PUBLIC FINANCE STUDY

GUIDE 2019/2020

FOR DPAM/CPAM YEAR

TWO SEMESTER ONE.

MORNING/EVENING/WEEKEND

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TOPIC 1: PUBLIC FINANCE

Public finance is part of macroeconomics concerned with how the

government raises its revenue and how it spends it to various sectors to
bring macroeconomic stability and economic development.

Alternatively public finance is part of macroeconomics dealing with various

sources of public revenue and how they influence macroeconomic stability
to bring economic stability.

SCOPE OF PUBLIC FINANCE

Public revenue collection: this deals with total government receipts from
both taxation and non-taxation sources. It’s upon this revenue that the
government can finance its expenditure.

Public expenditure: this deals with how the government spends its revenue
to various sectors of the economy. The government may spend its revenue
on recurrent activities or development activities.

Public debt: this deals with how the government raises money through
borrowing. The government can borrow either externally or internally.

Public undertakings: the government comes up with enterprises by an act

of parliament or government decree to render specific services and provide
essential goods and services.

National budget: this is the summary proposal of projected government

revenue and projected government expenditure in a given financial year.
The government uses approaches such as zero based budgeting, priority
budgeting, incremental budgeting and performance based budgeting.

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Fiscal policy administration: this is the deliberate government attempt to
use tools of taxation, national budget and public expenditure to influence,
direct and control economic activities of the country.

OBJECTIVES OF PUBLIC FINANCE

 To maintain price stability in the economy by controlling aggregate

demand
 To check on increasing inflation
 To harmonize and improve the investment climate to promote
investment opportunities
 To stabilize balance of payment positions in the country
 To protect and sustain high employment opportunities levels in the
economy
 To reduce public debt burden in the country
 To generate maximum public revenue for both recurrent and capital
budgets
 To ensure equitable distribution of income and resources

ROLE OF PUBLIC FINANCE IN AN ECONOMY

Public finance plays the following roles in an economy.

1. Raising government revenue. Public finance through taxation enables

the government to0 raise revenue to finance public expenditure.
Revenue is collected by imposing both direct and indirect taxes.
2. Protecting infant domestic industries. Infant industries are protected by
the government imposing taxes on imports such as import duties/tariffs.

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3. Controlling consumption of harmful commodities. Dangerous products
which are harmful to nationals can be controlled by sumptuary taxes
which candiscourage their production and consumption.
4. Controlling monopoly power in an economy. By government imposing
heavy taxes on profits of monopolist, exploitation by public by
monopolist is reduced hence checking on monopoly.
5. Checking on demand pull inflation. The government imposes direct
taxes on incomes of the people to reduce the disposable incomes to
control aggregate demand and check demand pull inflation.
6. Stabilizing balance of payment position. This is achieved by increasing
import duties to reduce excessive importation to close balance of
payment deficit.
7. Encouraging forced savings. By increasing income taxes government is
able to promote savings of nationals necessary for future economic
development.
8. Regulating economic activates. The government influences aggregate
demand in periods of economic depression government may reduce
taxes and in periods of economic boom government increases taxes.
9. Ensuring equal income distribution by reducing income inequalities. This
is achieved through imposing progressive taxes on peoplesincomes to
redistribute incomes between the rich and the poor.
10. Encouraging infrastructural development. The government imposes
taxes to generate revenue for development of infrastructures such as
roads in an economy.
11. Attracting investments. The government issues subsidies to potential
investors to reduce the costs of production.

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12. Reducing public debt burden. The government levies taxes to reduce
the burden of paying a national debt.
13. Controlling dumping. This done by government imposing taxes on
dumped goods and their importation improves on the terms of trade.

PUBLIC AND PRIVATE FINANCE

Public Finance: studies income and expenditure activities of the state or

government.

Private Finance: studies income and expenditure activities of the private

individuals and private entities.

Similarities between public and private finance

Both the individuals and & the state have broadly same objectives, via the

satisfaction of human wants. Private finance- satisfaction of personal wants

& public finance- satisfaction of collective wants

Both individuals and state have receipts and expenditure and each

tries to balance both to get maximum satisfaction.

Both in private and public finance, borrowing becomes essential when

expenditure is more than income.

Both face the problem of adjustment of income and expenditure that is

problem of unlimited wants and scarce resources.

Differences between public and private finance

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 Determination of expenditure- Public authority first determines the volume

of expenditure and then tries to find out resources to meet this expenditure.

Whereas private individual first looks at income and then decides volume of

expenditure.

 Compulsory Character- State cannot avoid or postpone certain

expenditure, while this can be done in case of individuals. E.g.

expenditure on defence, public administration etc. cannot be avoided or

postponed.  

Principle of equi-marginal utility- Private individuals are more capable of

applying this principle because they are more free to follow their own scale

of preferences. Whereas public authority is unable to take this principle as

a basis of its expenditure on defence, education, agriculture etc.

Nature of Resources- The resources for individuals are more or less limited.

Whereas when it comes to public authority, it can print currency, pass

different laws to increase its income etc.

Motive of expenditure- Motive of private individual on business transaction

is profit. Transaction of public bodies is motivated by public welfare.

Publicity and Audit- Private individual likes to keep his financial

transaction secret, while govt. gives greatest publicity to its budget

proposals and allocation of resources to different heads in its plan

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documents.

Long Term Consideration- Private Individuals invest where returns are quick

and immediate. Government undertakes projects in interest of public

welfare.

Coercive Methods- Public authority can use coercive methods to realize its

revenue. But private individuals cannot use force to get their income in the

manner in which the government does.

Nature of Budget -An individual generally believes in surplus budget but

public authority may follow deficit budget for several years, especially in

case of war and economic development.

TOPIC TWO

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PUBLIC REVENUE

This refers to total of government receipts from both taxation and non-
taxation sources of revenue.

It consists of all state finance, all state obligations in the economy.

SOURCES OF PUBLIC REVENUE

The main sources of public revenue are

1. By taxation. Government can impose both direct and indirect taxes to

rise public revenue in the economy.
2. By borrowing internally and externally. Internal borrowing needs
government to raise revenue by borrowing from within the economy from
both citizens and domestic financial institutionswhileexternal borrowing
encourages borrowing from friendly countries and international bodies
like World Bank and international monetary fund.
3. By licensing. The government imposes licenses to raise revenue from
producers of goods and services.
4. Through Sale of government securities. The government sales its
securities on open market operations to rise government revenue.
5. Through privatization. The government raises public revenue by selling
its state parastatal to private investors.
6. By appealing for grants and donations. The government appeals for
grants and donations from friendly countries like Japan.
7. Through national rotaries. The government organizes public rotaries to
raise government revenue.
8. Through fines and penalties. The government also raises its revenue by
giving fines to law breakers\criminals.

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9. Through returns from state corporations. The government raises
revenue by generating profits from its investments.
10. Through rent/lease fees. The government raises revenue from
occupants of public property by paying lease fees or rent.

REASONS FOR LOW PUBLIC REVENUE IN UGANDA

1. The existence of poor infrastructures. The poor state of

infrastructures more especially roads makes it difficult to access
some areas to collect taxes and this limits the taxes collected.
2. Tax exemptions and holidays. The government is giving a lot of tax
exemptions and holidays in a bid to attract investors and this reduces
the target tax base.
3. Existence of a large subsistence sector. This reduces the tax base
since the output from such sector is not taxed.
4. High unemployment level. Many people are unemployed and do not
have incomes on which taxes are levied.
5. Existence of political instabilities. These discourage economic
activities as well as making some area inaccessible for tax collection.
6. Poor identification of tax sources. Many income generating activities
exist but because they have not formerly registered with the tax
authorities, they are not identified as tax bases.
7. Existence of small industrial sector. The industrial sector is small and
therefore cannot provide wide enough bases for taxation that is there
are a few firms on which taxes are imposed.
8. Limited economic activities. The number of economic activities is not
as many as they can lead to few items eligible for taxation.

