Public Expenditures

&
Public Debts
Lecture 9
Learning outcomes
• Learners will be able to:
• Define and classify public expenditures.
• Explain the canons of public expenditures and how Ghana strives to
achieve them.
• Explain the phenomenon of ever-increasing public expenditures.
• Brainstorm how public expenditures can be efficiency in Ghana.
• Assess debt sustainability of Ghana with various indicators (FAQ).
• Explain the consequences of public debts on generations.
 Public Expenditures
• Introduction:
• The economic functions of government often times do require expenses to be made by government.
These expenses are analyzed within the framework of public expenditures.

• Public expenditures refer to the outlay, expenses or costs that government usually incurs for
maintenance of itself as an institution, the economy and the society.

• Classification of public expenditures

• Objective Classification:
• This looks at public expenditures as Personnel compensation Expenditures (eg. Compensation for
full time permanent jobs, emoluments for consults of projects, etc) and Personal benefit
Expenditures ( eg. T&T expenses, grants and subsidies etc).

• Functional classification
• This classification is based on the services that public or govt expenditures provide. Two categories
here include General Public Service Expenditures (eg. Spending on defence, education, social
security and welfare, housing and community amenities), and Economic Service Expenditures (eg.
3
Spending on agriculture, mining, manufacturing, electricity, roads, railways and communications).
 Public Expenditures …Definition
• Economic classification
• This classification is often referred to in many analyses. Three categories are normally identified:

• Recurrent Expenditures (generally spendings on day-to-day administration of the public sector

activities or govt machinery and to maintain the existing facilities in the economy including wages
and salaries, maintenance of social services and security, interest payments, subsidies and transfer
payments);
• Capital Expenditures (spending on all investment in infrastructural projects; physical assets that
are for long term purpose or generally productive investments like housing, road construction,
agriculture and water resource).
• Expenditure on Memorandum items (eg. Expenditure abroad, domestic lending, lending abroad,
expenditure on activities of international organizations, or in aid of support for international
organization activities)
• Other classifications include: Productive expenditures vs Unproductive expenditures; Development
vs Non-development expenditures, etc.
4
 Public Expenditures
• Classification of public expenditure in Ghana
• In Ghana, government expenditure is mainly categorized into two: Discretionary expenditures and statutory expenditures.

• Discretionary expenditure consists of that expenditure for which the government can exercise some judgment with respect
to the quantum of resources it provides.
• Discretionary expenditure is further classified into four major categories:
 Personnel emoluments,
 Administration,
 Services,
 Investment

• Statutory expenditure, on the other hand, is obligatory for government to undertake since it is usually defined by legislative
instruments or backed by some legal authority.
• Statutory expenditure includes:
 Transfer to statutory funds such as the district assembly common fund (DACF),
 Transfers to households through the social security system and gratuities,
 Ghana Education Trust Fund (GETFUND),
 The Road Fund.

• Measurement of public expenditures

• Absolute measurement: eg. €7.8m
• Percentage measures: eg 44% of GDP.
5
 Canons of Public Expenditures
• Canons (principles) of Public expenditures:
• Good attributes of public expenditures:
• 1). Canon of Economy: Public expenditures (PE) should not be wasteful; it should be productive
and efficient. To ensure this in Ghana, we have Public Accounts Committee, PFM Act, Fiscal
responsibility Act, Auditor General’s surcharges and disallowance.
• 2). Canon of sanction/approval: No expenditure should be incurred without the prior approval of
the appropriate authority. This is to avoid misuse of public funds or reckless spending. In Ghana,
government first seeks approval from Parliament for spending plans (appropriation) of Ministries,
MMDAs, etc.
• 3). Canon of surplus: Refers to avoidance of deficits in government finance. Govt should live
within its means. Public bodies should aim at budget surpluses. Routine public expenditures
should be met from current revenues and not from borrowings. Hardly met in Ghana so Fiscal
Responsibility Act specifies 5% budget deficits as a rule. Because deficit budgets sometimes
support capital formation or increases overhead economic and social capital.
• 4). Canon of benefit: PE should bring maximum social advantage. PE should be planned to yield
maximum social advantage and social welfare to the entire community and not just a segment.
Examples: increased production, security, narrow income inequalities, serve public interest. 6
 Canons of Public Expenditures
• 5). Canon of Elasticity: PE should contain an element of flexibility so that it is amenable to
changing circumstances: can be expanded or contracted in emergency situations like floods, war,
external shocks, or difficult periods. Example: Recent cuts in expenditures due reasons offered.
• 6). Canon of productivity: PE should aim at improving the productive capacity of the
economy: development purposes, raise output, employment, and income, provide social amenities,
etc.
• 7). Canon of Equity: PE should aim at equitable distribution of income especially more benefits
for the poorer in society to reduce inequalities e.g. health, education, and housing facilities.

