PUBLIC FINANCE (ECU_08606)

LECTURES

By
Dr. MNAKU H. MAGANYA
Department of Economics and Tax
Management

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 7. GOVERNMENT EXPENDITURE AND
REVENUE
1.Government Expenditure
1.1 Importance of Government Expenditure
1.2 Classifications of Public Expenditure
1.3 Causes of Increase in Public Expenditure
2. Government Revenue
2.1 Tax Revenue
2.2Non Tax Revenue
3. Government Budget and Fiscal Policy
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 Importance of Public Expenditure
1. To promote economic growth
2. To promote trade and commerce
3. To promote rural development
4. To ensure equitable distribution of income
5. To promote full employment and maintain price
stability
6. To develop agricultural and industrial sectors
7. To promote infrastructure development
8. To provide collective wants and maximize social
welfare
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 Types of Public Expenditure
1. Capital and Current Expenditure: Whether
government expenditure results in creation of
fixed assets or not.
2. Development and Non-Development
Expenditure: Whether spending results directly in
development process or not.
3. Transfer and Non-Transfer Expenditure: Whether
there is corresponding increase in national income
not.
4. Plan and Unplanned Expenditure.

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 Causes of Increase in Public Spending
1. Growing Population
2. Citizen Preference
3. Interest Payment of Public Debts
4. Government Subsidies
5. Administrations Cost
6. Marxist View for Public Spending
7. Income Redistribution
8. Inflation
9. Chance Events
10. Rural Development
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 Government Revenue
Non-Tax Revenue apart from Tax Revenue
1. License and User Fee
2. Penalties and Fines
3. Grants and Aids
4. Foreign Investment and Rent Income
5. Seignorage
6. Profit from State Owned Enterprises
7. Issued Government Securities
8. Royalties

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 TYPES OF PUBLIC REVENUE

Revenue Receipts Public Capital Receipts

Receipts

Tax Revenue
Non-tax Revenue Market Borrowings

Income Tax Printing

External Borrowings
currency

Interest, dividend, Recoveries of loan and

Property profit advances
Tax
Grant, donations,
Indirect Tax Others-
deposits, Govt. PF

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 Government Budget and Fiscal Policy
Government Budget

Revenue GR
and
Expenditure Surplus
GE
Deficit

National Income
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The Government Budget – Surpluses and
Deficits
In a particular year, a government’s budget can
either be balanced, in surplus or in deficit. The net
effect on aggregate demand depends on the
government’s budget balance.
A balanced budget: A government’s budget is in
balance if its expenditures in a year equals its tax
revenues for that year. A balanced budget will have
no net effect on aggregate demand since the
leakages (taxes collected) equal the injection
(expenditures made).

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 Government Budget
A budget surplus: If, in a year, the government
collects MORE in taxes than it spends, the budget
is in surplus. A surplus may sound like a good
thing, but in fact the net effect of a budget surplus
on AD is negative, since leakages exceed injections.
A budget surplus will reduce the national debt.
A budget deficit: If a government’s expenditure
in a year a greater than the tax revenue it collects,
the government’s budget is in deficit. A deficit has
a positive net effect on AD, since injections exceed
leakages from the government sector. A budget
deficit will add to the national debt.
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 Government Budget
The national debt: A nation’s debt is the
sum of all its past deficit minus its past
surpluses. If this number is negative, then it
means the government has borrowed money
over the years to finance its deficits that it
has not paid back through accumulated
surpluses

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 Government Budget and Fiscal Policy
Does a Budget Deficit Matter?
1. Financing a deficit: Domestic or foreign
borrowings, or by printing new money? Issue of
inflation in an economy.
2. A government debt mountain: In the long run,
a high level of government borrowing adds to the
accumulated National Debt.
3. Wasteful public spending: a rising share of GDP
taken by the state sector has a negative effect on
the growth of the private sector of the economy.
Crowding out of private investment which could
be more efficient.
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 Government Budget and Fiscal Policy
How government finance a Deficit
Budget
1. Through Borrowing: Internal and External
Borrowing resulting into Public Debt.
2. Through Printing New Money (Deficit
Finance):
3. Through Grants and Aids from Developed
Countries:

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 Government Budget and Fiscal Policy
Causes of a Huge Public Debt
Expansionary fiscal policy
Government subsidy policies
External financing of over ambitious projects
Price shocks of the 1970s: increase in imports
prices due to oil shocks
Deterioration in Terms of Trade
Rise in foreign interest rates, especially for
countries that made significant use of commercial
borrowing.