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 9. Limited skills of tax assessors. Tax assessors do not have sufficient
skills to recognize all items and sources that are liable for taxation.
10. High levels of corruption. Tax officials ignore economic activities
that can be liable for taxation after receipt of bribes by potential tax
payers.
11. Limited information or data. Many people don’t keep records of
their economic activities and incomes. This limits accessibility by tax
assessors to information to be used for identification of items to be
taxed.

WAYS OF INCREASING PUBLIC REVENUE IN AN ECONOMY.

In order for the government to increase public revenue the following

measures have to be put in place.

 Under takingprivatization and divestiture. To widen the tax base and

reduce public expenditure on nonprofit making parastatal.
 Fighting against corruption and embezzlement of public resources.
Through setting up anti-corruption laws.
 Improving tax revenue collection to increase tax revenue to close
deficits. This can be done through proper tax assessment and
computerization of public revenue collection.
 Adopting soft and short term loans at a low interest rate to reduce the
burden of debt serving in an economy.
 Promoting sale of public securities as a means closing deficits other
than use of external borrowing to reduce the size of budgetary deficits.

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 Maintaining political stability to check excessive expenditure on military
hardware to close the deficits.
 Diversifying and promoting exports to increase foreign exchange
earnings to bridge the budgetary deficits.
 Improving planning in allocation of public resources to cater for priority
spending to reduce public resource misallocation to close the deficit.
 Adopting population control policies reduce dependency burden of
financing dependants.
 Widening the tax base through diversifying the economy by developing
both industrial and agriculture sectors which can generate high
government to close deficits.
 Attracting foreign capital inflows by promoting foreign investment in the
economy to increase foreign exchange in flows to bridge deficit.

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TOPIC 3: PUBLIC EXPENDITURE

This is a section of public finance that deals with spending of public

revenue realized from both taxation and non-taxation sources to various
sectors of the economy so as to attain macro-economic stability.

FORMS OF PUBLIC EXPENDITURE

Public expenditure may be categorized in to two forms which include the

following:

1. Recurrent expenditure.

This is the expenditure for the daily running of state. It involves expenditure
on daily activities of the state.

SOURCES OF RECURRENT EXPENDITURE

 Paying salaries of civil servants

 Maintaining of roads
 Donations to charitable organizations
 Expenditure on foreign missions
 Expenditure on acquisition of military hardware.
2. Development/ capital expenditure.

This is the expenditure on long term capital development projects in the

country. It involves expenditures on fixed assets of a country.

SOURCES OF DEVELOPMENT EXPENDITURE

 Expenditure on construction of power dam projects

 Expenditure on construction of roads
 Expenditure on construction of bridges.

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PRINCIPLES/CANON/DOCTRINES OF PUBLIC EXPENDITURE

Canon of benefit: public expenditure should be incurred on various items

that provides maximum benefit to the society as a whole.

Canon of neutrality: public expenditure should be incurred in a manner that

it neutralizes all adverse effects on production and distribution. It should
encourage productive activity and at the same time reduce inequalities of
income and wealth.

Canon of productivity: public expenditure should help in increasing

productivity. It should increase infrastructure facilities such as roads,
bridges, railways among others.

Canon of equity: it should be incurred in the manner that helps in reducing

the inequalities of income and wealth. The pattern of public expenditure
should be in the way that the weak and poor sectors receive maximum
benefits.

Canon of elasticity: it should change with the needs and requirements of

the economy. It should be flexible so that it can be increased during
depression and reduced during inflation.

Canon of economy: public expenditure should be increased as to avoid

waste of public money. It should avoid extravagances and use less
expenditure.

Canon of surplus: the government in as much as possible should raise mor

revenue than its expenditure rather should less than it earns.

Canon of sanction: the canon of states that no public expenditure should be

incurred without sanction of proper authority.

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CAUSES OF INCREASED PUBLIC EXPENDITURE IN UGANDA

Uganda like any other developing country is having a lot of public

expenditure due to the following reasons.

 Increasing number of civil servant. The government has got a lot of civil
servants which further increases the wage and salary bills hence
increased public expenditure.
 Increasing expenditure on military hard ware. Due to political
instabilities and desire to have a sound security base the government is
spending more on military ammunitions which has increased public
expenditure.
 Increasing population. The population in Uganda is growing at a very
high rate, which implies that the government has to spend a lot on social
services to improve the standard of living of its people, thus increasing
public expenditure.
 Increasing debt servicing. The government of Uganda gets debts which
attract high interest rates, in return of paying them and the interest a lot
of money is spent hence increasing public expenditure.
 Increasing desire to attain sound infrastructural development. The
government is spending a lot on construction of infrastructures in form of
roads, hospitals, power dams, schools among others which has
escalated public expenditure.
 Increasing expenditure on foreign trips and missions in other countries.
Uganda is spending a lot on foreign trips of its civil servants and
maintaining of foreign missions in other countries which has increased
public expenditure.

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 Lack of priority spending. The plans in Uganda are over ambitious,
implying that a lot of money is spent on projects and activities of not
greater importance, which increases public expenditure.
 Increased financing of unprofitable public enterprises. Uganda spends a
lot of revenue in running and managing of unprofitable public enterprises
which do not make profits at all and this strains the government budget.
 Increased corruption and embezzlement of public funds. The
government officials in Uganda are characterized with a lot of corruption
and embezzlement of public funds and resources which has resulted in
to double financing hence increasing government expenditure.

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TOPIC4: PUBLIC UNDER TAKINGS

Under this the public sector through the government comes up with
enterprises which are known as public undertakings by either an act of the
parliament or government decree. These enterprises offer to the public,
social or public goods.

THE CONCEPT OF SOCIAL OR PUBLIC GOODS

This is a good that is provided by the state or government to the public, and
whose consumption is at free price. This means you cannot exclude one
person from consuming a public good.

Examples of public goods include:

Public roads

Public schools

Public hospitals

Public lights

Public toilets

THE CONCEPT OF A PRIVATE GOOD

A private good is a good which is exclusively owned by an individual. Like

private cars, houses, phones among others.

The public may either own parastatal enterprises/ public enterprises or

public corporations.

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PARASTATAL ENTERPRISES/ PUBLIC ENTERPRISES

These are state owned enterprises set either by an act of parliament or by

government decree to carry out specific activities to the public. Like the
Uganda national examinations board, bank of Uganda among others.

PUBLIC CORPORATIONS

These are business organizations or enterprises in which the government

holds all its shares or majority of its share capital. They are also created by
an act of parliament which clearly defines its aims and objectives. Like the
national water and sewerage corporation, national housing corporation.

ROLES OF PUBLIC ENTERPRISES TO THE DEVELOPMENT OF AN

ECONOMY

1. Creation of employment opportunities. Public enterprises employ public

people as accountants, managers, drivers, which help to reduce the
burden of unemployment in the country.
2. Development of infrastructures. Public enterprises encourage the
development of infrastructures such as roads in areas where they are
situated to ease transportation of both finished goods to the market and
raw materials to the organization.
3. Raising large capital and thus undertaking large scale operations. Public
enterprises tend to invite public members to subscribe for shares which
in turn increase their share capital which facilitates large scale
operations.
4. Promoting economic growth and development. This is because public
enterprises are always development oriented, which produce large

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 quantity output which increases the level of economic growth and
development.
5. Provision of essential goods and services to the public. Public
enterprises provide essential goods and services to the public at a
cheaper price than the private enterprises which further improves the
standard of living of individuals.
6. Help in avoiding foreign domination of the economy. Public enterprises
help in indigenousing the economy and protect it from foreign
domination; this is because they are owned locally by the state or
government.
7. Provision of non-profitable but essential goods and services. Public
enterprises tend to provide non profitable and essential goods and
services to local people such as garbage collection, which cannot be
provided by private enterprises.
8. They under take strategic investments/ projects of national importance.
Public enterprises tend to take projects which benefit the country at
large other than privately owned enterprises which take projects to meet
their own targets/ demands.
9. They are source of revenue to the government. Public enterprises
provide national revenue, through proceeds they get as profits and the
government uses this revenue to provide social services to the public.
10. Ensures consumer protection against undesirable goods. Like the
Uganda national bureau of standards which ensures the quality of goods
produced for human consumption.
11. They help in controlling monopoly. Public enterprises tend to create
competition in the market with other privately owned enterprises and in
most cases public enterprises tend to charge low prices for their goods
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 and services compared to monopolists, implying that monopolists will
move out of the unprofitable industry.