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 Public Expenditure effects
•Principles/impact/effects of public expenditures
•The principles of public expenditures refer to the application of economic theory to examine the
consequences of public expenditures programmes. In doing this, we distinguish:
•
• Allocation effects
• This refers to the way an expenditure program affects pattern of goods and services produced in the
economy. For instance, does a given government subsidy raise output in the economy or does it
raise consumption in the targeted area of the economy.
•
• Redistributive effects
• This also looks at how government expenditure redistributes income within the economy in order to
achieve some equity. That is to say that, who benefits from the expenditure process and who loses?

• Stabilization effects
• This refers to role of government expenditure in achieving specified targets of levels of output and
employment as well as stabilization of prices. Expenditure methods can be used to check
inflationary pressures or raise a modest inflation rate. 8
 Other Public Expenditure effects
• Other perspectives on the effects of public expenditures

• 1. Effects on Production

• The effect of public expenditure on production can be examined with reference to its effects on ability & willingness to work,
save & invest and on diversion of resources.

(a) Ability to work, save and invest (positive effect): Socially desirable public expenditure increases community's productive
capacity. Expenditure on education, health, communication, increases people's productivity at work and therefore their
incomes. With rise in income savings also increase and this in turn has a beneficial effect on investment and capital
formation.

(b) Willingness to work, save and invest (negative effect): Public expenditure, sometimes, brings adverse effects on people's
willingness to work and save. Government expenditure on social security facilities may bring such unfavourable effects. For
e.g. Government spends a considerable portion of its income towards provision of social security benefits such as
unemployment allowances old age pension, insurance benefits, sickness benefit, medical benefit, etc. Such benefits reduce
the desire to work. In other words they act as disincentive to work.

(c) Effect on allocation of resources among different industries & trade (negative effect): Many a times the government
expenditure proves to be an effective instrument to encourage investment on a particular industry. For e.g. If government
decides to promote exports, it provides benefits like subsidies, tax benefits to attract investment towards such industry.
Similarly government can also promote a particular region by providing various incentives for those who make investment 9 in
that region.
 Other Public Expenditure effects
• Other perspectives on the effects of public expenditures

• 2. Effects on Distribution

• The primary aim of the government is to maximise social benefit through public expenditure. The objective of maximum
social welfare can be achieved only when the inequality of income is removed or minimised. Government expenditure is very
useful to fulfill this goal. Government collects excess income of the rich through income tax and sales tax on luxuries. The
funds thus mobilised are directed towards welfare programmes to promote the standard of poor and weaker section. Thus
public expenditure helps to achieve the objective of equal distribution of income through spending towards welfare
programmes that promote the standard of living of the poor and weaker section of the society.

• Expenditure on social security & subsidies to poor are aimed at increasing their real income & purchasing power. Public
expenditure on education, communication, health has a positive impact on productivity of the weaker section of society,
thereby increasing their income earning capacity.

