Economics and Public Finance
Economics and Public Finance tests macroeconomic literacy and the budget process. Candidates should read fiscal data, understand the Central Bank's mandate and distinguish stocks from flows.
Core rules
- GDP measures output; real GDP removes price effects. Inflation is a sustained rise in the price level.
- Fiscal deficit = government revenue − expenditure. Primary balance excludes interest payments.
- Public debt is a stock; the deficit is a flow. Debt sustainability depends on growth, interest rates and primary balance.
- The budget cycle: preparation by the Ministry of Finance, Cabinet approval, parliamentary appropriation, implementation, audit by the Auditor-General, scrutiny by COPA and COPE.
- The Central Bank Act No. 16 of 2023 strengthened the Central Bank's mandate, created a Monetary Policy Board and formalised inflation targeting.
Worked example
Revenue 3,000; expenditure 4,200; interest 900; GDP 12,000. Fiscal deficit = 4,200 − 3,000 = 1,200 (10% of GDP). Primary deficit = 1,200 − 900 = 300 (2.5% of GDP). Reasoning: the primary balance shows whether current revenue covers non-interest spending; interest is a legacy cost.
Traps
- Calling the deficit 'the debt'.
- Mixing nominal and real values.
- Treating Central Bank financing as costless.
- Ignoring SOE and off-budget liabilities.
- Confusing the Auditor-General's audit with parliamentary authorisation.