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Course Title: Public Finance Administration

Lesson 3: Public Expenditure

By the end of this lecture, you should be able to

i) know the introduction of Public Expenditure

ii) know the classification of public expenditures

iii) understand the purposes/ functions of public expenditure

iv) understand about Fiscal policy

v) Monitoring government allocation and expenditure

INTRODUCTION
The Theory of Public Expenditure
Two notable theories of public expenditure are examined, viz:
(a) "The Law of Increasing State Activities": A German Economist- Adolph Wagner in
1890 postulated this theory. According to him, there are inherent tendencies for the
activities of Government to grow, both intensively and extensively. He added that
there exists a functional relationship between the growth of an economy and that of
Government activities, and that the Governmental sector grows faster than the
economy. All categories of Governments, irrespective of their levels, intentions and
sizes, had exhibited the same kind of tendencies of increased expenditure.
(b) "The Displacement Theory": Jack Wiseman and Allan T. Peacock put forth the
theory in 1961. Their main argument was that public expenditure does not increase
in a straight or continuous manner, but in "Jack or Stepwise" fashion. At times, some
social or other disturbances occur which show the need for increase in public
expenditure, which the existing level of revenue cannot meet. Therefore, public
expenditure increases will make the inadequacy of the existing level of revenue clear
to everyone. The movement from the initial and low level of expenditure and taxation
to a new and higher level is known as the "displacement effect," while the
inadequacy of the revenue as compared with the required expenditure creates the
"inspection effect." Both Government and the people would attain a new level of "tax
tolerance" by reviewing the revenue position and finding solution to the problem of
inadequate finance. Since each major disturbance always leads Government to
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assume a larger proportion of the national economic activities, the net result is the
'concentration effect'. Therefore, 'concentration effect' is the tendency for
Government activities to grow faster than the economy.
The Meaning of Public Expenditure
Public expenditure refers to the expenses which Government incurs in the
performance of its operations. With increasing State activities, it may be difficult to
judge what portion of public expenditure can be ascribed to the maintenance of
Government itself and what portion to the benefit of the society and the economy as
a whole.

CLASSIFICATION OF PUBLIC EXPENDITURE

Public expenditure may be classified on the following basis:
(i) Nature of Expenditure Incurred: Under this basis Government expenditure is
broadly divided in to two (2) main categories, namely recurrent expenditure
and capital expenditure:
(a) Recurrent/revenue expenditures: Recurrent expenditure is the type of
expenditure that happens repeatedly on daily, weekly or even monthly
basis. This includes for example payment of pensions and salaries,
administrative overheads, maintenance of official vehicles, payment of
electricity and telephone bills, water rate and insurance premiums etc.
(b) Capital or development expenditures: Capital expenditure on the other
hand refers to expenditure on capital projects. This includes construction of
houses, roads, schools and hospitals, human capital development
(expenditures on education and health), purchase of official vehicles,
construction of boreholes and electrification projects, etc.
(ii) Economic Purpose for Expenditure: Under this basis we have three classes,
namely:
(a) Government consumption: Government purchases of goods and services
for current use, eg. road and infrastructure repairs, national defence, schools,
healthcare, government workers salaries e.t.c
(b) Government Investment: Purchases of goods intended to create future
benefits e.g. infrastructure, education and research and development.
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(c) Transfer payments: Transfers that do not involve purchase of any good or
service or payment to individuals, eg. Unemployment benefits, scholarships,
social welfare support, interest on public debt, etc.
(iii) Unit of government involved: Under this basis we have:
(a) Federal government and its MDAs
(b) State government and its MDAs
(c) Local government
(d) Separate Government bodies
(iv) Basis of function at which expenditure is directed:
a) justice and public order;
b) infrastructure (roads, railways, etc);
c) military;
d) Education;
e) health care;
f) support for the poor, the old, the disadvantaged;
g) support for firms, export and production in general;
h) special policy expenditure (e.g. foreign aid, fight against
drugs, etc). –
(v) Kinds of goods and services purchased. This gives rise to three sub-
classifications:
a) capital goods;
b) consumption goods;
c) personnel expenditure.
(In national accounts, public expenditure does not include transfers among social
groups, such as pensions, and interest payments of public debt).

