★ Public Finance

Q-1: What is public finance? What are the main features of public finance?

Public finance
Public Finance is the study of Government activities and how the Government finance those
activities. Collection of taxes from those who benefit from the provision of public goods by the
government, and the use of those tax funds toward production and distribution of the public goods.

Main features of public finance:

1. Efficient allocation of resources.

2. Distribution of income.
3. Improve the quality.
4. Raise extra benefits.
5. Facilitate the customer.
6. Macroeconomic stabilization.
7. Earn maximum turnover.
8. Improve goodwill.

Q-2: Distinction between public finance and private finances.

Difference between private and public finance:

these are the differences between the private and public finance.
1: Adjustment of income and expenditure: a government first prepares an estimate of expenditure
and then means to raise that sum and the individual must adjust his expenditure to his income.
2: Budgeting: the unit for the public budget is one year but an individual needs not balance his
budget during a given period.
3: Deficit financing: deficit financing is a peculiar privilege of government but an individual can not
do it, unless he is prepared to go behind the bars.
4: Different objectives: an individual tries to maximize his satisfaction or profit from a given amount
of resources but the objective of government expenditure is to maximize social benefit.
5: Publicity of finance: budgets are published and the widest publicity is given to them. On the other
hand, the secrecy surrounds individual finance.
6: Coercion: a government has to pass a law and compel the citizen to pay a tax while an individual
lacks the coercive authority.

Q-3: What are the relationship between public finance and the economic system?

Public finance is the study of the role of the government in the economy. It is the definitive branch
of Economics which assesses the Government revenue and Government expenditure of the Public
Authorities and the adjustment of one or the other to achieve desirable effects and avoid
undesirable .
Public finance studies the income-getting and income-spending activities of the public bodies or the
state. Private finance deals with the way a private person gets and spends his income.

An economic system is comprised of the various processes of organizing and motivating labor,
producing, distributing, and circulating of the fruits of human labor, including products and services,
consumer goods, machines, tools, and other technology used as inputs to future production, and
the infrastructure within and through which production, distribution, and circulation occurs. These
processes are overdetermined by the political, cultural, and environmental conditions within which
they come to exist. In comparative economic systems, these economic systems are usually
defined within determinate political boundaries.

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★ VAT

Q-1: What is VAT?

Value added tax refers to the tax applied on value added as per prescribed rate. In fact, it is a multi-
stage indirect tax imposed on the value added at different stages starting from production to
distribution process.
A value added tax (VAT) is a form of consumption tax. From the perspective of the buyer it is a tax
on the purchase whereas from the seller’s point of view it is a tax only on the value added to a
product material or service at the stage of its manufacture or distribution. The value added to a
product by a business is the sale price charged to its customer minus the cost of materials and
other taxable inputs. A VAT is like a sales tax in that ultimately only the end consumer is taxed.

Q-2: Process of VAT assessment.

Step-1: Manufacturer adds value to product which value is the difference between cost of raw
materials & price charged by manufacturer for sale of the product. VAT is charged on value added
with price charged while selling.
Step-2: The manufacturer pays VAT on the basis of percentage & gets a rebate from government
for VAT paid on input raw materials.
Step-3: The wholesaler pay VAT on the product they purchase for sale on the value they add—
which is the difference between the price what they paid to manufacturer & the price at which they
sell to retailer. The VAT is charged on percentage basis & added to price while selling.
Step-4: The wholesaler gets rebate from government for VAT paid to the manufacturer.
Step-5: The retailer pay VAT on the product they purchase from wholesaler on value added—
which is the difference between price they paid to wholesaler for the product & the price at which
they sell it to consumer. This VAT is added to price charged on consumer & this is the final sale
price.
Step-6: The retailer gets rebate/collect rebate from government for VAT paid to wholesaler.
Step-7: The retailer collect VAT from consumer & buy products along with price charged on
consumer. Thus VAT is charged at each stages, computed based on percentage & charged on
value added. The process of getting rebate from government through earlier parches stage thus
goes on and the ultimate total VAT is borne by consumer.

Q-3: Different modes of Computation of VAT.

There are different procedures of computing VAT depending on situation & methods. The important
formulae for computation depending on situation are given below—
• Under Tax Credit Method: VAT payable = Output VAT – Input VAT, where, Output VAT = Output
Value exclusive of VAT × VAT Rate, Input VAT = Input Value Exclusive of VAT × VAT Rate
• On the basis of Value Added: VAT Payable = VAT Rate × Value Added, where, Value Added =
Output Value exclusive of VAT – Input Value exclusive of VAT
• In case of Service with turncated rate of value addition: VAT Payable = Output Value exclusive of
VAT × Rate of Value Addition × VAT Rate

In this connection, it may be noted that in Bangladesh for computing VAT liability of a tax-payer, the
tax credit method is followed. In Bangladesh now VAT is imposed at import level, producers level,
wholesale level and retail level.

Q-4: Give list of items chargeable to VAT and those exempted in Bangladesh.

Q-5: Discuss the reasons for introducing VAT in Bangladesh.

• Greater simplicity, transparency

• Increase competitiveness of industries
• Increase revenue
• Encourage better administered tax system
• To avoid the problem of under valuing
• To help in fiscal consolidation.
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Q-6: Describe the method and time for payment of VAT.

