Question Tag: Government Borrowing

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  • 5 Marks

PT – Aug 2022 – L2 – Q1b – Overview of the Ghanaian Tax System and Fiscal Policy

State five conditions that justify deficit financing by the government.

Deficit financing is the budgetary situation where government expenditure is higher than government revenue. It is a practice adopted for financing the excess expenditure with external funding. Most governments both in the developed and developing world are having deficit budgets, and these deficits are often financed through borrowing.

Required:
State FIVE (5) conditions that would make it necessary for a government to support its budget through deficit financing. (5 marks)

Conditions necessary for budget deficit financing:

  1. During a Period of Depression: Deficit financing is important when private sector activities and traditional monetary policies are inadequate in restoring economic stability. It injects funds to reduce under-utilization of resources and increase labor and capital deployment through additional spending.
  2. During Wars: Governments may raise additional resources to finance wars or conflicts, although this could have inflationary consequences.
  3. During Economic Development: Developing countries often use deficit financing to compensate for low voluntary investment and spur rapid economic development to break the cycle of poverty.
  4. Ineffective Financial Management: Poor management of budgetary projects can lead to deficits that require loans or aid to cover ineffective programs.
  5. Weak Expenditure Control and Monitoring: Unpredictable economic and social conditions may cause governments to incur expenditures beyond the budget, resulting in excess spending that necessitates deficit financing.
  6. Low Revenue Mobilization: Inadequate tax revenue due to a narrow tax base can lead to a need for deficit financing to cover government obligations.
  7. Political Pressure: Political promises that are not budgeted for can lead to unplanned expenditures that require deficit financing to maintain political integrity.
  8. Infrastructural Development: Financing infrastructure projects often requires deficit financing to meet development goals.
  • 9 Marks

AT – Nov 2015 – L3 – Q3a – International taxation

Explanation of public sector debt and objectives of public debt management.

It is the opinion of some people that borrowing by government may be a better option in some cases than the imposition of taxes as taxes have the potential of creating resentment and upheavals during a period of economic difficulties.

i. Explain fully what Public Sector Debt is.
(5 marks)

ii. What are the objectives of Public Debt Management?

(4 marks)

i. Public Sector Debt
Public debt is the sum of public and publicly guaranteed debt. Public debt refers to the domestic and external obligations of public debtors, which include the central government and its agencies. Publicly guaranteed debt is the sum of all domestic and external obligations of the private sector that is guaranteed for repayment by a public entity.

ii. Objectives of Public Debt Management
The objectives of public debt management include:

  1. Minimizing borrowing costs.
  2. Keeping risks at an acceptable level.
  3. Supporting the development of domestic markets.
  4. Ensuring the financing needs of the government are met.
  • 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).

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