Models of a State
The starting point is to understand that public spending nearly corresponds to three
general models of state to which a government may subscribe. In other words, how
much a government spends, overall, depends on which of these political frameworks
it has chosen as the foundation for running its affairs. These models are:
1) The minimal state: This is the model where justice, public order, foreign policy
and some basic functions should be carried out by the state; relaying on private
sector for the rest. The minimal state is currently the trend and is manifested in the
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drive towards less- government and greater privatization in what advocates call
public sector reforms;
2) The welfare state: This is the model where the state cares about the people’s
well-being directly, also through expenditure in education, health, and support for the
poor, the old, and the disadvantaged;
3) The developmental state: This is the model where the state takes the
responsibility of promoting economic development; also through expenditure in
infrastructure, support for firms, export and production in general.

Items of the minimal state are found in both welfare and developmental states.
However, military and special spending is common to all three models, even though
in different proportions. Government expenditure virtually depends on the model of
state chosen.

Determinants of Public Expenditure

Determinants-Public expenditure is determined, generally, by:
(a) The political will of those at the helm of affairs of the government;
(b) their priorities,
(c) chosen state-model
(d) interpretation of current economic and political trend.
(e) Other factors: Urbanization; Population; Economic growth; Depreciation;
Technological change; and Reduction in inequality.

Reasons for Increase in Government Expenditure

A number of factors have been identified as causing increasing in public expenditure
in various countries over time. Some of these are general, having relevance to all
countries, while others are specific to certain countries. These factors include the
following:

(i) Increase in Costs of Providing Security: The traditional functions of

government such as defense, maintenance of law and order, etc. are
becoming extensive and cumbersome. Defense is becoming expensive
more than ever. Within the country administrative set up is increasing both
in coverage and intensity, that is, government machinery has to be
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manned by experts in their respective fields. In addition, various
complexities of economic and social measures develop which make an
efficient administration complex and expensive as well.

(ii) Increase in Public Awareness: Besides the traditional functions of the

state, there is growing awareness of additional responsibilities. The
government is expanding its activities in the area of various welfare
measures which include measures to enrich the cultural life of the society
and those designed to provide social securities to the people such as
pensions, old peoples’ home etc.

(iii) Growing Population: Increasing population may also be a determinant of

public expenditure growth. The share scale of various public goods and
services has to rise in conformity with the growth of population. The need
for more schools, hospitals and such likes cannot be over-emphasized is
the light of increasing population.

(iv) Urbanization: It has been suggested that urbanization and the resulting
congestion has increased the need for more infrastructure and public
goods and services. Also quite a number of incidental services like those
connected with traffic, roads, pedestrian bridge etc. has to be provided.

(v) Increase in prices: The tendency for prices to go up has equally

contributed to the growth of public expenditure. The increase in prices of
input and other goods purchased by public sector has resulted in an
increase in public expenditure. It is the responsibility of the government to
protect the citizenry against the evils of price mechanism. Consequently,
anti-cyclical and other regulatory measures are put in place. Efforts are
made to reduce income and wealth inequalities and bring about social and
economic justice.

(vi) Increasing Cost of Debt Servicing: Increasing public expenditure can

also be explained in terms of increasing cost of debt servicing. Since
states are related to one another through various economic transactions,
there are tendencies to run into debts, which must be settled.
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PURPOSES/FUNCTIONS OF PUBLIC EXPENDITURE
The effects of public expenditure include the following:

1. Economic Stabilization: The philosophy of Laisser faire leaves much to be

desired in terms of economic results. The more advanced and free the market
mechanism, the more prone the economy is to the vagaries of income,
employment and price fluctuations. Public expenditure as an anti-cyclical tool can
be devised in such a manner as to create effective demand thereby stimulating
investment activities. It may be emphasized that the total demand need to be
regulated so that the demand flows match the supply flows otherwise the
stimulating effect would result in inflationary pressure.

2. Production: Public expenditure can help the economy to attain a higher level of
production. Through stimulation of investment, it can create conditions favourable
for market forces to push up production. It can be used to create human skills
through education and training and maintenance of social overheads. Public
sector investment can be specifically directed towards creation of particular
supplies and facilities, which may form an important and necessary input for other
industries. Through research and development, new and effective methods of
production can be found whereby local resources are used.