• 3. Effects on Consumption

• Public expenditure enables redistribution of income in favour of poor. It improves the capacity of the poor to consume. Thus
public expenditure promotes consumption and thereby other economic activities. The government expenditure on welfare
programmes like free education, health care and housing certainly improves the standard of the poor people. It also
promotes their capacity to consume and save.
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 Other Public Expenditure effects
• 4. Effects on Economic Stability

• Economic instability takes the form of depression, recession and inflation. Public expenditure is used as a
mechanism to control instability. The modern economist Keynes advocated public expenditure as a better
device to raise effective demand & to get out of depression. Public expenditure is also useful in controlling
inflation & deflation. Expansion of Public expenditure during deflation & reduction of public expenditure during
inflation control money supply & bring price stability.

• 5. Effects on Economic Growth

• The goals of planning are effectively realized only through government expenditure. The government allocates
funds for the growth of various sectors like agriculture, industry, transport, communications, education, energy,
health, exports, imports, with a view to achieve impressive growth.

• Government expenditure has been very helpful in maintaining balanced economic growth. Government takes
keen interest to allocate more resources for development of backward regions. Such efforts reduce regional
inequality and promote balanced economic growth.

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 PUBLIC EXPENDITURE GROWTH MODELS

• Ever-increasing Public Expenditures?

• Critical observations have been made about the quantum and trend of government or public expenditures and
various attempts made to explain the phenomenon of government expenditures and management strategies.

• It is generally observed that government or public expenditures tend to increase with time.

• Various arguments have therefore been advanced by research to explain the phenomenon in what is termed as
models of public expenditure growth. These models attempt to answer the question: What accounts for the
growth in government expenditure?

• These include Musgrave-Rostow Development Model,

• Wagner’s model (The Law of Increasing State Activity),

• The peacock-Wiseman model (Displacement Effect Model).

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 PUBLIC EXPENDITURE GROWTH MODELS
• Musgrave-Rostow Development Model

• This model suggested that the growth of public expenditure might be related to the pattern of economic growth
and development in societies. Three stages in the development process could be distinguished:

• (a) The early development stage where considerable expenditure is required on education, health and the
infrastructure of the economy (also known as social overhead capital). Under normal circumstance, these
necessary expenditures should have come from private savings. But at the early stage of development, private
savings are inadequate to finance these necessary expenditures.

• According to Rostow and Musgrave, at the early stages of economic development, the rate of growth of public
expenditure will be very high. This is the case because at the early stages of economic development, the
government provides the basic infrastructural facilities (social overhead capital) and most of these projects
require huge capital, therefore the spending of the government will increase steadily.

• The investments in water education, health, water, roads, electricity, and water supply (Social Overhead Capital
(SOC)) are necessities that can launch the economy from the traditional stage to the take-off stage of economic
development, making government to make increasing expenditures. At this stage, government expenditures as
a proportion of total output or GDP is really high.
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 PUBLIC EXPENDITURE GROWTH MODELS
• (b) This stage or phase is characterised by rapid growth (given that SOC is adequately provided) in which
there are large increases in private saving and public investment falls proportionately because private savings
are high enough to finance expenditure on education, health and infrastructure. Hence in the second stage of
development, public expenditures fall proportionately with an increase in private savings. However, public
expenditures are necessary to act as permissive force to sustain the growth and economic activities. Public
expenditures increase at a decreasing rate because of the increase in private savings.

• (c) The third stage identified in high income societies with increased demand for private goods which need
complementary public investment expenditures (e.g. motor car, urbanisation and good roads). Besides, high
population movements could also lead to development of slums in this stage hence need high government
expenditures to address such problems together with redistributive welfare expenses such as unemployment
benefits, transfer payments, etc.

• Summary of this model: Public expenditures increase but vary with the stage of development.

