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- 5 Marks
Question
b) The development agenda of a developing country like Ghana can only be brought to reality through the availability of funds. The two (2) main sources of government revenue are taxation and debt. In spite of the fact that taxation remains the most reliable source of government revenue for government plans, projects and programmes, it is said to be limited in its role and function in the economy.
Required:
Justify the use of public debt as an alternative to taxation.
(5 marks)
Answer
The following are the arguments in favor of the use of public debt as an alternative to taxation:
Facilitating Growth: Public debt allows the government to finance critical infrastructure and social projects that taxation alone may not cover.
Avoids Disincentive Effects: Taxation beyond a certain level becomes a disincentive to economic activity. Public debt does not have this negative impact.
Tax Smoothing: Public debt helps smooth taxes and allows for counter-cyclical fiscal policies, reducing economic volatility.
Benefit-Cost Alignment: It shifts the taxation burden away from current generations for long-term projects, allowing future generations to bear part of the costs.
Foreign Investment: Public debt attracts foreign investment, as it is seen as a safer method for foreign investors to engage with a country’s economy compared to direct investment.
Crisis Financing: Public debt can be used in emergencies, such as during the COVID-19 pandemic, where loans helped Ghana combat the crisis.
(Any 5 points at 1 mark each = 5 marks)
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