Those people who are interested in public affairs are eagerly waiting to see how the 2017/18 National Budget will be like. To appreciate the budget provisions, we must first acquaint ourselves with the elements of public finance, the money used by the civil service, local government and State-owned corporations.
Functions of public finance
The functions of public finance are as follows;
(i) The provision of goods and services for the community as a whole. These services include the civil service, the police, defence force, the courts, roads and bridges. Defence force, police and roads are called public goods.
(ii) The provision of social services such as health, education and social security payment.
(iii) The provision of assistance to certain sectors of the economy such as agriculture, industry, and so on. For example, it provides farmers with agricultural extension services and subsidies of farm inputs.
(iv) The management of the economy as a whole. There are times when the local demand of goods and services in the economy falls very low; business is poor, and employees are laid off. This is called recession. The government uses fiscal policy (taxation and expenditure) to revive the economy. Sometimes, the opposite happens, the economy is overheated. There is inflation; the government uses the budget to reduce the inflation by cutting its expenditure on selected goods and services.
Public expenditure consists of expenditure by central government, local authorities and public corporations.
Government expenditure, including both central and local government, may be grouped under three headings: current expenditure on goods and services, capital expenditure and transfer payment. Current expenditure is incurred on new projects such as hospital buildings, new offices, purchasing new vehicles while transfer expenditure includes payment of pensions and relief money to those involved in disaster.
An individual first earns a salary and decides on what goods or services to spend it. A government first draws expenditure plans and then draws revenue plans. That is, decides how it is going to raise the money to finance the items that are indicated in the expenditure plan. This is the essence of budgeting.
The main source of revenue is taxation. Taxes are usually divided into two groups: direct and indirect taxes. Direct taxes are paid via a third party to the tax authorities whereas indirect taxes are paid via a third party. Direct taxes are paid on income and capital; indirect taxes are pain on expenditure.
The main direct taxes are as follows:
(i) Income tax. This is the income levied on salaries using percentages. In assessing what to tax, allowances are made for spouses and children. But to discourage families from having too many children, a government may make allowances for one or two children only.
(ii) Corporate tax. This is a tax paid by companies on the gross profits that they make.
(iii) Capital transfer tax. This is tax levied on transfers of value, on gifts made during a person’s lifetime and transfers on death.
(iv) Capital gains tax. When certain assets are sold for an amount greater than that for which they were bought, the excess is subject to tax. For example, you buy a plot in the urban area for K12 million, this year and sell it for K15 million next year; the K3million difference will be taxed.
(i) Customs and exercise taxes. Most goods are imported into the country and customs duties are imposed on them. They are often paid by traders. When the trader sells those goods, the price he charges includes the customs he paid, and the amount is now paid back to him by his customer. The incidence or burden of the customs duty ultimately falls on the consumer or user of the goods.
(ii) Value added tax. Compared with customs duties and sales tax, the Value Added Tax (VAT) is quite recent. It is imposed at each stage of the process of production and distribution, manufacturer, wholesale and retail.
Classification of taxes
A proportional tax is one which leaves the distribution of income uncharged. The percentage of income or whatever being taxed is the same, whether you earn K20 or K40 million a year, you may be taxed same percentage.
Progressive taxes are those taxes where the higher the income, the higher the percentage when it is taxed. This tax is used to reduce gross income inequalities in the country.
Regressive taxes make the poor pay more than the rich. This happens where indirect taxes are levied.
When presentation of the national budget is over, what sort of comments can we expect from members of Parliament and one-man non-governmental organisations (NGO’s) who see themselves as champions of the poor? They will protest as they have done before that the budget is not pro-poor. They view the budget days as harvest days. To the contrary, it is the beginning of the rainy season when we must speak the language of the Swahili host “mgeni latatu m’pe jembe”:treat the stranger as a guest for two days, the third days give him a hoe.
..to be continued