3. Economic Growth: Economic growth can be defined as an increase in a

country’s physical output over a long period of time. A country is said to have
experiment economic growth, when the real output of goods and services is
increasing at a faster rate than the rate of growth of its population. Countries
pursue economic growth in order to enjoy the benefit of a greater output, hence
improve their standard of living. In a developed economy, through economic
stabilization, stimulation of investment activities and so on, public expenditure
helps to maintain a smooth growth rate. In an under-developed economy. Public
expenditure has important role to play in reducing regional disparities, developing
social overheads, creation of infrastructure for economic growth in terms of
communication and transportation facilities, education and training, growth of
capita] goods industries, research and development etc. When expenditure is
incurred, it may be directed towards a particular investment or it may be used to
bring about re-allocation of investible resources in the private sector of the
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economy. An important way in which expenditure can accelerate the rate of
economic activities is by reducing the divergence between the social and
marginal productivity of certain investment.

4. Economic Development: Economic development cat be defined as the

elimination or reduction in poverty, inequality and unemployment within the
context of a growing economy, there may be growth without economic
development.

5. Distribution: An important evil of the market mechanism is the inequalities of

income and wealth, which arise on account of it and get widened through the
institution of private property and inheritance Furthermore, such income and
wealth disparities not only result in social and economic injustice but also distort
production and employment patterns. Suffice to say that lesser income and
wealth inequalities contribute towards economic stability. Welfare consideration
favours an equitable distribution of income and wealth since the purpose of
economic policy is to attain the maximum level of social benefits possible. A shift
towards equality may be achieved through various forms of public expenditure
especially those that are meant to help the poorer sector of the society. Items of
common consumption may be subsidized and production of those, which are in
short supply, can be taken up by Public Sector. Left for the market mechanism
the supply of merit goods tiny in be possible. Public Expenditure through direct
purchase production or subsidies can ensure that their supply is augmented to
the desired level and can reduce unemployment and improve income and wealth
distribution.

6. Price Stability: Price stability refers to a situation where the general level of
prices of goods and services changes very little or no changes at all. Price level
stability exists when the annual rate of increases in prices measured by
appropriate indexes is less than 2%. Common measures of price stability are: (i)
Consumer price index (measure of level of prices of all new domestically
produced goods and service); (ii) Wholesale price index; and (iii) National product
deflator (an economic metric that accounts for the effect of inflation in the current
year’s GNP by converting its output to a level relative to a base period).
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7. Full Employment: Full employment is a concept that cannot be precisely
defined. Full employment does not mean that everyone has a job. This is
because there shall always be people, such as babies, under-aged kids, very old
people who cannot work even if they are willing to do so. This situation makes
every government to define its full employment level e.g. in US full employment
level is 97%. In Canada it is 96%, then the balance being the unemployment rate.

In Sierra Leone, however, full employment policy has not been given a place of
prominence and specific target has not been mentioned, Unemployment is a
welfare loss to the society in terms of total output that is being forgone. It is
equally a welfare burden borne by individuals.

8. Balance of Payment (BOP) Equilibrium: Balance of Payment (BOP)

equilibrium is a record of a country’s transaction with the rest of the world over a
period of time in respect of visible and invisible items. The balance of payment
provides an indicator of a country’s international economic position. Because of
the importance of the above, balance of payment equilibrium becomes an
important objective of economic stabilization policy.

9. Equitable Distribution of Incomes: This has to do with how income is being

distributed in the economy in a fair and equitable manner. Unfortunately in less
developed countries, the income distribution pattern is an asymmetrical one, i.e. it
is not evenly distributed. This accounted for the widespread poverty in these
countries. The policy investment usually used to achieve the above macro-
economic objective are: (i) Monetary Policies (cost, allocation and distribution of
credit to change the level of money supply); (ii) Fiscal Policies (government
spending and levying taxes to achieve macroeconomic objectives); (iii) Incomes
Policy (regulation of reward to factors of production, minimum and maximum
prices, minimum wages, rent and interest). The monetary policy is a measure
designed to influence cost, allocation and is tribulation of credit in order to change
the level of money supply in the economy. This fiscal policy refers to the
deliberate action, which the government of a country takes in areas spending
money and/or levying taxes with the objective of achieving macro-economic
variable. The income policy on the other hand relates to the regulation of the
rewards that go to the factors of production such as labour (minimum wage
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legislation). It equally includes the registration of product prices (minimum and
maximum price legislation).