PROBLEMS FACED BY PUBLIC ENTERPRISES

1. Inadequate capital. This hinders the effective operations of public

enterprises and thus makes it impossible for them to compete favorably
with the private enterprises.
2. Poorly developed infrastructures. These hinder production as well as
distribution of goods more especially to the market.
3. Bureaucracy. There are a lot of procedures when it comes to decision
making and this delay the operations of such enterprises as decision
made by the government take long period of time.
4. Political interference. The politicians tend to interfere with the operations
of such enterprises and this delay the operation of the public
enterprises.
5. Foreign interference. The foreigners more especially donor countries
tend to interfere with activities of such enterprises by setting up
conditions in order to extend aid.
6. Limited skilled manpower. This is because most developing countries
are suffering from manpower problems and the labour available does
not have adequate skills and this leads to production of low quality
products.
7. High levels of corruption and embezzlement. Public enterprises are
characterized by low levels of accountability and this has led to a lot of
loss to the government.
8. Limited supply of raw materials. This has led to low levels of output
produced by public enterprises and this reduced the market size.

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9. Limited market size. This is due to poverty among individuals and
production of low quality output by such industries.
10. Stiff competition. There is a lot of competition between the private
and the public sector due to trade liberalization.

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TOPIC 5: PUBLIC BORROWING AND DEBT MANAGEMENT

Public borrowing is a method of raising public revenue in a country by

borrowing from alternative sources. Public borrowing can be classified into
two;

1. Internal borrowing
It refers to the government policy of raising revenue through borrowing
or getting loans from citizens of a country and from domestic financial
institutions. Such loans are called internal debts.
An internal debt is a total amount of loan borrowed from internal financial
institutions. Or it refers to the debt a government owes to a country’s
citizens in a country.
Internal debts are raised through;
 Selling of government securities to the public in form of treasury bills
and bonds.
 Borrowing from the nationals of a country.
 Borrowing from the central bank.
 Borrowing from domestic financial institutions like commercial banks.
 Borrowing from strong firms in the economy.
 Through ways and means with combined borrowing central and
commercial banks at the same time.
2. External borrowing.
It is a government policy of raising revenue by acquiring loans from
outside countries and from external financial institutions like World Bank,
IMF etc.
The debt is known as the external debt.

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 An external debt is the total amount of loans government owes to foreign
countries and foreign institutions

Sources of external debts are;

 Friendly outside countries.
 International financial institutions e.g.World Bank and IMF.
 From multi –national co-operations.
 From regional co – operation such as economic (EC) community

CLASSIFICATION OF PUBLIC DEBTS

1. PUBLIC DEBTS
It is a total amount of debts borrowed by a state including the debts
borrowed by local authorities in a country.
2. NATIONAL DEBT
It is the size of a debt borrowed by the government on behalf of its
nationals internally and externally excluding loans of local government
institutions or authorities
3. FUNDED DEBT
It is a long term debt borrowed by the government with a fixed rate of
interest and usually backed by a real stock of assets e.g. a loan of 10
years, 20 years etc.
4. FLOATING DEBT.
It’s a short term loan borrowed by the government and usually not
backed by a real stock of assets e.g. a one year loan.
5. REPRODUCTIVE DEBT.
It is a debt borrowed by the government backed by a real stock of
assets and invested in productive economic activities which easily pay

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 back the debt e.g. loans borrowed to construct development projects,
these loans are usually self-liquidating.
6. DEAD WEIGHT DEBT (NON PRODUCTIVE)
This is a debt borrowed by the government but not backed by a real
stock of assets and not self-liquidating e.g. debt borrowed to finance
wars. Loans to bridge balance of payment deficits etc.

MERITS OF PUBLIC BORROWING AS A MEANS OF RAISING

REVENUE OTHER THAN TAXATION FINANCING

1. It enables the government to supplement inadequate tax revenue as a

means of raising tax revenue therefore public borrowing bridges tax
revenue deficits in the economy.
2. It reduces on the costs of rising public revenue.
It is cheap to raise money by borrowing other than through taxation which
has got high administrative costs.
3. Borrowing is a reliable source of revenue because government can
exactly project what amount of revenue is to be earned from loans than in
taxation which may be un reliable.
4. It enables government to raise revenue in a short period of time e.g
through selling government securities, the government can easily rise state
revenue in a short period of time.
5. It is a flexible means of raising public revenue.
It is more convenient than taxation to raise public revenue.
6. It ensures effective planning for government because projected
government revenue from borrowing can easily match with planned
activities of the government.

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7. It is an effective measure of bridging balance of payment deficits
government can easily close B.O.P deficits through borrowing as a source
of public revenue.
8. It has less adverse effects in the economy as compared to taxation.
9. Borrowing enables the government to finance long term investment
programmes which cannot easily be financed by tax revenue because
borrowing ensures lump sum earning of public revenue finance at once.
10. It can be a tool to check on demand pull inflation in the economy e.g.
internal borrowing of the government reduces money in circulation and thus
reducing demand pull inflation.
11. It is politically popular in the economy as a means of raising public
revenue compared to taxation.
12. It has got less resentment from the public as compared to taxation.
13. Borrowing enables government overcome budgetary deficits where
other forms or sources of revenue have failed.
14. It enables the government to undertake economic recovery thus
stimulating economic activities.
15. It enables government to raise quickly revenue in period of National
crisis where taxation cannot be used.
Note; debt financing this refers to the form of financing where an economy
relies on revenue collected from public borrowing to finance its
expenditures.

DEMERITS

1. It results into a dependency syndrome to a country where nationals

remain lazy or less hard working due to reliance on external borrowing.

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2. Public borrowing increases capital outflows from the economy inform of
debt servicing which reduces the rate of capital accumulation.
3. The increased debt servicing worsens the balances of payment position
of a country due to high interest on public debts.
4. The burden of paying public debts is shifted to future generations yet the
benefits may be enjoyed by the current generation which may be
undesirable.
5. It has got much conditionality attached which reduces the absorptive
capacities of a country from public debts.
N.B; the term absorptive capacity refers to the ability of a country to
attract foreign resources and optimally utilize them to increase
economic growth and development of a country.
6. It increase extravagancy and mismanagement of public resources leads
to corruption and embezzlement of borrowed funds.
7. Dead weighed debts such as loans for financing wars increase a
country’s dependency (economic) due to a large public debt extended
on the nationals to pay such debts.
8. It may affect projected plans where the government fails to secure loans
to finance plans drawn basing on public loans.
9. In the long run public borrowing causes budgetary deficits where
government has to mobilize means of paying back loans depending on
the scarce available revenue.
10. It may accelerate inflation due to excessive public expenditure
through use of loans in most cases loans don’t match with economic
activities and thus may accelerate inflation.