• Public expenditures are high in the early stages of development, falls in the second stage of development and
the rise again in the last stage of development. But irrespective of the stage of development public
expenditures are necessary. The arguments advanced by this model are interesting in relation to theories of
growth and development but are rather too general to provide much of a guide to recent experience in
14
developed industrial countries.
 PUBLIC EXPENDITURE GROWTH MODELS
• Wagner’s Model: The Law of Increasing State/Government Activity
• Based on Adolf Wagner’s study on public expenditures, he propounded a law called "The Law
of Increasing State Activity" which states that "as the economy grows or develops over
time, the activities and functions of the government increase". In other words, Wagner’s
law states that as per capita income of an economy grows, the relative size of public
expenditure grows along with it. This observation was made because there was a direct
relationship between growth of output or GDP and government expenditures in absolute and
specific terms, and the share of public sector activities in GDP was increasing over time.
Public expenditures co-move with GDP.
•
• Can this law be justified? On what basis? What are the reasons for this co-movement?
1. Economic growth results in an increase in complexity of society requiring continued
introduction of new laws and development of the legal structure. As the economy grows, there
will be an increase in the number of urban centers with the associated social vices such as
crime which require the intervention of the government (new laws, legal structure etc) to
reduce such activities to the barest minimum. Such interventions will come with increasing
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 PUBLIC EXPENDITURE GROWTH MODELS
2. Economic growth and development comes with urbanization. Urbanisation
increases situations of externalities and market failure which necessitate intervention
(regulation and legislation) to address such externalities and market failure.
3. To sustain economic growth and development, there is need for increased
government or public expenditures to serve as a permissive force for directly
productive activities (DAP). These expenditures are needed to provide social
overhead capital to create enabling environment for enterprises and put business
activities on expansion path.
4. Over time, as the economic grows, luxury goods gradually become necessities
and government has to provide complementary public goods for such luxuries.
For example, ownership of a car in Accra is no more viewed as a luxury but like a
necessity. Thus, as per capita income grows there will high preference for certain
private goods which need more social goods to complement their usage or
consumption. 16
 PUBLIC EXPENDITURE GROWTH MODELS
5. Often times, economic growth also elicits quest for increased civil, social and political
rights and democratization. Embarking on these activities to advance citizens’ civil and
political rights call for increasing government expenditures. Eg. Government or public
expenditures over-run their targets in almost every election year in Ghana. The budget for
the Electoral Commission in Ghana is huge every election year and has to be paid for by the
government. Expenditure shocks have therefore become a common phenomenon after
many elections in Ghana.

6. For purposes of equity, as the economy grows need for redistribution policies become
very much pronounced. Governments therefore have to maintain a certain standard of living
eg. 2 dollars per day etc, this makes governments draw up huge expenditures for transfer
payments for such purposes: unemployment benefits, LEAP, school feeding, free school
uniform among others.

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 PUBLIC EXPENDITURE GROWTH MODELS
• Peacock-Wiseman model (Displacement Effect Model)
• This model explains that government expenditures are often times shifted upwards because in
times of crisis (eg war, famine, drought, upheaval etc), the citizen are willing to pay some more tax
to enable government solve such problems, so public expenditures increase but thereafter
government will keep its expenditures at that high level after the crisis as if that is the usual trend.
• This temporary rise in expenditures, which later turn out to be permanent provide another reason
while there is rising public expenditures. The displacement effect comes handy when the private
expenditure is displaced downwards (as a result of increased taxation) while government
expenditures are displaced upwards during such periods of crises and thereafter.