Q-7: Discuss some important features of VAT in Bangladesh. (152)

• General tax
• Charge as percentage
• Compulsory for buyers and sellers
• Zero rated for export
• Exempted for cottage & agro-
based industries
• Paying system
• Easy and transparent

Q-8: What is the arguments for (advantages) of value added tax? (152)

• Encourages personal savings & investment

• Revenue Potential
• Act as supplementary tax
• Cross audit feature
• Less Litigation
• Easier
• Minimum Exemptions

Q-9: What is the arguments against (disadvantages) of Value added tax? (152)

• Revenue is lower than expected

• Increase inflation
• Refund of Tax
• Increase in Investment
• Not Credit for Tax paid on Interstate

Q-10: Discuss the power and function of VAT appellate tribunal.

12. (1) Unless the President in any particular case or class of cases otherwise directs, the powers
and functions of the Appellate Tribunal shall be exercised by Benches of the Appellate Tribunal,
hereinafter referred to as Bench, to be constituted by the President.

(2) A Bench shall be so constituted that it has not less than two members
subject to the provisions of sub-sections (2) and (3), the decision of bench in any case or on any
point shall be given in accordance with the opinion of the majority of its members.

(2) Any point on which the members of a Bench are equally divided shall be stated in writing and
shall be referred by the President to one or more other members of the Appellate Tribunal for
hearing and the Point shall be decided according to the majority of the members of the Appellate
Tribunal who have heard it including those who first heard it.

(3) Where there are only two members of the Appellate Tribunal and they differ in any case, the
Government may appoint an additional member of the Appellate Tribunal for the purpose of hearing
the case; and the decision of the case shall be given in accordance with the opinion of the majority
of the members of the Appellate Tribunal as constituted with such additional member.

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★ Tax

Q-1: What is tax?

Tax is the revenue collected by the government from persons and organizations under different
taxing acts. In other words it is a liability imposed(levied) upon the assessee who may be
individuals, groups of individuals and other legal entities.

According to Justice Holmes, the price paid to he government for living in a civilized society is the
tax.

According to Taylor, taxes are the compulsory payments to government without expectation of
direct benefit to the tax payer.

If tax is levied directly on personal or corporate income, then it is a direct tax. If tax is levied on the
price of a good or service, then it is called an indirect tax. The purpose of taxation is to finance
government expenditure. One of the most important uses of taxes is to finance public goods and
services, such as street lighting and street cleaning. Since public goods and services do not allow a
non-payer to be excluded, or allow exclusion by a consumer, there cannot be a market in the good
or service, and so they need to be provided by the government or a quasi-government agency,
which tend to finance themselves largely through taxes.

Q-2: What are the characteristics of tax?

i. It is a compulsory levy under taxing act;

ii. It is generalized exertion for indirect and group exertion for direct tax;
iii. Tax payers cannot claim direct and proportionate or equivalent service for payment of tax;
iv. It is the price paid to the government for living in a civilized society;
v. It is the main stay of government revenue.

Q-3: What are the objectives of tax?

Objectives:
1. Collection of revenue: No government can run its administration and perform development works
without collecting tax as a source of revenue. Thus, the main objective of tax is the collection of
revenue.
2. Redistribution of income: Concentration of money and income in few hands can create socio-
economic and political problem. Through taxation and various techniques under it, government
endeavors to the redistribution of income.
3. Economic control: To guide the economy in desired direction, government needs to control
inflation, push money to the economy, develop certain sectors of the economy and control some
activities.
4. Protection of industry: For the greater interest of the country government may provide incentive
to infant and certain basic industries. For this, tax incentive for setting up and protect such industry
through tax policy.
5. Economic development: For development of a certain government needs to create infrastructure
and invest in certain sectors. For this activities government needs funds and tax revenue can
provide fund for the purpose.
6. Full employment: One of the most important objectives of tax is to lead the economy to full
employment stage. Through efficient tax system and expenditure policy, government can achieve
this objective.
7. Raising National income in the desired level: Taxation can be used as a tool for raising national
income. For increasing national income in adequate level, tax system should be taken as the
important tool and it can be effectively used if the policy is framed taking such objective as

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important.

Q-4: Discuss the role of tax in economic development of a developing country?

For economic development of a country, tax can be used as an important tool in the following
manner—

1. Optimum allocation of available resources: Tax is the most important source of public revenue.
The imposition of tax leads to diversion of resources from the taxed to the non-taxed sector. The
revenue is allocated on various productive sectors in the country with a view to increasing the
overall growth of the country. Tax revenues may be used to encourage development activities in
the less developments areas of the country where normal investors are not willing to invest.
2. Raising government revenue: In modern times, the aim of public finance is not merely to raise
sufficient financial resources for meeting administrative expense, for maintenance of low and order
and to protect the country from foreign aggression. Now the main object is to ensure the social
welfare. The increase in the collection of tax increases the government revenue. It is safer for the
government to avoid borrowings by increasing tax revenue.
3. Encouraging savings and investment: Since developing countries has mixed economy, care has
also to be taken to promote capital formation and investment both in the private and public sectors.
Taxation policy is to be directed to raising the ratio of savings to national income.
4. Reduction of inequalities in income and wealth: Through reducing inequalities in income and
wealth by using a efficient tax system, government can encourage people to save and invest in
productive sectors.
5. Acceleration of Economic Growth: Tax policy may be used to handle critical economic situation
like depression and inflation. In depression, tax is set to increase the consumption and reduce the
savings to increase the aggregate demand and vice verse. Thus the tax policy may be used to
strengthen incentives to savings and investment.
6. Price Stability: In under developed countries, there is another role to maintain price stability to
ensure growth with stability.
7. Control mechanism: Tax policy is also used as a control mechanism to check inflation,
consumption of liquor and luxury goods and to protect the local poor industries from the uneven
competition. Taxation is the only effective weapon by which private consumption can be curbed
and thus resources transferred to the state. Thus the economy can ensure sustainable
development.