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 CAUSES OF A LARGE PUBLIC DEBT BURDEN IN THE
ECONOMIES OF LDCS
 Persistent BOP deficits in a country. This because developing export
mainly primary product which fetch less forex and import more
expensive good in the country. Therefore a need to borrow to finance
the deficit.
 High dependency ratios due to rapidly increasing population in LDCS.
The rate at which population is growing in many developing countries
is very high therefore leading to too much borrowing to provide
essential services and goods to the public.
 Inadequate tax revenue. Dueto a small tax base in many developing
countries and high rates of poverty, this limits the revenue realized for
state expenditure and therefore a need for public borrowing.
 Persistent budgetary deficits in developing countries like Uganda.
This is due to less revenue realized compared to planned
expenditure.
 Desire for to develop sound infrastructure networks which can’t be
financed using internal sources of revenue. This is because such
infrastructures cannot be developed by only internal sources of
revenue.
 High interest rates on loans and thus increasing the burden of debt
servicing and payment of loans (principle loans). Therefore there is a
need to get more loans to service the other loans.
 Corruption and embezzlement of tax revenue which has increased
public borrowing. This leads to loss of public revenue and this further
leads to more borrowing.

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 Existence to disasters. Developing countries are vulnerable to many
disasters which have increased public borrowing.
 Lack of priorities of government and country’s public expenditure
which has increased borrowing and thus the debt burden. This due to
over ambitious plans which escalate a lot of borrowing.
 Existence of Political instabilities. These have disrupted economic
activities and thus increasing borrowing.
 Dependency syndrome of developing countries to raise revenue
through external borrowing. Many developing countries depend
entirely on more developed economies and this has led to much
borrowing.

EXPRESSION OF A PUBLIC DEBT BURDEN

1. Ratio of a public debt to GDP of a country

PDB = PUBLIC DEBT
GDP OF THE COUNTRY
2. The ratio of the public debt to the total population i.e. the
proportional of the public debt per head
PDB = PUBLIC DEBT
TOTAL POPULATION
3. Ratio of the public debt to the total tax revenue of a country
PDB = PUBLIC DEBT
TOTAL TAX REVENUE
4. Ratio of the public debt to the total export receipt or earnings
PDB = PUBLIC DEBT

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 TOTAL EXPORT EARNINGS

PUBLIC DEBT MANAGEMENT

It refers to the means under taken by the government to raise public loans
and ways of paying the loans borrowed by the government.

AIMS OF PUBLIC DEBT MANAGEMENT

 To maximally utilize the borrowed funds or resources to accelerate

economic growth
 To reduce the size of the public debt burden
 To improve investment opportunity for borrowed funds
 To generate revenue for clearance of public debt
 To harmonize ways of borrowing the government to match with
national development objective

WAYS OF PUBLIC DEBT MANAGEMENT

1. Debt servicing, is the continuous payment of interest on public

debt before the principle debt is paid to reduce the size of the
public debt.
2. Debt waiving / cancellation, it refers to the appeal (from the
borrowers) to waive off the debt due to inability to pay.
3. Debt re- scheduling, is the policy of the government to appeal
to the creditor nation to post pond the re payment period to
enable her to pay.
4. Debt conversion is the policy of the government of borrowing
low interest loans and uses the loan to pay mature loans / debts
with high interest rate.

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 5. Debt repudiation, is the deliberate government refusal to pay
the debt it owes to creditors, however, it is not a good method of
debt management because it causes tension.
6. Sinking funds, is a policy of a government where it establishes
a resource poll per year for clearing of mature debt to reduce the
size of a public debt.
7. Debt redemption is a payment of a principle debt and its interest
as a means of clearing of the public debt.
8. Borrowing from central bank through ways and means of pay
mature debt.
9. Through taxation of masses to raise public revenue for clearing
of public debt.
10. Withdrawal of resources from the central bank to pay foreign
debts or resources.
11. Selling an equivalent volume of exports to the size of the debt
to a creditor nation.

Note. Taxation financing this is where an economy uses revenue from

taxation to finance its expenditures.

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TOPIC 6: TAXATION

Taxation is the process of tax collection and tax administration. Therefore a

tax is a compulsory non quidproquo payment by the public to the
government whose returns are not known. This means that the tax payers
do not expect anything in return from the government.

CANONS/DOCTRINES/PRINCIPLES OF TAXATION

1. Principle of equity. This means that the taxes charged should be fair
to all tax payers. This simply means the tax rate should change with
the changes in people’s incomes. Basically there are two types of
equity and that is.
i) Vertical equity. Under this people who are earning more
incomes should be taxed more than the poor. That is the rich
should pay more than the poor.
ii) Horizontal equity. Under this people who are in the same
income bracket should be tax similarly.
2. Principle flexibility. That it is the tax charged should change with the
changes in economic activities or tax payer’s income.
3. Principle of comprehensiveness or diversity. Taxes should cover a
wider base in order to raise much revenue by the government.
4. Principle of simplicity. The mode of collection, and the mode of
payment should be well understood by both the tax collectors and tax
payers to avoid tax evasion and avoidance.
5. Principle of productivity. Taxes should be able to yield maximum
revenue so as to finance government expenditure.

30
 6. Principle of economy. The cost of collecting taxes should be very low
compared to the revenue realised. They should not exceed 5% of the
total revenue realised.
7. Principle of convenience. The taxes should be collected at the period
when the tax payer is willing and able to pay, so as to avoid tax
evasion and avoidance.
8. Principle of ability to pay. Taxes should be charged according to the
ability of tax payer to pay them.
9. Principle of neutrality/ impartiality. The taxes should not discriminate
among the tax payers, they should fair to all tax payers.
10. Principle of no double taxation. That is a tax base should not
be taxed twice so as to leave people with enough incomes to live a
reasonable standard of living.
11. Principle of certainty. The time of payment and method of
payment should be certain to the tax payers.

FEATURES/ CHARACTERISTICS OF A GOOD TAX SYSTEM

1. It should be certain. That a good tax its period of payment and the
date of payment should be known to the tax payers.
2. It should be convenient. A good tax should be collected at time when
the tax payers are a convenient to pay.
3. It should be economical. That is the cost of tax administration,
assessment and the collection should be low.
4. It should be equitable. The burden of payment should be fair to all tax
payers according to income brackets.
5. It should be neutral/ impartial. That is it should not discriminate
among tax payers.

31
 6. It should be simple. A good tax should be easily understood and
easily calculated by both the tax payers and tax collectors.
7. It should be elastic/ flexible. It should change with the changes in the
economic activities which are prevailing.
8. It should be productive. Should be able to encourage efforts and hard
work and should not discourage investment.
9. It should be comprehensive. In that it should have a wider base in
order to raise much revenue from it.
10. It should be consistent. In that it should be in line with the
national objectives of development.

THE PURPOSE OF TAXATION

Reasons why the government levies taxes

The socio- economic reasons as why the government levies taxes on its
citizens and may include the following:

1. To raise revenue for recurrent and development expenditure.

Taxation is undertaken to raise government revenue to enable her
meet her recurrent and development expenditures such as payment
of wage, provision of infrastructures and provision of public utilities
and goods.
2. For the purpose of reducing disparities/differences in the distribution
of incomes, taxation is carried out by the government in order to
reduce the income gap between the rich and the poor and this
through progressive taxation system.
3. To discourage consumption of harmful products. This through taxing
highly such commodities which makes the prices of such

32
 commodities to increase and this makes consumers not to buy such
commodities.
4. To protect infant domestic industries. This is through imposing high
tariffs on imported goods and this reduces their importation, which
gives room for demanding locally produced commodities.
5. To control demand pull inflation. This is through progressive taxation
system in which peoples incomes are taxed highly and this reduces
the purchasing power of consumers hence reducing aggregate
demand.
6. To control dumping. This is through imposing high taxes on imported
dumped commodities so as to avoid their importation.
7. To improve on balance of payment position. This is through taxing
highly imported commodities in order to reduce import expenditures
as well as charging low tariffs on exports.
8. To control monopoly. This is through taxing highly the profits of
monopolists, which reduces profitability as well as forcing them to
move out of production.
9. To encourage infrastructural development. The revenue realised from
taxation is used by the government to construct infrastructures such
as roads, hospitals, schools which are essential for economic
development.
10. To regulate economic activities. This means during economic
boom high taxes are charged and during economic depression low
taxes are charged.

