This is an aspect of economics which relates to income and expenditure of the government. Every government has various project to execute and government has to derive means of generating income.
Budget is a financial statement by the government showing revenue and proposed expenditure for the coming financial year. A budget consist of packaging of proposals regarding revenue which is likely to be derived from various sources and expenditure which is likely to be met on various items
TYPES OF BUDGET
- DEFICIT BUDGET: A deficit budget means that governments planned revenue for the year is greater than the expenditure.
- SURPLUS BUDGET: A surplus budget means that the planned government expenditure is less than the estimated government revenue.
- BALANCE BUDGET: This is when the planned government expenditure is equal to the estimated government revenu
Fiscal policy involves the use of government income and expenditure instruments to regulate the economy. Fiscal instruments are used as weapon of economic control full-stop fiscal policy is aimed at achieving certain objectives which are beneficial to the economy. It is used to remedy adverse conditions in the economy such as inflation, deflation, balance of payment deficit, a low level of productivity, economic recession, unemployment etc
- Types of fiscal policy?Discretionary fiscal policy: this is a deliberate fiscal approach or measures by the government in order to achieve some macro-economic objectives such as fighting inflation in the country but I'm working on surplus budgeting, increase in taxes and deduction in government expenditure. On the other hand,the government may want to reduce the unemployment level in the country and in that case focuses and tension on deficit budget.Non-discretionary fiscal policy: non discretionary fiscal policies and fiscal policies without any deliberate action on the part of the government to achieve any macro-economic objectives. Rather they are built-in features that help to stabilize the country without conscious actions and effort on the part of the players in the economy.WHAT ARE THE INSTRUMENTS OF FISCAL POLICY?TaxationExpenditureBorrowingNational budgetObjectives of public finance and fiscal policy
- Efficient allocation of resources: the major aim of public finance is to ensure that resources are effectively and efficiently allocated among competing units.
- To improve the level of production: public finance can be used to stimulate the level of productivity by reducing tax, granting subsidise and increasing the size of the government investment in productive activities
- Redistribution of income
- to ensure efficient running of the economy through increase in revenue
- To improve balance of payments position
- To develop a proper fiscal policy
- Provision of full employment.
SOURCES OF GOVERNMENT REVENUE
1. Taxation: This is the major source of government revenue. Taxation can be divided into direct and indirect tax.
- Direct tax: These are tax levied directly on the income or properties of individuals or organisation. Examples are company tax, personal income tax, capital gain tax.
- Indirect tax: These are tax levied on goods and services e.g. sales tax, excise duties, import and export duty.
2. Fees, fines, charges and licenses: These are visa fees, passport fees, court fees, vehicle license, Hospital fees, and school registration fees.
3. Grant and Aids: Grants and Aids can be received from foreign countries or international financial institutions e.g. International Monetary Fund, World Bank. These are used purposely to finance projects
4. Loans: Government can borrow internally or externally to finance project. e.g. Loans club, IMF and World Bank.
5. Royalties and rent: Revenue can be generated from rent and royalties. Royalties are paid by Mining Sector and rent from government properties. 6. Interest , dividend and profit from government direct investment: Profit of public corporation is a major source of revenue for the government e.g.
Dividend from investment
7. Other sources are:
- Disposal of assets
- Personal savings
- Sale of assets
- Equiting financing i.e public sale of shares.
- Equipment leasing: Later date funds realized from leasing equipment to firms may be used for business expansion.
- Plough back profit
- Purchase of goods on credit
- Personal income tax: This is a tax on an individual’s income. E.g pay-as-you-earn. In this case, income and taxed progressively
- Corporation or company tax: This is a tax on the profits of companies, usually allowance is made for capital expenditure before calculating profit
- Capital gain tax: This is a tax the properties of deceased persons, such a tax cannot be levied on land in West Africa because of the difficulty involved in identifying ownership of land
- Royalties and mining rent, stamp and motor vehicle duties: Royalties and mining rents contributed largely to government revenue in Nigeria.
- More equitable: The system of tax d Pay-as-you-earn (P.A.Y.E) for example the progressive tax system made direct taxes more equitable than indirect taxes since the rich are taxed at a higher rate than the poor
- Redistribute income better: Since more tax is levied on the rich than on the poor the gap between the rich and the poor is made closer
- Tax yield is more certain and easier
- Direct taxes give the pair freedom to spend his disposable income (i.e. income after tax) as he wishes
- Direct taxes are anti-inflationary i.e. it can be used to combat inflation in the economy. The purpose is to check people spending through reduction in their disposable income
- It could act as these incentives to add work if the rate of taxation is high
- It discourages saving: If a higher percentage of income is removed from the people in the form of higher taxes, they would have less money to save after meeting their basic requirements
- Direct taxes are prone to tax evasion i.e. people make false declaration of income in order to pay less tax
- High company taxes could discourage investment
- Custom duties: These are taxes levied on goods brought into the country (i.e. import duties) and those goods sent to the country (i.e. export duties)
- Excise duties: It is levied on home or locally produced goods. Little revenue is generated from this
- Sales tax: It is a tax levied and collected either at a wholesale or retail level. E.g. taxes on the sale of petrol
- Purchase tax: This is a tax levied based on the value of the commodity E.g. consumer goods like cosmetics, television sets, clothing and furniture at varying rates
- Licence: The use of radio and television set and sales of drinks at truck taxes in the form of licence which are to be obtained
- Indirect taxes can be used to correct an adverse balance of payment through increase in price of imported goods
- Indirect taxes could be used to check the importation of harmful and non-essential items
- Indirect taxes do not discourage hard work i.e. workers can work overtime to get more income to purchase commodities whose price has increased
- Indirect taxes cannot be evaded i.e. it is easy to collect from buyers
- They could be used to protect infant industry and help prevent competition with locally produced goods
- The burden of tax is relatively small when spread over many purchases
- It forms an important part of government revenue
- They are usually regressive i.e. both rich and the poor pay the same amount of indirect tax
- It is expensive to collect i.e. it is not economical. Resources are spent in trying to combat smuggling
- Indirect taxes may generate inflationary trends with the economy
- Indirect taxes have uncertain revenue yields i.e. they are therefore not reliable source of revenue
- Export duties which is an indirect tax, discriminate
- against certain section of the community
- Progressive tax system
- Proportional tax system
- Regressive tax system
- It is based on ability to pay
- It is productive
- It is equitable
- It is economical
- Tax evasions
- It is not justified
- It discourages capital formation
- It is arbitrary
- It is dis-incentive to work
- It is very simple
- It is easy to calculate
- It does not affect the pattern of income distribution
- It is less productive
- It affect the economy
- It is easy to collect
- It is not a dis-incentive to saving and Investment
- It takes more from low income
- The body is felt by low income earners
- It aggravates income inequality
- To generate Revenue
- To discourage consumption pattern of certain goods
- To redistribute income in the economy
- To maintain a high level of employment
- To protect infant Industries
- To correct balance of payment deficit
- To control inflation
- To stabilize the economy.