Thus it can be said that the economic development of a country depends various reasons one of
them are on the presence of an effective and efficient taxation policy.

Q-5: Distinguish between proportionate tax and progressive taxes.

Proportional Taxation
Under this system all taxpayers pays the same proportion of their income in taxes. The same
percentage tax is levied on both high and low income earners. Therefore if the percentage tax
charged is 10% of income then each person will pay that proportion of their income.

Progressive Taxation
A progressive tax system levies a higher percentage of tax on high income earners compared to
lower income earners. This ensures that higher income earners pay a larger proportion of their
income than lower income earners.

The difference between proportional and progressive tax is that the former levies the same tax
percentage even if an individual’s spending fluctuates while the latter imposes a varying tax rate
depending on one’s income. This means that with proportional taxes, one’s tax liability does not
increase in proportion with one’s income growth or fall. Whatever your income level is, you’ll
continue to pay the same flat amount on your taxes regardless of any significant changes on your
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wealth. On the other hand, progressive tax will increase one’s tax rate at a higher percentage once
your income also rises. If your income lowers then your tax rate will also lower commensurately if
you are taxed using a progressive tax. Thus, this kind of tax will inevitably take a more substantial
amount from you once your income also increases.

Q-6: Mention the arguments for and against proportional taxation.

Arguments Against Proportional Taxes

Some argue that proportional taxes are most difficult to pay for those who are poor, and feel that a
proportional system is too similar to a regressive tax system to be beneficial. In general, a
regressive tax is one that requires a higher amount of income from the lower class than from the
higher class, even though the regressive tax rate is the same for both classes. For example, upper
and lower class people will pay the same tax rate on a box of detergent, but it may hurt the poorer
man’s pocket more when he has less money to spare due to his lower income. In the case of a
proportional system, some argue that even though the tax rate remains constant for everyone, it
will be most difficult for the poorest people to pay because they have so little to spare.

One argument against proportional taxes is that it can act similar to a regressive tax. The fact that
everyone pays the same amount of sales tax on a purchase is indeed true; however, a $50 sales
tax bill would be a higher percentage of income from someone making $30,000 annually as
opposed to someone making $100,000 annually. The Treasury Department has stated as far back
as 1984 that it opposes a flat income tax because such a high amount of the tax burden would be
moved from high-income earners to low-income earners.

Q-7: Differentiate between direct and indirect taxes.

Direct tax will refer to any levy that is both imposed and collected on a specific group of people or
organizations. An example of direct taxation would be income taxes that are collected from the
people who actually earn their income.

Indirect taxes are collected from someone or some organization other than the person or entity that
would normally be responsible for the taxes. A sales tax, for instance, would not be considered a
direct tax because the money is collected from merchants, not from the people who actually pay
the tax (the consumers).

The difference between Direct Tax and Indirect Tax:

• Indirect tax changes the preference of a consumer towards goods because of price changes.
Thus indirect tax has an adverse effect on allocation of resources whereas there is no such effect
in case of direct taxes and hence realization is more.

• One other difference is in the nature of direct taxes being progressive as they reduce inequalities
whereas indirect taxes are regressive and lead to more inequalities.

• However, indirect taxes are easier to administer than direct taxes. Then there are no exemptions
in case of indirect taxes whereas there are many kinds of exemptions in direct taxes.

• Indirect taxes, being wrapped up with retail prices are more efficient than direct taxes and more
difficult to evade.

• Cost of collection is also less in case of direct taxes which is pretty high in direct taxes.

• Indirect taxes are inflationary in nature. On the other hand, direct taxes bring stability and reduce
inflationary pressures as they take away excess purchasing power from the people.

• Direct taxes reduce savings and people are not able to make investments which affects growth.
On the other hand, indirect taxes are growth oriented. Indirect taxes discourage people from

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spending too much and as such encourage savings.

Q-8: Discuss the merits and demerits of direct taxes.

Merits of Direct Tax:

(A) Equitable: Direct taxes are impose that a progressive rate. Therefore, these are more equitable.
The richer has to pay more as compare to the poorer.

(B). Economical: The cost of collection of direct taxes is small. There is no intermediary between
the tax payer and the state. Therefore, these taxes are economical.

(C) Certain: The direct taxes are calculated with the fair degree of precision. The tax payer is
certain of the amount that he has to pay while government is also certain about its revenues.

(D) Elastic: Direct taxes have a high degree of elasticity. There rate can be change according to the
needs of the country.

Demerits:

(A) Inconvenient: The direct tax is paid in a lump-sum which is difficult to pay at a time. Therefore,
direct taxes are very inconvenient to pay.

(B) Unpopular: To part with money is not an easy thing for a tax payer. Therefore, these taxes are
very unpopular.

(C) Arbitrary: The rates of taxes are not determined on any specific principle but the rate of taxes is
fixed arbitrarily by the government.