33
THE ROLE OF TAXATION IN THE DEVELOPMENT OF AN ECONOMY

1. Raises revenue for recurrent and development expenditure. Taxation

helps to raise government revenue to enable her meet her recurrent
and development expenditures such as payment of wage, provision
of infrastructures and provision of public utilities and goods.
2. Reduces income disparities/differences in the distribution of incomes.
This is through progressive taxation where the rich pay more taxes
than the poor.
3. Discourages the consumption of harmful products. This through
taxing highly such commodities which makes the prices of such
commodities to increase and this makes consumers not to buy such
commodities.
4. Protects infant domestic industries. This is through imposing high
tariffs on imported goods and this reduces their importation, which
gives room for demanding locally produced commodities.
5. Controls demand pull inflation. This is through progressive taxation
system in which peoples incomes are taxed highly and this reduces
the purchasing power of consumers hence reducing aggregate
demand.
6. Controls dumping. This is through imposing high taxes on imported
dumped commodities so as to avoid their importation.
7. Improves on balance of payment position. This is through taxing
highly imported commodities in order to reduce import expenditures
as well as charging low tariffs on exports.

34
 8. Controlsmonopoly. This is through taxing highly the profits of
monopolists, which reduces profitability as well as forcing them to
move out of production.
9. Encouragesinfrastructural development. The revenue realised from
taxation is used by the government to construct infrastructures such
as roads, hospitals, schools which are essential for economic
development.
10. Regulates economic activities. This means during economic
boom high taxes are charged and during economic depression low
taxes are charged.

CLASSIFICATION OF TAXES

Taxes may be classified according to

i) To proportion of one’s income

ii) According to incidence of tax
A. CLASSIFICATION ACCORDING TO INCOME.
i) PROGRESSIVE TAX
This is a tax whose rate increases as one’s income increases.
In that as the income increases also the tax rate increases. Like
individual income taxes. Under this the high income earners
pay more taxes than the low income earners.

35
 ii) REGRESSIVE TAX
This is a tax whose rate reduces as one’ income increases and
increases as one’s income reduces. Like value added tax. In
this system the low income earners pay more taxes than the
high income earners.

TAX

1 INCOME
III) PROPORTIONAL TAX
This is a tax whose rate is constant irrespective of the level of
income. Like corporation tax. It means that the tax rate does not
change with the level of income.

36
 IV) DIGRESSIVE TAX -This is a tax whose rate first increases as
one’s income increases and reaches a certain point and it
becomes proportional with income. Like advorelem tax.
TAX

0 INCOME

CLASSIFICATION ACCORDING TO INCIDENCE OF TAX.

Incidence of a tax is the final resting position of a tax. It means who bears
the tax burden last.

Impact of a tax. This is the first resting place of a tax. Who bears the tax
burden first?

Taxes are classified according to incidence of a tax as either direct or

indirect taxes

DIRECT TAXES

These are taxes levied on the incomes or wealth of an individual or a

business and whose burden cannot be shifted from one taxpaying entity to
another.

FEATURES OF DIRECT TAXES

The burden of the tax is not shifted from one taxpaying entity to another

37
They are levied on either incomes or property.

They vary with financial status of the tax payer.

FORMS OF DIRECT TAXES

i) Income taxes. These are taxes levied on incomes of individuals or

firms. Like individual income taxes collected under the
PAYEsystem.
ii) Capital gains tax. This is a tax levied on fixed assets whose value
has increased from the time of their purchase to the time of sale.
iii) Profit tax/ corporation tax. This is a tax levied on the profits of the
business in a given trading period. In Uganda corporation tax rate
is 30% of the total profits made.
iv) Death tax/ estates duty. This a tax levied on the property of the
deceased person.
v) Gift tax, this is a tax levied on the gifts of an individual.
vi) Rent tax. It’s a tax levied on the rent incomes received by either an
individual or a company. For an individual the rent tax rate is 20%
of the gross chargeable income and for a company the rent tax
rate is 30% of the gross chargeable income.

Advantages of direct taxes

1. They are elastic. They change with the changes in people’s incomes
and this helps to yield much revenue.
2. They are convenient. They are collected at appropriate time a tax
payer has got incomes. Like individual income tax is collected when
they are paying employees.

38
3. They control income inequalities. This is because they are
progressive in nature meaning that the rich pay more than the poor.
4. They provide government revenue. This is through taxing people’s
incomes as well as property.
5. They are economical. The cost of collecting and administering direct
taxes is very low like individual income taxes are collected by
employers on behalf the tax authority.
6. They help to control inflation. In that progressive taxes help to reduce
the purchasing power of individual which tend to reduce demand pull
inflation.

Disadvantages of direct taxes

1. They are not comprehensive. This is because they cover a narrow

base and that is incomes of individuals and wealth and this reduces
government revenue.
2. They discourage savings and investment. This is because high direct
taxes leave individuals with less income to be saved and invested
thus limiting capital formation.
3. They reduce people’s standard of living. This is because much of
incomes are paid as taxes, which makes people not to access the
required goods and services.
4. They discourage hard work. This is because much of people’
incomes are highly taxed more especially through the progressive
taxation system.
5. They are unpopular to the masses. The public people hate direct
taxes and this erodes the image of the government in power.

39
INDIRECT TAXES/ CONSUMPTION TAXES/ OUTLAYS/EXPENDITURE
TAXES

These are taxes levied on goods and services and their incidence can be
shifted from one taxpaying entity to another. Like a producer can shift tax to
a consumer inform of price increases for goods and services.

Features of indirect taxes

1. They are levied on goods and service

2. They are included in the prices of goods and service
3. Their incidence can be shifted from one person to another.

FORMS OF INDIRECT TAXES

1. Sales tax. This is a tax levied on sales of a business.

2. Excise duty. This is a tax levied on locally manufactured goods and
services.
3. Customs duty. This is a tax levied either on imports or exports of a
country. Customs tariffs can either be import tariffs levied on imports
of a country or export tariffs levied on exports of a country.
4. Value added tax. This is a tax levied on value added on a commodity
at different stages of production. The VAT was introduced in Uganda
in 1997 to replace sales tax and commercial transaction levy. The
VAT rate in Uganda is 18%.
5. Octori tax. This is a tax charged on goods and services of a country
passing through the boundaries of another country.
6. Advorelem tax. This is a tax levied as a percentage of value of a
commodity.

40
Advantages of indirect taxes

1. They are more convenient to the government. This is because their

collection and administration is simple to the tax collectors on behalf
of the government.
2. They are more flexible. This is because they can be easily varied to
meet desired objectives of the government.
3. They promote hard work. Indirect taxes promote hard work in an
Endeavour for a consumer to meet the high prices caused by taxes to
meet the standard of living.
4. They assist in improving balance of payment position. Indirect taxes
inform of import tariffs discourages the importation of goods and
services which help to improve on the balance payment position.
5. They are difficult to evade and avoid. This is because they are
included in the final prices of goods and services.
6. They safe guard the public from consumption of undesirable
commodities. This through imposing high indirect taxes on such
commodities to discourage their production and consumption.
7. They are politically popular to the public. This is because they are not
easily felt by the public since they are included in the final prices of
goods and services.
8. They protect infant domestic industries. Indirect taxes inform of
customs duties on imports discourage importation of goods and
services which help to prevent competition of imported commodities
with locally produced commodities.

