Theory question 101
Public FinanceThe following data shows the budget of a hypothetical country in 2006. Study the data and answer the questions that follow:
Revenue | [$ millions]
Company tax | 240
Workers' income tax | 160
Excise duties | 80
Taxes on exports | 100
Value added tax | 150
Import duties | 90
Non-tax revenue | 40
Expenditure | [$ millions]
Construction of roads | 100
Building of schools | 120
Payment of workers' salaries | 150
Government administration | 200
Maintenance of health facilities | 220
Extension of electricity to rural areas | 180
Maintenance of official vehicles | 70
(a) Calculate the total (i) direct taxes; (ii) indirect taxes.
(b) Calculate the total (i) recurrent expenditure; (ii) capital expenditure.
(c) What percentage of total revenue was collected as indirect tax?
(d) State two examples of non-tax revenue.
(e) What was the budget surplus or deficit? Explain your answer.
Show the model answer
(a)(i) Direct taxes = company tax 240 + workers' income tax 160 = $400 m
(ii) Indirect taxes = excise 80 + export taxes 100 + VAT 150 + import duties 90 = $420 m
(b)(i) Recurrent = salaries 150 + administration 200 + maintenance of health facilities 220 + maintenance of vehicles 70 = $640 m
(ii) Capital = roads 100 + schools 120 + rural electricity 180 = $400 m
(c) Total revenue = 400 + 420 + 40 = $860 m; indirect share = 420/860 × 100 ≈ 48.84%
(d) Any two: rents and royalties; fees and fines; profits of public enterprises; grants and aid; sale of government property.
(e) Total expenditure = 640 + 400 = $1,040 m; 1,040 − 860 = $180 m deficit, because expenditure is greater than revenue.
Indirect taxes are on goods and trade; capital spending builds new assets.