• Can we always justify rising public expenditures? To what extent can they be justified? What are
your proposals on how to strategically manage public expenditures? Discuss this among
yourselves!
• Hint: Quality spending (capital expenditures)-spending which yields returns in the future or
prioritization of expenditures, cutting waste in expenditures- pay roll clean-up exercise, halt of
initiation of new projects and concentration on ongoing projects, Need for workable cost-
benefit analysis (CBA), financing and time value.
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 Cost Benefit Analysis for Public Expenditures
• COST BENEFIT ANALYSIS (CBA)
• It is a technique normally used in assessing, in monetary terms, whether or not the costs of an activity (or
public expenditures earmarked or proposed) can be justified by the outcomes and impacts. Taking
government expenditures as an activity for instance, CBA will elicit whether or not government expenditure is
worth embarking upon in order to ensure efficiency in public spending.
• What can we use CBA for?
• ■ Informing decisions about the most efficient allocation of resources
• ■ Identifying projects that offer the highest rate of return on investment
• ADVANTAGES:
• ■ Good quality approach for estimating the efficiency of programs, projects and expenditures
• ■ Makes explicit the economic assumptions that might otherwise remain implicit or overlooked at the design
stage.
• ■ Useful for convincing policy-makers and funders that the benefits justify the activity
• DISADVANTAGES:
• ■ Fairly technical, requiring adequate financial and human resources available.
• ■ Requisite data for cost-benefit calculations may not be available, and projected results may be highly
dependent on assumptions made.
• ■ Results must be interpreted with care, particularly in projects where benefits are difficult to quantify.19
 Financing of PUBLIC EXPENDITURES
• FINANCING OF GOVERNMENT ACTIVITIES
• Government often times rely on tax and non-tax sources of revenue to finance its expenditures. While the
tax sources are more domestic in nature, the non-tax sources could be both domestic and external.
• Tax revenue
• Revenue from various taxes eg income taxes, property taxes, domestic taxes, taxes on international
trade (import and export duties) etc.

• Non-tax revenue
• Grants (aids),
• Loans (borrowing domestically and abroad),
• Sale of assets, goods and services by government- revenue from divestiture or privatization,
• User charges (road toll, talk time tax), and
• Monetization.
•
• In most countries especially the developing countries like Ghana, tax is the major source of government
revenue. In fact, in Ghana, tax revenue forms the largest proportion of government revenue. As a
consequence, taxes can also be described as the basic source of government revenue. Therefore,
government revenue could be divided into tax revenue and non-tax revenue. 20
 Public Expenditures with PUBLIC DEBT issues
• PUBLIC DEBT ANALYSIS
• Public debt (also known as government debt, national debt) is money (or credit) owed by any level
of government; either central government, regional government, municipal government or local
government.
• Public debt accrues over time when the government spends more money than it collects in taxation.
As government engages in more deficit spending, the amount of public debt also increases.
•
• Why Governments Borrow
• Countries borrow because of their inability to generate enough savings which could be used for
investment and hence growth. This is because the incomes of developing countries such as Ghana
is so low that it is hardly adequate for personal consumption and therefore individuals are not able
to save enough.
• Countries borrow to promote economic development, ensuring that there exists enabling
environment for people to invest their money in other sectors of the economy.
• Borrowing is necessary to meet the financing requirement of the government. Where
government has a budget deficit, then the best alternative is to borrow or increase taxes.
• Governments borrow in order to close the resource gap between savings and investment. 21
 PUBLIC DEBT
• Nature of public debt
 Public Debt can be either internal (where citizens and groups within the country lend the government
money to continue operating through issuance of government securities) or external (money owned to
foreign lenders like international organizations, other govts, or foreign groups). It can also be classified as
long term (designed to last more than ten years) or short term debt (foreseen to last only one or two years).
• Sources of public debt
• Domestic (internal) and External sources
• Ghana’s domestic debt sources:
(1) development stocks (floated mainly to raise long term finance for development projects by the government.
Its maturity ranges from five to twenty five years),
(2) treasury certificates (Treasury certificates are short term debt instruments where governments borrow.
Their maturity is of two denominations; one year and two year periods. Treasury certificate is also affected
by the practice of rolling over the issues),
(3) treasury bonds (were introduced with the objective of minimizing debt service payments rather than
providing deficit financing to meet budgetary gap. Treasury bills and certificates outstanding can be
converted into fixed interest bonds; carrying a fixed rate of interest of five percent and are wholly held by the
BOG).
(4) Treasury Bills are short term debt instruments that mature within 91 days. 22
 PUBLIC DEBT … Borrowing consequences
• External sources of debts
• Loans from international organizations and interests, international debt markets
•
• Consequences of domestic borrowing and external borrowing
• Borrowing in the domestic economy through the money and capital market has the advantage of
arresting foreign exchange leakages or outflows of investment funds.
• Also, it has the advantage of developing the financial market in a bid to mobilize domestic savings for
both public and private sector investment.
• However, borrowing by government must be guided because excess borrowing will shrink investible
funds in the money market ‘crowding out’ investors (crowding out effects).
• On the other hand, most external debts tend to have concessionary rates and long maturity. These
debts thus tend to be cheaper than domestic borrowing. Given its long term nature, concessional
external debts are also likely to be safer than domestic debt which often has short maturity and is
subject to roll-over risk.
• However, the supply of external funds tends to be volatile and pro-cyclical. Moreover, large industrial
countries can borrow abroad in their own currency, but most international borrowing by emerging and
developing countries is in foreign currency. These might lead to foreign currency debt explosions.
23
 PUBLIC DEBT…. Summary
• Summary:

 There are two main sources of Ghana’s public debt; domestic sources and external sources.

 Domestic debts are sourced from the domestic economy through the Bank of Ghana and
other financial institutions.

 External debts are obtained from bilateral and multilateral sources including international debt
markets.

 Borrowing from domestic and external sources has their consequences and various
governments ought to consider these before deciding on which source to borrow from and the
structure of their debt.

• Causes of public debt

• Unviable projects, Rise in interest rates, International Economic Recession, Availability of

cheap credit, Ownership of public corporations debts, etc 24
 PUBLIC DEBT SUSTAINABILITY
• Public Debt Sustainability

• Debt sustainability is the ability of government to service its borrowings, both internal and
external, without resorting to rescheduling or accumulation of arrears.

• The IMF and the World Bank define the external debt sustainability of a country as its ability
and willingness to “meet the current and future external debt service obligations in full, without
recourse to debt rescheduling or accumulation of arrears and without compromising growth”.

• This concept of sustainability focuses on the behaviour of the borrower (the borrower’s
willingness and ability to repay its debt “in full”) rather than on the behaviour of the lender
(based on the lender’s liquidity and investment alternatives).

• According to this view, the signal of an unsustainable debt is clear: a country receiving external
debt relief (in form of debt rescheduling or debt forgiveness) is in a situation of “excess” of debt.
That is, the current debt level is higher that the sustainable one.