Q-9: Name five indirect taxes imposed in bangladesh:

The name five indirect taxes imposed in bangladesh are

1. exports of goods and services,
2. basic food items,
3. printed matter,
4. certain agricultural machinery, and
5. international transport of passengers and freight,

Q-10: Distinguish between proportional and progressive taxes. Mention the arguments for
and against proportional taxation.

A proportional tax takes the same percentage of income no matter your income level. A
progressive tax, on the other hand, takes a larger percentage of income as your income increases.
An example of a proportional tax is the Medicare tax (everyone pays 1.45% of all income), while
the U.S. income tax is an example of a progressive tax (higher incomes get bumped into higher tax
brackets).

Many people believe sales taxes to be proportional because everyone pays the same rate, but
because sales taxes only apply to spending rather than overall income they almost always turn out
to be regressive.

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A proportional tax, also known as a flat tax, is a system under which the percentage of tax taken
from a person's income remains the same no matter how much money is earned. This type of
system can be applied to the income of an individual, or to an entire tax system, with applicable
time periods ranging anywhere from one year to a lifetime, depending on the country and laws
under which it is set up. Russia, Iraq, Kazakhstan, and many countries in Eastern Europe charge
working citizens a flat tax to help pay for the needs of their country; in many other countries,
including the US, the system is not used but is viewed by some as being an unfair system for the
lower class citizens who are taxed the same amount on a smaller salary.

★ Income Tax

Q-1: What is income tax? Discuss the objective of income tax?

A tax that governments impose on financial income generated by all entities within their jurisdiction.
By law, businesses and individuals must file an income tax return every year to determine whether
they owe any taxes or are eligible for a tax refund. Income tax is a key source of funds that the
government uses to fund its activities and serve the public.

Objectives Of Taxation
The basic objective of taxation is to raise resources for the State. Different objectives of taxation
may be summed up as under:
• Objective of raising revenue: The basic and primary objective of taxation is raising revenue.
Enormous amount needed by modern governments for National defence, creation of infrastructure
and social upliftment schemes make regular and systematic resource mobilization compulsory.
• Regulatory objectives: Taxation performs an important regulatory role in different socio economic
aspects.
• Regulatory consumption: State can discourage consumption of harmful and undesirable goods by
levying prohibitive rates of tax.
• Regulatory production: Production may be encourages by exempting new industries from tax for
someone, reducing tax on capital goods, increasing tax on imported goods to encourage local
production, etc.
• Regulating imports and exports: Imports of undesirable products can be curbed by imposing
prohibitively high import duties. Exports can be encourages by cutting duties and taxes on exports.
• Regulating effects of inflation, depression etc: Raising tax rates can reduce consumption of
goods and the demand in general. High levels of taxation can reduce the purchasing power of
people and the funds collected can be used by the state for

Q-2: What are the types of income tax authorities ?

There shall be the following classes of income-tax authorities for the purposes of this Ordinance,
namely:-

Administrative Authorities :
(1) The National Board of Revenue,
2.i) Chief Commissioner of Taxes; (ii) Directors-General of Inspection (Taxes),
(2A) Commissioner of Taxes (Appeals),
(2B) Commissioner of Taxes (Large Taxpayer Unit),
(2C) Director General (Training),
(2D) Director General, Central Intelligence Cell,
(3) Commissioners of Taxes,
(4) Additional Commissioners of Taxes who may be either Appellate Additional Commissioners of
Taxes or Inspecting Additional Commissioners of Taxes,
(5) Joint Commissioner of Taxes who may be either Appellate Joint Commissioner of Taxes or
Inspecting Joint Commissioner of Taxes,
(6) Deputy Commissioners of Taxes,
(7) Tax Recovery Officers(Magistrate) nominated by the Commissioner of Taxes among the Deputy
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Commissioner of Taxes within his jurisdiction;
(8) Assistant Commissioners of Taxes,
(9) Extra Assistant Commissioners of Taxes, and
(10) Inspectors of Taxes.

Judicial Authorities :
1) Appellate Tribunal,
2) Appellate Additional Commissioner of Taxes,
3) Appellate Joint Commissioner of Taxes,
4) Commissioner of Taxes-Appeal.

★ Incidence of taxes

Q-1: Distinguish Between Impact and Incidence of Taxation

1. Impact refers to the initial burden of the tax, while incidence refers to the ultimate burden of the
tax.
2. Impact is at the point of imposition, incidence occurs at the point of settlement.
3. The impact of a tax falls upon the person fr6m whom the tax is collected and the incidence rests
on the person who pays it eventually. For example, suppose a tax — excise duty — is imposed on
soap.
Its impact is on the producers, in the first instance, as they are liable to pay it to the government.
But, the producers may succeed in collecting it from the consumers by raising the price of soap by
the amount of tax. In that case, consumers eventually pay the tax and so the incidence falls upon
them.
4. Impact may be shifted but incidence cannot. For, incidence is the end of the shifting process.
Sometimes, however, when no shifting is possible, as in the case of income tax or such other direct
taxes, the impact coincides with incidence on the same person.

Q-3: What is deficit financing?

When a government spends more than what it currently receives in the form of taxes and fees
during a fiscal year, it runs in to a deficit budget. When the budget deficit is financed by borrowing
from the public and banks, it is called deficit financing.

Deficit financing refers to the borrowing undertaken by the government to make up for the revenue
shortfall. It is the best stimulant for the economy in short term. However, in the long term it
becomes a drag on the economy and becomes the reason for rise in interest rate.