41
 Disadvantages of indirect taxes

1. They are inflationary in nature. High indirect taxes can easily spark off
inflation since they are included in the final prices of goods and
services.
2. They may lead to trade malpractices. High indirect taxes may lead to
malpractices in trade like smuggling.
3. They tend to be regressive in nature. This means they are unfair to
low income earners, since they pay more taxes than the rich people.
4. They result into low standard of living. Since they make prices for
essential goods and services so high which affects people’s standard
of living.
5. They increase the costs of production. This may force some firms to
close since they cannot afford some basic inputs of production like
raw materials.

REASONS TO WHY THE GOVERNMENT PREFERS INDIRECT TAXES

TO DIRECT TAXES

1. Indirect taxes yield higher revenue since they cover a wider economic
base than direct taxes which target a few economic bases such as
income and wealth of businesses and individuals.
2. Indirect taxes are very difficult to avoid and evade since they are
included in the final price for goods and services unlike direct taxes
which can be easily avoided and evaded since they are levied on
incomes and wealth of the business.
3. Indirect taxes are more economical in terms of collection and
administration since they are collected by agents on behalf of the

42
 government unlike direct taxes which involve high costs of collection
and administration.
4. Indirect taxes are neutral to all tax payers, implying that they do not
discriminate among tax payers unlike direct taxes which are
discriminative in nature.
5. Indirect taxes are more convenient to tax payers since they are not
paid in lumpsum unlike direct taxes which are paid in lump sum.
6. Indirect taxes are more flexible since they can be easily adjusted with
the prevailing economic conditions unlike direct taxes which depend
on the set tax rates.
7. Indirect taxes are politically popular to the public since they are less
feltand are included in the final prices of goods and services unlike
direct taxes which are politically unpopular since they are levied
directly on people’s property, income and wealth.

THE TAX BASE

This is an item or entity on which tax is levied by the government. It may be

a person, business, property and wealth.

REASONS FOR NARROW/SMALL TAX BASE IN UGANDA

1. The existence of poor infrastructures. The poor state of

infrastructures more especially roads makes it difficult to access
some areas to collect taxes and this limits the taxes collected.
2. Tax exemptions and holidays. The government is giving a lot of tax
exemptions and holidays in a bid to attract investors and this reduces
the target tax base.

43
3. Existence of a large subsistence sector. This reduces the tax base
since the output from such sector is not taxed.
4. High unemployment level. Many people are unemployed and do not
have incomes on which taxes are levied.
5. Existence of political instabilities. These discourage economic
activities as well as making some area inaccessible for tax collection.
6. Poor identification of tax sources. Many income generating activities
exist but because they have not formerly registered with the tax
authorities, they are not identified as tax bases.
7. Existence of small industrial sector. The industrial sector is small and
therefore cannot provide wide enough bases for taxation that is there
are a few firms on which taxes are imposed.
8. Limited economic activities. The number of economic activities is not
as many as they can lead to few items eligible for taxation.
9. Limited skills of tax assessors. Tax assessorsdo not have sufficient
skills to recognize all items and sources that are liable for taxation.
10. High levels of corruption. Tax officials ignore economic activities
that can be liable for taxation after receipt of bribes by potential tax
payers.
11. Limited information or data. Many people don’t keep records of
their economic activities and incomes. This limits accessibility by tax
assessors to information to be used for identification of items to be
taxed.

44
 MEASURES THAT SHOULD BE TAKEN TO INCREASE TAX BASE
IN AN ECONOMY

1. Political stability should be ensured. This is aimed at creating more

areas accessible for taxation as well as increasing economic
activities.
2. Development of the industrial sector can be ensured. This is through
promoting the growth of small scale industries so as to increase
taxpaying entities.
3. Commercialization of the economy should be done. This is aimed at
reducing the subsistence sector so as to increase more activities for
taxation.
4. Infrastructures should be improved. The government can rehabilitate
roads and construct new ones so as to open up more areas for
taxation as well as encouraging production and distribution of goods.
5. Liberalizing of the economy. Trade should be liberalized so as to
increase economic activities upon which taxes are levied.
6. Proper record keeping should be encouraged. This is aimed at
reducing under assessment and over assessment of the tax payers.
7. Training of tax assessors should be encouraged. This is aimed at
imparting tax officials with adequate skills for collecting and
administering of taxes.

PROBLEMS FACED BY TAX AUTHORITY IN UGANDA

1. Narrow tax base. There a few economic activities on which taxes can
be imposed. Since there a few tax bases on which taxes can be
imposed, tax revenue raised is low.

45
 2. Existence of large subsistence sector. This limits output to be taxed
since the output produced by such sectors is not meant for resale.
3. High levels of tax evasion. Many tax payers out rightly dodge tax
payments. This limits tax revenue realised by the government
because evasion reduces the number of tax payers.
4. High levels of tax avoidance. Many would be tax payers use the
loopholes in the tax laws to avoid tax payment. This is done by
substituting taxed activities with untaxed ones.
5. Existence of a small industrial sector. The industrial sector is mainly
composed of small scale industries whose contribution to tax revenue
is minimal.
6. Existence of high levels of poverty. Many people are poor thus having
low incomes to be taxed and this limits tax revenue.
7. Corruption by tax officials. Tax officials embezzle tax revenue
collected through taxation resulting in to low revenues for the
government.
8. Limited book keeping. Many business people do not keep records
upon which taxes are determined. This results into underassessment
or over assessment of tax payers.
9. Existence of political instabilities. This limits the areas to be accessed
for taxation and also limits production and carrying out of economic
activities.

MEASURES UNDERTAKEN TO INCREASE GOVERNMENT REVENUE

1. Promoting transparency and accountability. This is through

reorganizing the collecting authorities so as to reduce corruption and
embezzlement in the tax collecting body.

46
 2. Sensitizing the public about the benefits of paying taxes. This
increases the level of tax compliance as well as increasing tax
returns.
3. Developing a computerized tax collection system. This is aimed at
reducing tax avoidance and tax evasion.
4. Improving political atmosphere. This is aimed at increasing more
areas accessible for tax collection as well as increasing economic
activities in the country.
5. Encouraging the growth of the industrial sector. This is aimed at
increasing the tax bases upon which taxes are levied.
6. Improving the infrastructures. This is aimed at creating more areas
accessible for tax collection inform of expanding the road network.
7. Enacting the tax laws. This is aimed at reducing the levels of tax
evasion and avoidance so as to increase tax revenue.

TAX AVOIDANCE AND TAX EVASION

Tax avoidance. This where a tax payer exploits loopholes/ weaknesses
within the tax system to pay less or no tax at all.
Tax evasion. This is where a tax payer deliberately refuses to pay a tax at
all.
FORMS OF TAX AVOIDANCE IN UGANDA

1. Smuggling of goods. People tend to smuggle goods from one country to

another without paying customs duties.
2. Hiding of goods. Some traders tend to hide their goods when it comes to
periods of assessing taxes.
3. Bribing of tax officials. Some tax payers tend to bribe some tax officials
and this result into under assessment of tax officials.

47
4. Not keeping business records. Some business men merely keep
business records upon which taxes are assessed.
5. Closing business premises during the time of assessment of taxes.
6. Not registering the business, this limits tax bases.

Reasons for tax evasion

1. Unfair tax assessment

2. Low levels of income
3. Discontent about provision of services by the government\
4. Lack of adequate information about taxes
5. Desire to retain all earnings by business men
6. Laxity in the tax administration

ADVANTAGES OF TAXATION FINANCING OVER DEBT FINANCING

1. It reduces a dependency syndrome to a country where nationals work

hard unlike external borrowing which encourages laziness among
nationals.
2. Taxation reduces capital outflows from the economy unlike Public
borrowing which increases capital outflows from the economy inform of
debt servicing which reduces the rate of capital accumulation.
3. Taxation financing improves balance of payment position since revenue
is sourced with in the country unlike debt financing which is
characterized with increased debt servicing worsens the balances of
payment position of a country due to high interest on public debts.
4. The burden of tax is born by the present generation unlike the burden of
paying public debts is shifted to future generations yet the benefits may
be enjoyed by the current generation which may be undesirable.