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 Government Budget and Fiscal Policy
Consequences of a Huge Public Debt
Debt overhang: existence of large debt which
affects growth and investment.
Servicing rapidly growing stock of debt crowds out
other expenditures.
Debt servicing absorbs a significant share of
public revenues and expenditure and limit
resources available for investment in development.
Diverting limited resources to foreign creditors
has crowed out human and social investments.

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 Government Budget and Public Debt
A country's external debt (or foreign debt) is
the liabilities that are owed to nonresidents by
residents.
The following are types of external debts
1. Public and publicly guaranteed debt
2. Private non-guaranteed credits.
3. Loans due to IMF
4. Multilateral
5. Bilateral
6. Trade Credits and Commercial Borrowings

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 Government Budget and Public Debt
Methods of repaying public debts:
1. Refunding
2. Conversion
3. Surplus Budget
4. Sinking Fund
5. Terminable Annuities
6. Additional Taxation
7. Capital Levy
8. Surplus Balance of Payment

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 Government Budget and Fiscal Policy
Fiscal policy is the use of government expenditure
and revenue collection to influence the economy.
The two main instruments of fiscal policy are
government expenditure and taxation.
Changes in the level and composition of taxation
and government spending can impact on the
following variables in the economy:
1. Aggregate demand and economic activity;
2. The pattern of resource allocation;
3. The distribution of income.

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 Government Budget and Fiscal Policy
Economic Effects of Fiscal Policy
Uses of Expansionary and Contractionary fiscal
policy to influence the level of aggregate demand
in the economy, in an effort to achieve the
following macroeconomic economic objectives:
1. Price stability
2. Full employment
3. Sustainable economic growth
4. Soundness in foreign reserve (Balance of Payment
Equilibrium)

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Fiscal policy is the use of government spending
and revenue collection to influence the economy.
Central government…plan for the reception and
spending of government revenues
Fiscal year…12 month period that begins on any
date.
 Expansionary policy
 Fiscal policy that encourages economic growth
 Higher spending, tax cuts

 Contractionary Policy
 Fiscal policy that reduces economic growth
 Lower spending, higher taxes

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Expansionary Fiscal Policy – Impact on Deficits
and Debt
To achieve a particular increase in AD, taxes would
have to be CUT by more than spending would have
to INCREASE. There is a reason for this:
• A tax cut is an INDIRECT injection into the
nation’s economy.
 A tax cut increases the disposable incomes of
households
 Higher disposable incomes leads to more
consumption, but also increases savings and
imports, both leakages.
Fiscal stimulus (both tax cuts and spending
increases) lead to a budget deficit
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 Government Budget and Fiscal Policy
Problems with fiscal policy as demand
management tool:
1. Different types of lags (Timing Problems)
2. Fiscal Crowding-Out
3. The Rational Expectation View
4. Other Political Consideration besides
economic stability

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 TANZANIA BUDGET HIGHLIGHTS
Tanzania Budget for 2022/23
Expected Revenue TZS 41.48 Trillion
Domestic Revenue TZS 28.02 Trillion which
about 67.5% of the total budget.
Out of that Tax Revenue is TZS 23.65 Trillion
which is about 11.7% of the GDP.
Non-Tax Revenue TZS 4.37 Trillion and
Revenue from Local Government TZS 1,949
billions.

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 TANZANIA BUDGET HIGHLIGHTS
Tanzania Budget 2022/23
Expected Revenue from other sources
Grants from development partners TZS 4.65
Trillion which is about 11.2% of the total
budget.
Domestic loans of TZS 5.78 Trillion; of
which 2.48 is for development expenditures.
Conditional external commercial loans of
TZS 2.7 Trillion.

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 TANZANIA BUDGET HIGHLIGHTS
Tanzania Budget 2022/23
Expected government spending TZS 41.48
Trillion.
For current expenditure TZS 26.48 Trillion
and For development expenditure TZS 15.0
Trillion which is about 36.2% of the total
budget.
For development expenditure TZS 12.31
Trillion is from internal sources (82%)while
TZS 3.4 Trillion is from external sources.
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 THANK YOU
FOR
YOUR ATTENTION.

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