Theory question 104
Public Finance(a) Distinguish between the following pairs of terms: (i) capital expenditure and recurrent expenditure; (ii) fiscal policy and monetary policy.
(b) Explain four reasons why the government of a country imposes taxes.
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(a)(i) Capital expenditure is government spending on long-lasting assets that add to productive capacity, e.g. roads, schools, dams. Recurrent expenditure is regular spending on running government, e.g. salaries, maintenance, interest.
(ii) Fiscal policy is the use of government taxation and spending to influence the economy; monetary policy is the use of money supply, interest rates and credit by the central bank to influence the economy.
(b) Any four: to raise revenue; to redistribute income; to discourage consumption of harmful goods; to protect infant industries (import duties); to control inflation; to correct balance of payments deficits; to influence location of industries; to control monopolies.
Taxes raise revenue and are also tools of economic policy.