Public Finance and Government Economic Activity
Public finance examines the government budget, taxation, fiscal policy and public debt. GCE questions test direct and indirect taxes, progressive and regressive structures, budget deficits and the multiplier effects of government spending.
Budget and taxation
The budget shows planned government revenue and expenditure. Revenue comes from direct taxes on incomes and profits, indirect taxes such as VAT and customs duties, and non-tax revenue. Cameroon's standard VAT rate is 19.25%. Direct taxes may be progressive, proportional or regressive; indirect taxes are often regressive because the poor spend a larger share of income. A good tax should be equitable, certain, convenient, efficient and not discourage work excessively.
Expenditure and fiscal policy
Recurrent expenditure covers salaries and running costs; capital expenditure builds roads, schools and hospitals. Expansionary fiscal policy raises spending or cuts taxes to stimulate demand; contractionary policy does the opposite. The multiplier = 1 ÷ (1 − MPC) in a simple closed economy. Deficits may be financed by borrowing, which raises public debt and can crowd out private investment. Public goods such as defence and street lighting are non-excludable and non-rival, so markets underprovide them and government finances them through taxation.
Worked example
A government increases spending by 20 billion CFA and the marginal propensity to consume is 0.75. The multiplier is 1 ÷ (1 − 0.75) = 4. The total rise in national income is 20 × 4 = 80 billion CFA. If revenue is 1,500 billion and expenditure is 1,800 billion, the budget deficit is 300 billion CFA, or 16.7% of expenditure. The deficit adds to debt unless it is financed by higher revenue or lower spending later.
Traps that cost marks
Do not confuse a budget deficit with public debt; do not assume all direct taxes are progressive; and do not say tax avoidance is illegal. Avoidance is legal arrangement; evasion is illegal. Also do not claim government spending always crowds out private spending, and do not ignore leakages when using the multiplier.