PUBLIC EXPENDITUE

Budget
The Public Sector
• The public sector refers to that part of the national
economy for which the government has direct control
over the allocation of resources; it includes both
central and local government, public corporations and
other public enterprise activities.
 Purpose of Government Spending
• To supply goods and services that the private sector would fail to
do, such as public goods, including defence, roads and bridges; 
merit goods, such as hospitals and schools; and welfare
payments and benefits, including unemployment and disability
benefit.
• To achieve supply-side improvements in the macro-economy,
such as spending on education and training to improve labour
productivity.
• To subsidise industries which may need financial support, and
which is not available from the private sector.
• To help redistribute income and achieve more equity. By paying
unemployment benefits
• To inject extra spending into the macro-economy, to help achieve
increases in aggregate demand and economic activity. Such a
stimulus is part of discretionary fiscal policy.
 Budget

• A budget is a detailed statement of government’s planned

expenditure and expected revenue for a future period
• The act of budgeting involves ways and means of financing
expected public expenditure.
• The annual budget is detailed expression of the
government’s fiscal policy for the year.
• Fiscal policy is the control of government spending and
taxation to achieve specific macroeconomic goals.
Types of Budgets
• The government may run a:
• Balanced budget – planned government expenditure
equals government revenue
• Deficit Budget – planned government expenditure
exceeds government revenue( expansionary fiscal policy)
• For economic growth and job creation
• Applied in during economic recessions
• Surplus budget - planned government expenditure is less
than government revenue (contractionary fiscal policy)
• For reducing inflation (price stability)
• Applied during a period of rapid growth in total spending
Financing Deficit Budgets
• If government plans to spending more than the revenue
available, it has to borrow to meet the shortfall in
revenue
• Public Sector Net Cash Requirement (PSNCR) is the
amount that the government sector needs to borrow, to
finance planned excess government spending in a given
year.
• External or Foreign Sources for Financing Deficit:
• Multilateral sources of finance i.e. IMF, World Bank, African
Development Bank and the International Finance Corporation.
• Bilateral Sources i.e. borrowing from other rich countries e.g
UK, USA, China, Japan, etc.
• Foreign Capital Markets- this usually involves the sale of
government bonds in foreign financial markets.
• Domestic or Internal Sources for Financing Deficits
• Sale of short term government debt i.e. treasury bills ( they are
short term because they mature in one year)
• Sale of long term government debt i.e. bonds (they are long
term debt which mature in 5 years plus)
• Borrowing from the central bank but it may increase the money
supply
• Printing of new money – this is the least preferred option
because printing more money without a corresponding increase
in total output will trigger uncontrollable price inflation.
 National Debt
• This is the total amount owed by the government. It is
the sum of all PSNCRs ever borrowed.
• The degree of a country’s indebtedness is measured by
expressing the national debt as a percentage of GDP.
• Increased government borrowing adds to the debt
stock.
Sources of Government Revenue
• Government revenue includes:
• Taxes
• Proceeds from privatised industries
• Rent from government buildings and land
• Profits from nationalised industries
• Dividend income from any government shares in private
enterprises
• Grants received from other countries or international financial
institutions
The most significant source of government revenue is usually
income tax, VAT and social security contributions.