There is no precise definition of the term deficit financing. It is a method used to finance the overall
or net budget deficit. Deficit financing is said to have been practiced when the expenditure of the
government both development and non- development exceeds its current revenue and capital
budget and the deficit is met through government borrowing.

Deficit financing is an important source of capital formation in the developed and under developed
countries of the world. In advanced countries, the newly created money is used to finance public
investments which increases economic growth. The government invests borrowed money in
improving the quality and reliability of infrastructure i, e, railways, roads, air service, social
overheads such as schools. hospitals etc. The deficit financing is mostly employed to boost up
economic activity in the private sector, raising effective demand for goods and services, increasing
employment opportunities etc.

★ Public Debt

Q-1: What Is Public Debt?

Public debt, which is also sometimes referred to as government debt, is all of the money owed at
any given time by any branch of the government. It encompasses debt owed by the federal
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government, the state government, and even the municipal and local government. It is, in effect, an
extension of personal debt, since individuals make up the revenue stream of the government.
Public debt accrues over time when the government spends more money than it collects in
taxation. As a government engages in more deficit spending, the amount of debt increases.

Q-2: Mention types public debt.

Government loans are of different kinds, they may differ in respect of time of repayment, the
purpose, conditions of repayment, method of covering liability. Thus the debt may be classified into
following types.

1. Productive and Unproductive debts

i. Productive debt :-Public debt is said to be productive when it is raised for productive purposes
and is used to add to the productive capacity of the economy.
ii. Unproductive debt :-Unproductive debts are those which do not add to the productive capacity of
the economy. Unproductive debts are not necessarily self liquidating.

2. Voluntary and Compulsory Debt ↓

i. Voluntary debt :-These loans are provided by the members of the public on voluntary basis. Most
of the loans obtained by the government are voluntary in nature. The voluntary debt may be
obtained in the form of market loans, bonds, etc.
ii. Compulsory debt :-A compulsory debt is a rare phenomenon in modern public finance unless
there are some special circumstances like war or crisis. The rate of interest on such loans may be
low. Considering the compulsion aspect; these loans are similar to tax, the only difference is that
loans are rapid but tax is not.

3. Internal and External Debt ↓

i. Internal debt :-The government borrows funds from internal and external sources. Internal debt
refers to the funds borrowed by the government from various sources within the country.Internal
debt is repayable only in domestic currency. It imply a redistribution of income and wealth within the
country & therefore it has no direct money burden.
ii. External debt :-External loans are raised from foreign countries or international institutions.
These loans are repayable in foreign currencies. External loans help to take up various
developmental programmes in developing and underdeveloped countries. These loans are usually
voluntary.

4. Short-Term, Medium-Term & Long-Term Debts ↓

i. Short-Term debt :-Short term debt matures within a duration of 3 to 9 months. Generally, rate of
interest is low. Interest rates are generally low on loans.
ii. Medium-Term debt :-Long term debt has a maturity period of ten years or more. Generally the
rate of interest is high. Such loans are raised for developmental programmes and to meet other
long term needs of public authorities.
iii. Long-Term debt :-The Government may borrow funds for medium term needs. These funds can
be used for development and non development activities

5. Redeemable and Irredeemable Debts ↓

i. Redeemable debt :-The debt which the government promises to pay off at some future date are
called redeemable debts. Most of the debt is redeemable in nature. There is certain maturity period
of the debt. The government has to make arrangement to repay the principal & the interest on the
due date.
ii. Irredeemable debt :-Such debt has no maturity period. In this case, the government may pay the
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interest regularly, but the repayment date of the principal amount is not fixed. Irredeemable debt is
also called as perpetual debt. Normally, the government does not resort to such borrowings.

6. Funded and Unfunded Debts ↓

i. Funded debt :-Funded debt is repayable after a long period of time. Funded debt has an
obligation to pay fixed sum of interest subject to an option to the government to repay the principal.
ii. Unfunded debt :-Unfunded debts are incurred to meet temporary needs of the governments. In
such debts duration is comparatively short say a year. The rate of interest on unfunded debt is very
low. Unfunded debt has an obligation to pay at due date with interest.

Q-3: Explain the reason why a government raises public debt.

The reasons on which a government which might raise public debt are:

(1) Tax revenues are less than predicted borrowing means the government can meet a temporary
short fall by borrowing rather than having to cut back and spending like an overdraft facility.

(2) Automatic fiscal stabilizers: In a recession government tax revenues fall. Also the government
have to spend more on unemployment benefits therefore in an economic downturn.

(3) Investment: The government may invest in public sector investment.

(4) Political: The biggest tendency to borrow comes from political pressures. Voters generally like to
hear the promise of lower taxes and increasing spending.

(5) War: During a war, government spending is stretched leading to higher borrowing. The highest
rates of borrowing occurred during the two world wars.

(6) It’s cheap: Usually borrow at very low interest rates, especially during an economic downturns.
This is because people have confidence on government bonds.

Q-4: Explain the issues that should be considered in debt management.

The term debt management refers to the formulation & implementation of a debt policy designed to
achieve certain objectives. According to the traditional philosophy, debt management consisted of
keeping its interest cost to the minimum possible, and paying it off as early as possible. However, a
modern welfare state uses debt management as a policy tool for achieving various socio-economic
objectives. Of course, every government is still interested in keeping the interest cost to the more
minimum possible but if this objective comes into conflict with other objectives, it is sacrificed. Other
important objectives before authorities include economic stabilization, growth, employment and
overall soundness of the financial system as a whole.

