.
    (2.5 marks)

ii) Costs Associated with Cyclical or Structural Unemployment:

  1. Reduction in Government Revenue:
    Unemployment, whether cyclical or structural, reduces the revenue the government receives from taxes on workers’ income. As people are not earning any income, the government cannot collect income taxes from them.
    (2 marks)
  2. Declining GDP:
    Unemployment affects a country’s gross domestic product (GDP) negatively. When the country fails to create jobs for those willing and able to work, the general production of goods and services declines, leading to a reduction in GDP.
    (2 marks)
  3. Reduction in Standard of Living:
    Unemployment reduces the standard of living for people within a country. Without jobs, people may limit their expenditures to basic necessities, foregoing luxury products that provide comfort and quality of life.
    (2 marks)
  4. Rise in Crime:
    High levels of unemployment increase the level of criminal activities in a country. Jobless individuals may resort to illegal activities, such as theft, to earn money for their survival.
    (2 marks)
  5. Rise in Poverty:
    Widespread joblessness increases the level of poverty in a country. As people are not earning income and may not have savings, they are unable to provide for their basic needs, leading to increased poverty.
    (2 marks)

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