Government is planning to spend on the following goods and services in the fisca

Question

Government is planning to spend on the following goods and services in the fiscal year: i. Plant, machinery and equipment K150m ii. Insurance, transport and consultancy K 50m iii. Medicines K 25m The Ministry of Finance has been mandated to finance the expenditure through taxes. ZRA has been mandated to collect tax 20% in excess of the planned government spending. Financial/economic experts have revealed that domestic investment will be at 15% of government spending less 1% of taxes. i. Calculate the current account balance (14 marks) ii. Explain how the government can address unemployment and balance of surplus (6 marks)

Explanation / Answer

i. Total planned government spending =$150+$50+$25= $225 m

Total tax = $225+ $225*20%= $225+$45=$270 m

domestic investment =$225*15%-$270*1% = $33.75- $2.7= $31.05 m

Current account balance= Total revenue-total expenditure= Total taxes- total planned government spending- domestic investment = 270-225-31.05= $13.05 m

ii. Government should spend some proportion of surplus fund in infrastructure and manufacturing sectors that would create new employments in the country and reduce unemployment rate. Also government should also keep some remaining surplus fund to bridge the fiscal deficits or trade deficits in the future.

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