48
5. Taxation financing does not have a lot of conditionalities as compared
to debt financing which has got much conditionality attached which
reduces the absorptive capacities of a country from public debts.

49
TOPIC 8: THE NATIONAL BUDGET
It’s the summary proposal of the government showing the estimated public
revenue and the planned expenditure for a given period of time.

A budget can be classified into two sections:

Recurrent budget. It is a section of the national budget dealing with public

expenditure for meeting daily running of public activities and maintaining of
existing capacities and at the same time showing short term sources of the
revenue to meet recurrent expenditures.

A recurrent budget has got section of the recurrent public expenditure.

A recurrent expenditure is mainly channeled to the following:

Payment of wages for civil servants in a country

Expenditure for maintenance of social services

Expenditure to meetdiplomatic government mission

Expenditure of security of a country

Sources of recurrent revenue include:

Profits made by public enterprises

Import and export duties or tariffs

Revenue from sale of public enterprises

Development/capital budget. This section of the national budget consists

public expenditure for long term development of a country and long-term
sources of financing development programmes.

50
This budget is mainly financed by consolidated fund borrowed by the
government from external sources.

The capital expenditure is part of public expenditure concerned with

financing long-term public investments and development programme of the
government.

Capital expenditure is channeled to.

Development of infrastructures

Capital power investments

Expenditure for natural resource exploitation like mining.

OBJECTIVES OF THE NATIONAL BUDGET

To sustain desired economic development/growth rates in a country.

To achieve equitable income distribution through redistribution of resources

To promote and sustain employment opportunities in a country

To maintain price stability in a country

To maintain a conducive investment climate

To reduce poverty levels in a country.

To restrict public expenditure to reduce the size of deficits

To finance priority sectors in the economy

To increase national productivity

51
A BUDGET AS AN INSTRUMENT OF ECONOMIC GROWTH AND
DEVELOPMENT

A budget is a means of raising public revenue necessary for economic

development. Through the national budget, the government may devise
various sources of revenue especially taxation and borrowing to finance
economic growth and development.

A budget is an instrument of re-distributing of incomes to reduces the

inequalities. This is done by the government providing social services to the
poor and taxing high the rich through different taxes in the budget such as
progressive taxes.

A budget is an instrument of increasing employment opportunities in the

country. Through the capital budget government increases public
investments to increase employment opportunities.

A budget is used as an instrument of financing development of

infrastructures necessary for economic development. This is done through
long term expenditure of the development budget.

A budget is a policy of improving the standards of living of the native of the

country. This is done through the recurrent budget where the government
provides social services to the poor to improve social welfare.
The budget is a tool of ensuring stability in the economy. The government
uses the national budget to control inflation through restricted public
expenditure to ensure macroeconomic stability.

52
The budget is a tool of promoting investments in the economy. This is
through various investment incentives provided by the government to
promote private investment and government allocations to promote public
investments.

The budget is a tool of protecting infant domestic industries. This is done

through the section of priority spending where the government subsidies
the infant stages.

The national budget is used as an instrument of protecting the nationals

against consumption of harmful commodities in the economy. This is done
through high taxes imposed on producers of harmful products.

The budget is an instrument of economic recovery in the period of

economic depression. Through increasing public expenditure government
can be able to close a depression by increasing the level of economic
activities.

It is an instrument of redistributing resources in a country or economy to

ensure balanced economic development of a country.

It ensures development of priority sectors and regions which may be

backed to grow at the same pace with others.

It is an instrument of stabilizing the balance of payment position of a

country which is done through restricted expenditure on imports to reduce
balance of payment deficits.
53
It is a means of maintaining political stability through allocating funds
towards national security.

It is a means of attracting foreign resources in a country.

APPROACHES TO BUDGETING

1. ZERO BASED BUDGETING. This is budgeting from scratch. It is the

budgeting without referring to the previous year’s budget.
2. PRIORITY BUDGETING. This is the budgeting according to priority or
leading sectors. Sometimes the government budgets according to
dominant sectors.
3. Incremental budgeting. This is budgeting according to previous year’s
budget.
4. PERFORMANCE BASED BUDGETING- this is budgeting according to
performance sectors/activities. in terms of revenue

TYPES OF BUDGETS

A budget is categorized in to two:

Balanced budget

Unbalanced budget

BALANCED BUDGET

This is a budget where estimated public revenue matches with planned

expenditure for a given period of time.

54
UN BALANCED BUDGET

This is a budget where estimated public revenue is either greater or lower

than the projected expenditure for a given period of time.

Theun-balanced budget is divided into two:

1. Surplus budget.

This is a budgetwhere estimated expenditure is less than the anticipated

revenue in a given period of time.

2. Deficit budget.

This is a budget were the estimated expenditure is exceeding the planned

or expected revenue in a given period of time.

55
REASONS WHY THE GOVERNMENT MAY ADOPT AN UN BALANCED
BUDGET.

By adopting unbalanced budget, it implies either adopting a surplus budget

or deficit budget. A surplus budget may be adopted for following reasons:

To check inflation. By reducing aggregate demand through restricting

public expenditure and increasing taxes in the economy. This ensures price
stability in the economy.

To close an inflationary gap. By reducing aggregate demand to match with

aggregate supply to match in the economy to bring national income
equilibrium.

To close balance of payment deficits. Through reducing foreign

expenditure in the economy.

To increase forced savings. It’s a policy of increasing forced saving by

government from excessive incomes of nationals by increasing tax
collection and at the same time reducing public expenditure.

To reduce public borrowing. It’s adopted to reduce public borrowing and to

clear off public debts by generating reserve funds.

To finance long-term public investments. It’s adopted to finance long term

public investments by generating a reserve for future investments.

To increase government revenue. It may be adopted as a measure of

increasing progressive taxes were more revenue is generated from the rich
to create surplus.

However the government may also adopt a deficit budget for the following
reasons.
56
To stimulate a recovery in periods of economic recession by increasing
public expenditure to increase aggregate demand to increase the level of
economic activities.

To close a deflationary gap in an economy through or by increasing

aggregate demand to match with the aggregate supply for an economy to
overcome deflationary gap.

To increase employment opportunities to reduce the un employment rate in

the economy. Increasing public expenditure generates more employment in
terms of multiplier effects in the economy.

To reduce the tax burden on the public to promote household savings in

the economy

To expand infrastructures by increasing public expenditure on public works

like road network development

To improve the standards of living in an economy by increasing public

expenditure on provision of social services in the economy

To increase public and private investments in the economy. This is

achieved through increasing public expenditure on public investments and
reducing taxes on private investments

DEFICIT FINANCING/ PUMP PRIMING POLICY

This refers to a deliberate government policy of increasing public

expenditure over the estimated revenue with the major aim of promoting
public and private investments.

It is otherwise increasing expenditure on infrastructural development,

subsidizing the private firms and under taking long-term public advantage.
57
The government finances deficits through the following means;

1. Borrowing internally and externally.

2. Printing and issuing of more currency to the government by the central
bank.
3. Use of reserves to finance deficit.
4. Appealing for grants and donations.
5. Disinvestments by the sale of government assets e.g. through
divestiture.
6. Selling public 0securities both treasury bills and bonds.

NEGATIVE EFFECTS OF THE POLICY

Increases inflation in the economy by increasing aggregate demand for

goods and services

Increases public debt burden where the government has to borrow money
to finance the economic activities

Increases balances of payment deficits through debt servicing

Leads to depreciation of a currency in case of printing of money to finance

deficits

Increases external resource dependency where the government has to

depend on external resources to finance a deficit budget

58
BUDGETARY DEFICITS

LDCs like Uganda have been experiencing budgetary deficits persistently.