Debt management policy has to run in harmony with the monetary management of the country.
They both influence stabilization and economic growth. Open market operations are usually
conducted by sale or purchase of government securities. Through general and selective credit
controls, monetary policy tries to influence the volume and flows of funds and thereby the working
of the entire economy. The way in which debt management can also contribute to this policy
objective has been discussed above. It has also seen how the objective of reducing interest cost on
debt can come into conflict with the anti-cyclical monetary policy of the country.

It should be noted that the aggregate volume of outstanding debt reflects a cumulative effect of
budgetary policy of the government. The volume of debt increases or decreases in line with deficit
or surplus budgeting. But monetary policy can aim to alter the volume and composition of money
and credit without any such constraint. In this case of public debt, the management part would
mainly consist of changing its maturity composition so as to affect its yield structure and liquidity
content. But it must be reiterated that monetary policy and public debt are closely linked.

Q-5: How public debt is related to economic growth of a country?

(A) Contribution to the financial system of the economy: Economic growth brings monetization of
an increasing proportion of economic activities. In other words, economics activities result in
corresponding financial transactions. As a result the financial requirements of the economy
increase both absolutely and in relation to the national income. Existence of government debt
becomes a precondition for the existence of a developed financial system of the economy.
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(B) Contribution to the saving effort of the economy: An underdeveloped country is characterized
by a shortage of capital resources. Since the saving capacity of the masses is very low, the
authorities have to take appropriate measures to step up rates of saving and investment in the
economy. Resorting to public borrowings and investing the same is one of the several measures
that can be adopted for this purpose. However, the net effect of public borrowings also depends
upon the sources from which they come.
1. In the case of borrowings from the market, if the public reduces its own consumption and lends
its savings to the government, the result will be a net increase in the rate of savings.
2. When the authorities borrow from the central bank of the country, there is an addition to
aggregate money supply in the country. This causes an addition to demand and upward pressure
on prices.

Q-6: How public debt and inflation is related? Explain.

Public Debt: public debt issue which serves as a means of securing the effects of money creation
has been discussed. Public borrowing in depression when there exist unemployed resources and
public borrowing from the banking system in war provide the two separate cases. As suggested,
neither of these forms of public debt is essential to accomplish the real purpose desired; the same
results could be achieved by direct issue of currency without interest cost. Hence the real burden
differentially associated with debt could be avoided. Debt issue in such situations becomes a rather
clumsy way of inflating the currency.

Inflation: Debt issue in inflationary periods has as its only purpose the reduction of the liquidity in
the private economy. It is not, therefore, akin to the classical model in that government does not
utilize the proceeds to purchase real goods and services. Presumably, the government should
neutralize the proceeds collected from the sale of securities. (In the modern context this should
mean retiring that part of the national debt held by the central banks.) Only one half of the classical
debt-expenditure operation takes place, the opposite half to that which takes place with war
borrowing from the banking system. With anti-inflation debt issue, government does withdraw
current command over resources from the private sector, but it does not use this source to finance
collective purchases. The result is deflation, at least in some relative sense; deflation occurs when
compared to what would happen were not the debt issued. In the war borrowing case, which is the
precise opposite, the result is inflation.

★ Public Expenditure

Q-1: What is the nature of public expenditure?

Answer:

Public expenditure can be defined as, "The expenditure incurred by public authorities like central,
state and local governments to satisfy the collective social wants of the people is known as public
expenditure."
Public Expenditure refers to the expenses of public authorities like the central state and local
governments.
Public expenditure is incurred for the welfare of the society in the form of various developmental
and non-developmental activities.
Public Expenditure has an impact on production, distribution, national income and employment.
In developing economies, public expenditure helps to achieve higher economic growth and create
employment.

Q-2: Explain the role of public expenditure in economic growth of Bangladesh.

Growth literature that has emerged over the last 20 years supports the belief that public spending
affects long-term growth.
First, standard growth models explaining total output level as a function of factor inputs (capital and

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labour), as well as the productivity through which these inputs are combined, have been extended
by incorporating various elements of fiscal policy.
In particular, growth models assume that governments can raise taxes to finance various types of
public expenditures that raise the marginal product of factor inputs in the output production
process. This may, for instance, be motivated by the fact that private equipment, such as
machinery and vehicles, can be employed more productively when public infrastructure is in
place.Other models embody additional transmission channels through which public spending
affects aggregate private investment.
In neo-classical models, there are effects on growth only for a transitional period, as the economy
moves to its new level of output — though the length of this transition remains subject to debate
and may last a long time.

Q-3: Type of public expenditure:

~ Types of public expenditure is the systematic arrangement of different areas under which
government expenditure occurs.
~ Public Expenditure can be broadly classified as follows:

i) Capital and revenue Expenditure.

ii) Productive and Unproductive Expenditure.
iii) Transfer and Non-transfer Expenditure.
iv) Plan and Non-plan Expenditure.
v) Dalton's classification.

i) CAPITAL AND REVENUE EXPENDITURE:-

^ Capital Expenditure: ~ Capital expenditure is the expenditure incurred on building durable assets
like infrastructure such as roads highways, etc, multi-purpose dams, irrigation projects, power
generation projects, purchase of machinery, equipments, etc.

