Question

please be able to discuss government spending, taxation and borrowing

Answer 1

Government spending refers to money spent by the public sector on the acquisition of goods and provision of services such as education, healthcare, social protection, and defense.

• In national income accounting, when the government acquires goods and services for current use to directly satisfy the individual or collective needs and requirements of the community, it is classified as government final consumption spending.
• In national income accounting, when the government acquires goods and services for future use, it is classified as government investment. They include public consumption and public investment, and transfer payments consisting of income transfers.

Sources of Government Spending

Government spending is financed primarily through two sources:

1. Tax collections by the government

• Direct taxes- as the name suggests, are taxes that are directly paid to the government by the taxpayer. It is a tax applied on individuals and organizations directly by the government e.g. income tax, corporation tax, wealth tax etc.
• Indirect taxes- are applied on the manufacture or sale of goods and services. These are initially paid to the government by an intermediary, who then adds the amount of the tax paid to the value of the goods / services and passes on the total amount to the end user. Examples of these are sales tax, service tax, excise duty etc.

2. Government borrowing

• Borrowing money from own citizens (Internal Debt)
• Borrowing money from foreigners (External Debt)

Government debt can be categorized as internal debt (owed to lenders within the country) and external debt (owed to foreign lenders). Another common division of government debt is by duration until repayment is due. Short term debt is generally considered to be for one year or less, and long term debt is for more than ten years. Medium term debt falls between these two boundaries. A broader definition of government debt may consider all government liabilities, including future pension payments and payments for goods and services which the government has contracted but not yet paid.