Standards of Public Expenditure Decisions

Expenditure decisions should be guided by the following standards, among others:
a) Economy: The nation's resources are scarce, compared with the needs of the
society. It is therefore important that no wastage is allowed in public expenditure.
The process of public spending should not involve the use of more resources than
are actually necessary wasteful usage of public fund must be avoided. Scientific
approach towards assessment of required expenditure must be adopted. Budgeting
techniques such as Planning and Programming Budgeting System and Zero-Base
Budgeting System could be adopted.
(b) Benefit: Every public expenditure should be viewed against the benefits that will
accrue there from. It should be incurred only if it is beneficial to the society.
(c) Surplus: Government should avoid persistent deficit budgeting. It should be
consistently prudent and aim at meeting its current expenditure needs out of current
revenue. Government should not over- spend and eventually run into debt. Moderate
surpluses over some years will take care of any unavoidable deficit during any other
year.
(d) Sanction: All public expenditure should be subjected to legal appropriations and
authorisations. Any contravention of expenditure procedure and due process should
be sanctioned. As required by law all unspent appropriations should be returned to
the Treasury at the financial year end.

Public Expenditure Management and Control: The management and control of

public expenditure is a responsibility that falls on government institutions and
individual public servants. As an institutional duty, both executive and parliamentary
arms of government have constitutional roles aimed at ensuring the proper
disbursement of public funds. Individually, all civil servants who handle government
funds and properties are required to observe certain rules and guidelines in ensuring
appropriate custody and spending of public monies. For clarity, expenditure
management and control are discussed separately, although they are inter-related.

Principles of Public Expenditure Management (PEM): Due to the scarcity of

resources in the face of unlimited demands, the need for an economic utilization of
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these resources by the management of organizations becomes imperative. For this
reason, certain guidelines, in the form of basic truths or principles, ‘have been
evolved to assist in the effective and efficient management of public expenditure.
Before embarking on spending any of public funds, officials should examine the Ten
Principles of Public Expenditure Management contained in Table below.

Table 1: Guidelines for dealing with Public Finances

Principles to be
observed by Public
S/No. Officials Action Required from Public Officials
Budgets must encompass all financial operations of
government; off-budget expenditure and revenue are
1 Comprehensiveness prohibited.
Decision-making must be restrained by resource
realities over the medium term; the budget should
absorb only those resources necessary to implement
government policies, and budget allocations should be
2 Discipline adhered to.
Policymakers who are in a position to change policies
during implementation must take part in the formulation
3 Legitimacy of the original policy and agree with it.
Decisions should be defend until all relevant
4 Flexibility information has become available.
There must be stability in general and long-term policy
5 Predictability and in the funding of existing policy.
All sectors must compete on an equal footing for
6 Contestability funding during budget planning and formulation.
The budget must be derived from unbiased projections
7 Honesty of revenue and expenditure.
8 Information There should be medium-term aggregate expenditure
baseline against which the budgetary impact of policy
changes can be measured;
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Accurate information on costs, outputs and outcomes
should be available.
Decision-makers should have all relevant information
before them and be aware of all relevant issues when
they make decisions;

These decisions and their bases should be

communicated to the public.
9 Transparency
Decision-makers are responsible and accountable for
10 Accountability the exercise of the authority provided to them.

In addition to the ten principles outlined, civil servants are required to be cost-
conscious. The following ways could check extravagance:
a) Every officer or employee should justify his employment by giving efficient
services in return for his earning,
b) Every official expenditure should be duly authorized by an appropriate authority,
as required by regulation,
c) The expenditure should be in accordance with the Financial Regulations
(Instructions/Memorandum),
d) Staff recruitment should be dictated by real needs so that underemployment and
over-establishment are avoided,
e) Economy should be exercised in buying office furniture, equipment and stationery,
f) Made-in-SL goods should be preferred to imported goods,
g) No officer should condone wasteful spending of public funds by other civil
servants.