^Revenue Expenditure:~ Revenue Expenditures are current expenditures incurred on public

administration, defence force, public health and education, maintenance of government machinery,
subsidies and interest payments.

# Development Revenue Expenditure:~ The part of the revenue expenditure that directly / indirectly
contributes to the development of the nation is known as development revenue expenditure.

# Non-development Revenue Expenditure.~ The part of the revenue expenditure that may not
contribute to the economic development of the nation is known as non-development revenue
expenditure.

ii) PRODUCTIVE AND UNPRODUCTIVE EXPENDITURE:

~ Classical economist like Adam Smith made this classification on the basis of creation and
maintenance of productive capacity.

# PRODUCTIVE EXPENDITURE:~ This includes creation of tangible assets like infrastructure,

public enterprises, irrigation projects, power generation etc.These bring income to the government
in the form of tax and non-tax revenue.

# UNPRODUCTIVE EXPENDITURE:~ It is incurred on non-productive activities.This includes

activities like: defence, interest payments, expenditure on law and order, public administration, etc.

iii) TRANSFER AND NON-TRANSFER EXPENDITURE:

# TRANSFER EXPENDITURE:~ Transfer expenditure refers to expenditure against which there is

no corresponding return. These activities add to the welfare of the people.It results in redistribution
of money incomes with the society.

iv) PLAN AND NON-PLAN EXPENDITURE:

PLAN EXPENDITURE:~Plan expenditure refers to the spending of the annual funds allocated by
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the Government as per the on-going Five-year plan.This includes expenditure incurred on
transport, rural development, agriculture, communications, energy, social services like education,
health, family welfare, etc.

NON PLAN EXPENDITURE:~ It includes all those expenditures of the government that are not
mentioned in the on-going Five-year plan.It includes both development and non-development
expenditure.

v) DALTON'S CLASSIFICATION:~ Economist through Dalton has provided the following

comprehensive classification of public expenditure:
^ Expenditure on political executives. ^ Administrative expenditure. ^ Security expenditure.
^ Development expenditure. ^ Social expenditure. ^ Expenditure on administration of justice.
^ Public debt charges.

Q-4: Comparison between public and private expenditure.

Public and private expenditure differ on various counts as follows-

i) The purpose of public expenditure is the welfare of the society or the country but the motive of
private expenditure is limited to the welfare of himself and his family.
(ii) The individual always makes an attempt ‘to adjust his expenditure according his income
whereas the government attempts first to make an estimate of total expenditure and then devise
methods of raising the required revenue through various means.
(iii) The plans of private expenditure are generally short termed and are made only for the near
future. Public expenditure on the other hand. is planned with the objective of long term benefits to
the society.
(iv) The benefit of private expenditure can be measured with the help of the marginal utility of
goods and services purchased. The benefits accrued to a private firm can also be measured in
terms of equality between marginal cost and marginal revenue. But the measurement of benefits,
accruing from the public expenditure is not possible.
(v) Flexibility in public expenditure is much more the the private expenditure because the latter
cannot be squeezed later on whereas the private expenditure can be increased or decreased
according to the will of the individual.
(vi) Private expenditure is motivated by private profits where- as the main motive of public
expenditure is public welfare.

★ Balanced Budget & Fiscal Policy

Q-1: What is Balanced Budget?

Balanced Budget—
A situation in financial planning or the budgeting process where total revenues are equal to or
greater than total expenses. A budget can be considered balanced in hindsight, after a full year's
worth of revenues and expenses have been incurred and recorded; a company's operating budget
for an upcoming year can also be called balanced based on predictions or estimates.

Q-2: What is budget ? What are the types of budget?

An estimation of the revenue and expenses over a specified future period of time. A budget can be
made for a person, family, group of people, business, government, country, multinational
organization or just about anything else that makes and spends money. A budget is a
microeconomic concept that shows the tradeoff made when one good is exchanged for another.
There is no set way to define types, though the following types of budgets are used commonly,
however, these cannot be classified as the only types of budget used to make the Union Budget.
Revenue Budget, performance budget, zero base budget, capital budget and receipts budget.

Q-3: Explain the arguments for the balanced budget?

The arguments against a constitutional amendment to require balanced budgets are various and,
cumulatively, almost conclusive. Almost. The main arguments are:
The Constitution should be amended rarely and reluctantly. Constitutionalizing fiscal policy is a

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dubious undertaking. Unless carefully crafted, such an amendment might instead be a constant
driver of tax increases. A carefully crafted amendment that minimizes this risk could not pass until
Republicans have two-thirds majorities in both houses of Congress, which they have not had since
1871.
Furthermore, requiring a balanced budget would incite creative bookkeeping that would make a
mockery of the amendment and the Constitution. For example, New York, which like 48 other
states (all but Vermont) has some sort of requirement for a balanced budget, once balanced its by
selling Attica Prison to itself: A state agency established to fund urban redevelopment borrowed
$200 million in the bond market, gave the money to the state, and took title to the prison. The state
recorded as income the $200 million its agency had borrowed, declared the budget balanced, then
rented the prison from the agency for a sum adequate to service the $200 million debt

Q-4: Mention the arguments against balanced budget.