This has been due to;

Narrow tax base leading to low tax revenue. Government has been
collecting small tax revenue compared to the planned expenditure because
the taxable entities are limited which causes/ has caused budgetary
deficits.

High degree of tax evasion and avoidance in the economy many tax payers
have been deliberately refusing and dodging to pay taxes which has
caused low tax revenue and deficits in the government budgeting.

Low taxable capacity in the economy due to high levels of poverty. This has
reduced government ability to raise revenue composed to its planned
expenditures thus causing budgetary deficits

Poor tax administration and management. Uganda revenue authority has

been inefficient in collecting taxes and administering realised revenue
which has caused budgetary deficits.

Corruption and embezzlement of public resources of public resources. This

has exaggerated public expenditures and increased low tax revenue due to
corruption in tax collection thus persistent budgetary deficits.

Strained government expenditure to provide infrastructure in the economy.

Uganda has got poor infrastructural networks and this has strained the
government budget to increase their funding thus causing budgetary
deficits.

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High administrative expenses in the government department and
maintenance of public servants. Government has got a widened and
extended departments which have strained the scarce available resources
causing budgetary deficits.

Heavy public debt burden and debt servicing. Debt servicing has strained
the government budget and has increased the strain on the scarce
available revenue hence causing budgetary deficits.

Excessive military expenditure due to political instabilities in the economy a

lot of revenue has been lost to finance endless wars which has caused
budgetary.

Limited sources of public revenue from non-taxation sources

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TOPIC 9: PUBLIC FINANCE AND FISCAL POLICY MANAGEMENT

A fiscal policy is a deliberate government attempt through instruments of

taxation and public expenditure to influence and control economic activities
such as investments and aggregate demand to create macroeconomic
stability and accelerated economic development.

TOOLS OF THE FISCAL POLICY

Taxation

Public and government expenditure

Public borrowing

Subsidization

Government budget

OBJECTIVES OF FISCAL POLICY IN UGANDA

To maintain price stability in the economy by controlling aggregate demand
To check on increasing inflation
To harmonize and improve the investment climate to promote investment
opportunities
To stabilize balance of payment positions in the country
To protect and sustain high employment opportunities levels in the
economy
To reduce public debt burden in the country
To generate maximum public revenue for both recurrent and capital
budgets
To ensure equitable distribution of income and resources

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ROLES OF FISCAL POLICY IN AN ECONOMY

Fiscal policy plays the following roles in the economy.

Raising government revenue. Through taxation enables the government to

raise revenue to finance public expenditure. Revenue is collected by
imposing both direct and indirect taxes.

Protecting infant domestic industries. Infant industries are protected by

thegovernment imposing taxes on imports such as import duties/tariffs.

Controlling consumption of harmful commodities. Dangerous products

which are harmful to nationals can be controlled by sumptuary taxes which
can discourage their production and consumption.

Controlling monopoly power in an economy. By government imposing

heavy taxes on profits of monopolist, exploitation by public by monopolist is
reduced hence checking on monopoly.

Checking on demand pull inflation. The government imposes direct taxes

on incomes of the people to reduce the disposable incomes to control
aggregate demand and check demand pull inflation.

Stabilizing balance of payment position. This is achieved by increasing

import duties to reduce excessive importation to close balance of payment
deficit.

Encouraging forced savings. By increasing income taxes government is

able to promote savings of nationals necessary for future economic
development.

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Regulating economic activates. The government influences aggregate
demand in periods of economic depression government may reduce taxes
and in periods of economic boom government increases taxes.

Ensuring equal income distribution by reducing income inequalities. This is

achieved through imposing progressive taxes on peoples incomes to
redistribute incomes between the rich and the poor.

Encouraging infrastructural development. The government imposes taxes

to generate revenue for development of infrastructures such as roads in an
economy.

Attracting investments. The government issues subsidies to potential

investors to reduce the costs of production.

Reducing public debt burden. The government levies taxes to reduce the
burden of paying a national debt.

Controlling dumping. This done by government imposing taxes on dumped

goods and their importation improves on the terms of trade.

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 Revision questions
Set 1
Question one.
Public finance is a section of macroeconomics that deals with raising public
revenue and spending it to various sectors of the economy so as to
macroeconomic stability in the economy.
a) Discuss the sources of public money in relation to the above statement.
(13mks)
b) Explain the roles of public revenue to the development of your country.
(12mks)
Question two
Government owns organizations which are set by either a government
decree or an act of the parliament to extend specific services to the public
in order to improve people’s standards of living as well as enhancing
economic growth and economic development.
a) Discuss the roles of public enterprises to the development of your
country.(12mks)
b) Explain the problems faced by public enterprises in Uganda.(13mks)
Question three
Taxation is one of the major sources of public revenue that involves
administering certain taxes which are either direct or indirect. Following
characteristics of either being regressive, progressive, proportional and
digressive. Despite that taxes are collected following certain principles
there are also some problems faced by tax authorities in your country.
a) Discuss the principles of taxation that must be followed by Uganda
revenue Authority in order to realize much revenue from taxation.
(12mks)
64
b) What are the problems faced by tax authorities in your country?
(13mks).

Question four
There has been recent rise in the debt burden due to the fact that revenue
realized from taxation and non taxation sources is not enough yet the
government needs more money to cater for state activities.
a) Account for increased debt burden in your country.(10mks)
b) Describe the ways how a public debt is managed in an economy.
(15mks)
Question five.
Fiscal policy is one of the major scopes of public finance which involves
use of public expenditure and taxation so as to attain macroeconomic
stability as well as economic growth and development.
a) Give the objectives of fiscal policy in your country.(10mks)
b) Account for increased public expenditure in your country.(15mks)

Question six
Write short notes distinguishing the following terms as used in public
finance.
i) Tax evasions and tax avoidance
ii) Public goods and private goods
iii) Recurrent expenditure and development expenditures
iv) Balanced budget and un balanced budget
v) Taxation financing and debt financing
(@5mks)

65
Set 2
Question one.
Public finance is a section of macroeconomics that deals with raising public
revenue and spending it to various sectors of the economy so as to
macroeconomic stability in the economy.
a) Discuss the sources of public finance in relation to the above statement.
(13mks)
b) Explain the ways of increasing public revenue in your country.(12mks).

Question two
Government owns organizations which are set by either a government
decree or an act of the parliament to extend specific services to the public
in order to improve people’s standards of living as well as enhancing
economic growth and economic development.
a) Distinguish between public corporations and parastatal
organizations(5mks)
b) Discuss the roles of public enterprises to the development of your
country.(10mks)
c) Explain the problems faced by public enterprises in Uganda.(10mks)

Question three
Taxation is one of the major sources of public revenue that involves
administering certain taxes which are either direct or indirect. Following
characteristics of either being regressive, progressive, proportional and
digressive. Despite that taxes are collected following certain principles
there are also some problems faced by tax authorities in your country.

66
a) Describe different taxes collected by Uganda Revenue Authority in your
country. (12mrks)
b) What are the problems faced by tax authorities in your country? (13mks)

Question four
There has been recent rise in the debt burden due to the fact that revenue
realized from taxation and non-taxation sources is not enough yet the
government needs more money to cater for state activities.
a) Account for increased debt burden in your country. (8mks)
b) Describe the ways how a public debt is managed in an economy. (8mks)
c) Explain the advantages of debt financing over taxation financing. (9mks).

Question five.
Fiscal policy is one of the major scopes of public finance which involves
use of public expenditure and taxation so as to attain macroeconomic
stability as well as economic growth and development.
a) Give the objectives of fiscal policy in your country.(10mks)
b) Account for increased public expenditure in your country.(15mks).

Question six
Write short notes distinguishing the following terms as used in public
finance.
i) Principles of taxation
ii) Approaches to budgeting
iii) Tax classification
iv) Forms of tax evasion
v) Pump liming policy (@5mks)
67