FINANCING GOVERNMENT EXPENDITURES

How a government chooses to finance its activities can have important effects on the
distribution of income and wealth (income redistribution) and on the efficiency of
markets (effect of taxes on market prices and efficiency). The issue of how taxes
affect income distribution is closely related to tax incidence, which examines the
distribution of tax burdens after-market adjustments are taken into account. Public
finance research also analyzes effects of the various types of taxes and types of
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borrowing as well as administrative concerns, such as tax enforcement.

(i) Taxation: Taxation is the central part of modern public finance. Its significance
arises not only from the fact that it is by far the most important of all revenues
but also because of the gravity of the problems created by the present day tax
burden. The main objective of taxation is raising revenue. A high level of
taxation is necessary in a welfare State to fulfil its obligations. Taxation is used
as an instrument of attaining certain social objectives i.e. as a means of
redistribution of wealth and thereby reducing inequalities. Taxation in a modern
Government is thus needed not merely to raise the revenue required to meet
its ever-growing expenditure on administration and social services but also to
reduce the inequalities of income and wealth. Taxation is also needed to draw
away money that would otherwise go into consumption and cause inflation to
rise.
(ii) Public finance through state enterprise: Public finance in centrally planned
economies has differed in fundamental ways from that in market economies.
Some state-owned enterprises generated profits that helped finance
government activities. The government entities that operate for profit are
usually manufacturing and financial institutions, services such as nationalized
healthcare do not operate for a profit to keep costs low for consumers.
(iii) Non-Tax Revenue: This is made up of all revenues, other than taxes, that are
generated by government to finance its expenditures. These include fines, fees
and rates, licenses, earnings from sales, rent from government properties,
interest payment and repayment of loans, re-imbursement, and miscellaneous
revenue.
(iv) Donations: Donations received from foreign governments and donors
agencies.
(v) Public debt: Public borrowing from the capital market by way of bonds or from
local and international financial institutions.
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FISCAL POLICY

The Meaning of Fiscal Policy

The term fiscal policy has conventionally been associated with the use of taxation
and public expenditure to influence the level of economic activities. Fiscal policy
involves the use of government spending, taxation and borrowing to influence the
pattern of economic activities and also the level and growth of aggregate demand,
output and employment. Fiscal policy is concerned with deliberate actions which the
Government of a country take in the area of spending money and/or levying taxes
with the objective of influencing macro-economic variables, such as the level of
national income or output, the employment level, aggregate demand level, the
general level of prices etc in a desired direction.

The implementation of fiscal policy is essentially routed through government’s

budget. The budget is, therefore, more than a plan for administering the government
sector. It (budget) both reflects and shapes a country’s economic life and is used as
a tool of managing a nation’s economy. Fiscal policy can be used for allocation,
stabilisation of economic activities and income distribution. Fiscal system of an
economy may be either centralised or decentralised, depending on whether the
political structure is federalist or unitary. Sierra Leone as a state so that its fiscal
system is decentralised, and there exists a division of fiscal powers and
responsibilities among the federal, state, and local governments. In a unitary
government such as Britain, fiscal powers are concentrated with the central
government. Table 1 presents the allocation of responsibilities in Sierra Leone
between the states and the local governments.

Assignment
Table 1: Allocation of responsibilities by government in Sierra Leone (1961)
Please state the source:
Table 2: Sierra Leone’s major taxes, jurisdiction and right to revenue
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Source:
State and analyses the objectives of the Sierra Leone Fiscal Policies
How does Fiscal Policy Measures in Sierra Leone
List and explain the Instruments of Fiscal Policy in S/L
Explain the Effects of Fiscal Measures

Fiscal Policy through Variations in Government Expenditure and the

Achievement of Desired Economic Goals
To see how fiscal policy works, consider a business cycle. A business cycle refers to
cyclical movement in the level of economic fortunes of a country. As shown below,
the cycle tends to repeat itself overtime.

A boom period refers to the highest prosperity level. It describes a situation where
output level is high, employment, national income, and all macro-economic variables
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are at desirably high levels. While a non-boom period is generally desired,
sometimes, an undesirable by-product of this situation is a high level of inflation.