Arguments against the balanced budget:

1. The aim of budgetary policy of the government should not be to go in for a balanced budget for
its own sake. A public budget must aim at effectively helping the economy and minimizing its own
harmful effects.
2. The inflationary impact of a deficit budget does not depend upon only the presence or absence
of the deficit.
3. There can be situations in which a budgetary deficit would be only reflationary in character and
would be only helping the economy in recovering from a depression.
4. The change in the purchasing power of money depends upon demand for supply of goods and
services by both the public and private sectors.
5. Keynes maintains that the budgetary measures intended to balance the budget themselves lead
to subsequent budgetary deficits and the measures intended to create deficits would help them,
subsequently , to balance.
6. The argument that a deficit budget of today restricts the budgetary flexibility of tomorrow, is not
exactly true. It must be argued that a policy of avoiding today’s deficit at any cost is itself a major
restriction on the budgetary maneuverability.
7. Fiscal policy is one of the many economic instruments with the authorities and restricting its use
in any manner only makes it less effective.

Q-5: What type of budget usually formed in Bangladesh?

Fiscal Policy generally refers to the use of taxation and government expenditure to regulate the
aggregate level of economic activity in a country. Fiscal policy in Bangladesh basically comprises
activities, which the country carries out to obtain and use resources to provide services while
ensuring optimum efficiency of the economic units. The policy influences the behaviour of
economic forces through public finance. Major objectives of the fiscal policy of Bangladesh are to
ensure macroeconomic stability of the country, promote economic growth, and develop a
mechanism for equitable distribution of income. The main tools to achieve these objectives are
variation in public revenue, variation in public expenditure, and management of public debt. These
are reflected in the budgetary operations of the government, prepared and implemented on year-
on-year basis.
Most governments try to keep their deficits below 3 percent of GDP. Here is the reason. When the
government runs a deficit, they borrow money and, as result, their debt increases. However, it their
debt goes up by 3 percent of GDP and, meanwhile, the GDP has grown by 3 percent, then the debt
to GDP ratio remains the same. The debt has increased but so has income. Looking across many
countries over time, GDP tends to increases by about 2-3 percent per year. Hence, governments
try to keep their deficits below 3 percent of GDP.Budget, $2.3 billion (2012).

So, Bangladesh always formed deficit Budget.

Q-6: What is fiscal policy? Discuss the relationship between fiscal policy and stability?

Fiscal policy is the use of government spending and TAXATION to influence the economy. When
the government decides on the goods and services it purchases, the transfer payments it
distributes, or the taxes it collects, it is engaging in fiscal policy. The primary economic impact of
any change in the government budget is felt by particular groups—a tax cut for families with
children, for example, raises their disposable income.

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Fiscal policies have a significant impact on economic growth, macroeconomic stability and inflation.
Key aspects in this respect are the level and composition of government expenditure and revenue,
budget deficits and government debt. Fiscal discipline is a pivotal element of macroeconomic
stability. The need for fiscal discipline is even stronger in a monetary union, such as the euro area,
which is made of sovereign states that retain responsibility for their fiscal policies. There are no
longer national monetary and exchange rate policies to respond to country-specific shocks, and
fiscal policies can better cushion such shocks if they start from a sound position.
The main rationale of the Stability and Growth Pact is to ensure sound budgetary policies on a
permanent basis. The Pact lays down the obligation for Member States to adhere to the medium
term objectives for their budgetary positions of 'close to balance or in surplus', as defined under
country-specific considerations. Adjusting to such positions will allow Member States to deal with
normal cyclical fluctuations without breaching the 3% of GDP reference value for the govt. deficit.

★ Other

Q: Briefly discuss the limitations of the principle of maximum social advantages.

The principle of maximum of social advantage has been criticised on various grounds. The ten
main practical difficulties in following the principle of maximum social advantage are discussed in
the article.

1. Difficulties in measuring social benefit:

The principle of maximum social advantage is theoretically explained with the help of the marginal
utility analysis. The marginal utility analysis itself is criticized because it is not possible to measure
utility or disutility experienced by people.

2. Unrealistic assumptions

It is unrealistic to assume that government expenditure is always beneficial and that every tax is a
burden to society. For example, taxes on cigarettes or alcohol can provide benefit to society,
whereas a tax on education of essential commodities may harm general interest of society,
similarly, expenditure on social overheads like health care will give rise to social benefit whereas
unnecessary increase in expenditure on defence may divert resource from productive activities
causing loss of welfare to society.

3. Neglect non-tax revenue

The principle says that the entire public expenditure is financed by taxation. But, in practice, a
significant portion of public expenditure is also financed by other sources like public borrowing,
profits from public sector enterprises, imposition of fees, penalties etc. Dalton fails to take into
account all such other sources.

Q: What is custom duty? Why it is important?

One of the most important roles of a country’s customs agency is the imposition and collection of
duties. A duty is a kind of tax that is imposed on certain items that are purchased in another
country. Why are duties required? Well, any nation wants its own businesses to grow and develop.
The government wants their citizens to buy domestic goods over foreign ones. However, many
products are available cheaper coming from another country. To protect domestic business from
the entry of lower-priced foreign products, governments impose duties, or tariffs, on these goods.
The imposition of duties raises the prices, making them at par or even more expensive than local
prices. Aside from encouraging and protecting domestic business, a duty also acts as a means of
controlling trade. For instance, to limit the entry of alcohol and cigars, a government imposes a
higher duty on those goods. In addition, two nations may agree to lower the amount of duty
imposed on each other’s imported goods, resulting in a mutually beneficial trade agreement that

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enables those countries to trade more freely.

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