• 25
 PUBLIC DEBT SUSTAINABILITY
• Indicators of debt sustainability
• Debt stock: The quantum of the total debt in absolute terms. However, the debt stock
does not indicate the capacity of the economy to service such debt obligations.
• Debt burden indicators include the debt to GDP ratio, foreign debt to exports ratio,
and government debt to current fiscal revenue ratio. This set of indicators also covers
the structure of the outstanding debt including the share of foreign debt, short-term debt,
and concessional debt in the total debt stock.
• Another set of indicators focuses on the short-term liquidity requirements of the country
with respect to its debt service obligations. These indicators are useful early-warning signs
of debt service problems, but also highlight the impact of the inter-temporal trade-offs
arising from past borrowing decisions.
• Examples of liquidity monitoring indicators include the debt service to GDP ratio, foreign
debt service to exports ratio, and government debt service to current fiscal revenue
ratio.
• Incurring high public debt is not necessarily bad. It is really bad if the ratios show that the
26
economy will be unable to service such debts.
 PUBLIC DEBT BURDEN
• Analysis of public debt burden
• It is possible to explain the burden of public debt.
• Three schools of thought (The Learner’s model,The overlapping generation model, and
The Neoclassical model) attempted this and their conclusion are summarized below:
 Learner’s model: The future generation will not bear debt financing burden if the
borrowed funds are invested into productive activities (capital investments) which will yield
benefits greater than the debt.
 Overlapping generational model : The old age at the time of borrowing enjoy at the
expense of the young generation at the time of payment.
 Neoclassical model : Borrowing imposes a burden on the future generation through its
impact on capital formation. It reduces the ability of the future generation to accumulate
capital to meet their own development needs.
 Conclusion: It is quite clear from these models that the future generations do bear much
burden of public debt than the current generation. This is largely because the future
generation will have to pay higher taxes to pay off the debt. Be a generational thinker.
27
 PUBLIC DEBT BURDEN
• The debt burden and intergenerational equity
• Intergenerational equity is the equity between one generation (present) and another (future)
generation.
• Arguments on the prospect of passing on the debt burden to succeeding generations:
•
• Fiscal solvency argument
• A loan finance is a mere postponement of tax payment. The postponement makes the burden
fall on future generation causing future welfare loss to posterity.
• Contracting a loan to finance development projects amounts to postponing tax payments in
which case the burden is shifted forward to the future generation.
• If the government has to tax the people in the future to pay the loan (interest payment &
amortization), the burden then falls on the future generation.
• This burden will not be acceptable (offers no equity) if the loan was spent on current
consumption e.g. on wages and salaries, etc.
• Counter-argument: When the loan is invested in long-lasting projects the future generation will
benefit, even as they bear the debt burden so there is equity (benefit principle). E,g.: Building
28 of
 PUBLIC DEBT BURDEN
• Debt-capital formation argument
• Government can take loan or tax to finance its activities.
• Tax financing falls on private consumption because it reduces disposable income.
• Loan financing tends to fall on investment because a loan can crowd out private sector, i.e. a
reduction in private capital formation.
• Tax financing reduces consumption, so the current generation bears the burden.
• Loan financing will affect future generations because it reduces private investment and loan
payment by future generations.
• To ensure intergenerational equity, loan financing should go into capital investments by the
state so that future generations can benefit.
• We can have a situation of overlapping in inter-generational equity where investment goods are
concerned. In this case, the first generation bears part of the burden, and the second
generation bears the rest.
• For instance, if investment projects are financed with borrowed money, the effect can be inter-
generational where the current bears some of the burden (in terms of short-term interest
payment) and the future generation bears the rest (in terms of amortization). This often ensures
29
 PUBLIC DEBT SUSTAINABILITY
• External debt and burden transfer
• Loan financing through external sources has grave effect on the second generation. But if the
loan is used well to increase social overhead capital (SOC) to create enabling environment for
directly productive, future generation will benefit as well. Thus, it is possible the benefits that
future generations will get may even outweigh the tax burden they shoulder in paying the loan.
Eg. Hospital, School, robust economy.
•
• Public Policy implications:
• Policymakers should try to be mindful about generational equity in public debt issues.

30
 Formative assessment question

• Assess the inter-generational equity implications of the recent

Ghana Government’s domestic debt exchange programme
(DDEP).

31
 Practice Questions
1. State any three external sources of revenue to the government of Ghana.
2. What are public expenditures?
3. Distinguish between government’s recurrent expenditures and its capital expenditures.
4. Briefly explain any three canons of public expenditures.
5. Explain the efforts Ghana is making to achieve some of the canons of public expenditures.
6. Explain any four reasons why economic growth can be associated with rising public expenditures.
7. Explain how the stage of development of a country can require rising public expenditures.
8. What is a public debt?
9. How do we ensure public debts do not overburden future generations?
10. Explain any three ways by which Ghana can ensure efficiency in public expenditures.
11. State any four sources of tax revenue to Ghana.
12. Distinguish between public borrowing and public debt.
13. Briefly justify why financing public expenditures through domestic borrowing is less preferable to sourcing
external resources.
14. Why is cost-benefit analysis important in public expenditure decision making? Because government
expenditures are more for equity reasons hence to ensure some level of efficiency, it is required that the
discounted benefits of a public expenditure exceeds the discounted costs and CBA does ensures this. To
ensure efficiency in government spending.
32
15. What is debt sustainability? Assess the sustainability of the current public debts of Ghana.