A recessionary phase of the business cycle refers to a downturn in the economy. It is

characterized by falling levels of aggregate demand, output, income and
employment. A depression phase is when things are completely down and there is
widespread unemployment and general misery. A recovery phase refers to a
situation when an economy is picking up again. Aggregate demand for goods and
services may be rising gently to be followed by rising levels of income, output and
employment. As the trend continues, this may lead to another boom as shown in
figure 1.

Figure I: A Business Circle

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To see the effect of changes in Government expenditures, consider an economy
which is in equilibrium at a recessionary phase. The Government, in order to stem
the tide, may increase its spending. This is a fiscal measure. The increased
government spending from say, G1 to G2 (G2 higher than G1), will raise the level of
aggregate demand (see figure 2).

Figure II: Effect of Increase in Public Expenditure on the Economy

AD1 (C+I+G1) to AD2 (C+I+G1). The increased level of aggregate demand will raise
national income (through the multiplier effects) and, therefore, output and
employment, many times more than the increased Government spending that sets
the scenario off. In fact, the level to which national income will rise, will depend on
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the marginal propensity to consume. If the marginal propensity to consume is say 4/ 5
then, the marginal propensity to save will be (1- 4/ 5)= 1/ 5 . The multiplier coefficient
will then be 5 the reciprocal of the marginal propensity to save. Consequently, if the
initial government spending were increased by say, Le20 million, then the increased
level of income that would result, would be Le20 million x 5 = Le100 million. By the
time income is increased by Le100 million, output level in the economy would have
increased and so would the employment level through the multiplier effects. Thus,
the effect of increased Government spending will be to stimulate the economy
towards the path of growth only. It can also be used to reduce or moderate
inflationary pressures. To do this, the Government has to reduce its expenditures. A
reduction in Government expenditure will reduce aggregate demand for goods and
services. This reduction in aggregate demand, in turn, will eventually lead to a
reduction in prices. But again, an undesirable effect of a reduction in Government
spending, may be a reduction in national income, output level and-, consequently,
employment level. Because’ of this undesirable effect, Governments are very
cautious about deflationary policies which affect the level of employment.

Taxation as an Instrument of Fiscal Policy

A tax is a form of levy imposed by the state on people, corporate bodies or goods.
There are two forms of taxes: These are:
(a) Direct taxes and
(b) Indirect taxes
Direct taxes are levied on people or corporate bodies and the burden of such a tax
cannot be shifted to anyone else (However, some tax experts have argued in recent
times that virtually all taxes can be shifted). Indirect taxes are levied on goods and
services. The whole or part of the burden of an indirect tax may be shifted by
producers to consumers.

Automatic Stabilizers
Taxes and transfer payments which change with income are referred to as automatic
stabilizers. They are regarded as automatic stabilizers because they reduce
fluctuations in income, output and employment without deliberate action on the part
of policy makers. Thus, automatic stabilizers are built into the economy. The two
automatic stabilizers are progressive income tax and transfer payments. To see how
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these automatic stabilizers work, let us consider the two cases separately.

Progressive Income Tax

In virtually all economies, some taxes are progressive. This means they change at a
higher rate with changes in the level of income. Thus, if income changes, taxes, if
progressive, change more than the proportion by which income has changed and
thereby dampen consumption. If, therefore, income is rising as a result of the
operation of the multiplier process, the extent of the fluctuation is checked to some
extent by the higher progressive taxes. Thus, the progressive nature of taxes tends
to have a stabilizing effect on income by reducing consumption expenditure, thereby
making the multiplier smaller. The reverse is also true. A fall in income will lead to a
less than proportionate fall in the amount of taxes collected. This will lead to a higher
consumption relative to the amount of income.

Transfer Payments
Another set of automatic stabilizers are transfer payments. As already mentioned
earlier, transfer payments are expenditures such as unemployment benefits,
pensions, etc which are paid to beneficiaries by the government or the private sector
even though the people involved may not have contributed to the present national
income.

Transfer payments are stabilizing because when economic activity is at a low level
and national income is declining, unemployment benefits and pensions tend to rise
because more people qualify for these payments. The resulting spending from the
transfer payments made to these people may generate the multiplier process leading
to rising income to compensate automatically for the initial decline in income.
Conversely, as economic fortunes improve for a country the level of national income
starts rising and the number of people who were previously unemployed reduces.
Also, some of those who probably retired earlier may now wish to go back to work.
Transfer payments therefore fall this time around. The reduction in expenditure as a
result of the fall in transfer payments may generate a fail in income in the opposite
direction to the initial rise in income, as a result of the earlier improved economic
conditions. This Situation stabilizes the economy and serves to moderate
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fluctuations.

Advantages of Automatic Stabilizers

Automatic stabilizers have many advantages. In the first place, as already implied
above, they serve to moderate fluctuations in economic activity. As the level of
economic activity declines for example, output and employment eventually would fall.
This, in turn, would result in an automatic fall in taxes while government transfer
payments would increase. These changes prevent disposable income, and,
consequently consumption, from decreasing by as much as they would in the
absence of the automatic stabilizers. This makes the decline in economic activity not
to be as severe as it otherwise would be.

The second advantage of automatic stabilizers is that since taxes and transfer
payments change automatically when income changes, the resulting change occur
rapidly. Thus, if workers lose their jobs, taxes are no longer paid. Some of them may
become eligible for unemployment benefits immediately. This is unlike discretionary
fiscal policy (see below) which may require legislation and therefore takes time to
become effective.

Despite these advantages, automatic stabilizers have one major disadvantage.

Automatic stabilizers retard a nation’s recovery from recession. As income and
employment increase, taxes will increase automatically and transfer payments will
fall. These changes, in turn, lead to a fall in the rate of increase in disposable income
and consumption which eventually leads to a fall in income.

The Use of Taxation as an Instrument of Fiscal Policy in Sierra Leone

Fiscal policy is part of government policy concerning taxation and other revenues,
public spending, and government borrowing (the public sector borrowing
requirement).

Governments have to decide how much to spend, how resources should be shared
between different spending programmes, how much to raise in taxes and in
borrowing, as well as what taxes to levy, thereby directing the economy. For
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example, value-added tax (VAT) and excise duty on tobacco discourages cigarette
smoking; mortgage tax relief encourages people to buy their own home. At
macroeconomic level, more public spending and less taxation will stimulate total
spending in the economy, leading probably to a fall in unemployment but a rise in
inflation.

In Sierra Leone, the Fiscal Policy Department of the State Ministry of Finance,
formulate and implement the fiscal policies of the Republic of Sierra Leone.
Formulation of Government’s fiscal policy is made on the basis of the required
adjustments and changes, to be made in taxation, revenue and expenditure for
purposes of economic growth, stabilization and equity. Sierra Leone is governed by
a state system, hence its fiscal operations also adhere to the same principle. This
has serious implications on how the tax system is managed in the country. In Sierra
Leone, the government’s fiscal power is based on a three-tiered tax structure divided
between the state and local governments, each of which has different tax
jurisdictions.

MONITORING GOVERNMENT ALLOCATION AND EXPENDITURES

The principles for managing public resources run through many diverse
organizations delivering public services. The requirements for the different kinds of
body reflect their duties, responsibilities and public expectations. The standards
expected of public services anywhere in the world are honesty, impartiality,
openness, accountability, accuracy, fairness, integrity, transparency, objectivity and
reliability, carried out in the spirit of, as well as to the letter of, the law in the public
interest to high ethical standards achieving value for money.

Expenditure control could be defined as the strings of coordinated actions which

have to be taken to ensure that all expenditures are 'wholly', 'necessarily',
'reasonably' and 'exclusively' incurred for the purposes for which they are meant.
The following are the basic controls exercised over Government expenditure:
(a) The Executive Control.
(b) The Legislative Control.
(c) The Ministry of Finance Control.
(d) The Treasury Control (Office of Accountant - General of the Federation)
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(e) The Departmental Control.
(f) Office of the Auditor - General for the Federation.

1. The Executive Control

The Executive comprises the President and his cabinet members who have the
responsibility for the efficient and effective control of the administration of the country
- politically and economically. The Constitution created two other arms of
government, called the Legislative and the Judiciary for purposes of checks and
balances. All measures and policies taken by the President are subject to the
approval of the Legislature within the ambit of the Constitution. Consequently, in
accordance with Section 75(1) of the Constitution, "The President shall cause to be
prepared and laid before each House of the National Assembly at any time in each
financial year, estimates of revenue and expenditure of the Federation for the
following financial year." The President, in order to satisfy the provisions of the
Constitution also appoints a Cabinet Committee on Estimates, to advise him on the
contemplated policy measures. The policy measures contemplated are then
transmitted to the Budget Department in the Presidency. This development in turn
leads to the issuance of guidelines on the preparation of the Budget. As a result,
effective supervision is exercised on all the Agencies involved in budget operation.
Any Unit of the Government whose requirements are higher than the 'control figures'
already issued, is invited to defend the excess request.

2. The Legislative Control

The National Assembly is the Supreme Authority on matters of the Nation's finance.
The control exercised by the Legislature is both 'antenatal' and 'post-natal'. The
'ante-natal' control is in the sense in which the Legislature considers and approves
the Estimates submitted to it by the President. 'Post-natal' control is the review of
transactions after payment. No amount of public fund may be spent without the
approval of the National Assembly. However, Section 82 of the 1999 Constitution
empowers the President to spend from the Consolidated Revenue Fund to carry on
the administration of Government of the Federation for not more than six (6) months
or until the coming into operation of the Appropriation Act, whichever is earlier.
3. Ministry of Finance Control
When Ministries/Departments require money to pay for services, they normally apply
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to the Minister of Finance, for such funds. The tradition is that once a year the
Ministries and Parastatals present Estimates to cover their needs and requirements
which are expected to be prudent, necessary and reasonable, in accordance with the
Financial Regulations and Appropriation Act. The Minister passes the Consolidated
Revenue and Expenditure Estimates to the President who will present them to the
Federal Executive Council for approval before they are forwarded to the National
Assembly as Appropriation Bill.

4. The Treasury Control - Office of the Accountant-General of the State (OAGS)

The Accountant-General has overall responsibility for the total expenditure of
Government. His office would keep necessary books of accounts to record all the
receipts and expenditure of the various Ministries and Departments. The Treasury
Department exercises some measure of supervision and checks over the accounting
records of the Non-Self Accounting Units.
5. Inspectorate Officers from the Office of the Accountant - General of the
Federation visit the various Ministries and Departments to evaluate the system of
internal control. They do this to ensure that the accounting system and maintenance
of various books of accounts conform to the approved regulations and procedures.

This is another aspect of control exercised in any organisation. The Treasury

dispatches Internal Auditors to the Ministries and Self-Accounting Departments to
appraise the effectiveness of the existing internal checks and report upon any
inadequacy discovered.

6. Controls by Warrants
Although the Estimates and Appropriation Acts guide the disbursement of public
funds, the release of money is subject to issuance of relevant Warrants by the
Finance Minister, for the expenditure. The Warrant authorizes the Accountant-
General to release fund from the Consolidated Revenue Fund or Development Fund.
The system of Warrant gives the Executive greater control over the issuance of
funds than would be offered by a system which relies solely on the provisions of the
Appropriation Acts.

7. Departmental Control over the Budgeted Expenditure

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A Departmental Vote Expenditure Allocation Book (D.V.E.A. Book) is a record of
payments made and liabilities incurred under the Votes or Funds approved for each
Ministry or Extra-Ministerial Department. A Vote Book is maintained for each Head or
Sub-Head of expenditure. It is an integral part of the Budgetary Control System. The
Book is designed to facilitate vote watching to ensure that expenditure incurred are
not in excess of appropriation. Over-expenditure of departmental vote amounts to
reckless use of public funds and is seriously frowned at by Government. It is the
duty of the Officer who is controlling the Vote to thoroughly investigate, without
delay, payments or charges which appear in the schedules drawn up by the
Accountant-General, which do not appear in the Vote Books particularly with a view
to the prevention and detection of fraudulent payments.

9. Auditor-General for the State

The Auditor General for the Federation scrutinizes all accounts and records of the
money collected and spent and reports to the National Assembly appropriately on
the instances of waste, extravagance, inefficiency or fraud. It is observed that the
Auditor-General's duty is post-payment audit, except in the matters relating to
pension and gratuity payments on which he performs pre-payment audit. This is in
addition to the regularity and compliance audit that he carries out as a duty.