Concept of Money, Financial Institutions and Public Finance

Have you ever imagined how the government decides what to spend money on and where it gets that money? In this section, you will uncover the answers as you dive into the national budget and how it shapes the economy. You will learn how the government raises money, plans how to spend it, manages national debt, and how taxation affects different groups in society. This will help you understand how budgeting decisions influence economic growth and national development.

Earlier in your studies, you looked at the concept of money and the role of financial institutions in supporting economic activity. You also explored why people hold money, the functions of financial institutions, and the benefits and challenges of taxation.

These earlier lessons now come together to help you see how the national budget works as a financial tool to guide the country’s development and manage the economy.

KEY IDEAS

• Government expenditure is the money the state spends on public services such as healthcare, education, and road construction to support national development.

• Government revenue is the money it collects from taxes, fees, and borrowing, which is used to fund public services and programmes.

• Incidence of tax shows who pays a tax, the buyer or the seller, depending on how the market responds to the tax.

• National debt happens when the government spends more than it earns, leading it to borrow money to cover the gap.

Government expenditure is the total amount of money the government spends to meet the country’s expenses. This includes spending by both central and local governments on services such as education, healthcare, roads, and security. It shows how public funds are spent to support economic growth, reduce poverty, and improve living standards in Ghana.

Types of Government Expenditure

₁. Recurrent Expenditure These refer to the regular, ongoing spending by the government or an organisation on items needed for daily operations. These expenses do not create new assets but are necessary to keep existing services running. Examples include paying salaries of teachers and nurses, electricity and water bills for public offices, interest payments on government debt, free SHS meals and learning materials, maintaining public hospitals and schools, fuel for government vehicles and tractors.

2. Capital Expenditure

These are expenditures on long-term investments that help to build or improve infrastructure. Examples are constructing roads, schools and hospitals; building water supply systems and markets; providing irrigation facilities and farm warehouses;

electrifying rural communities; purchasing medical equipment or ICT tools for classrooms; setting up industrial parks and technology centres.

Functions of Government Expenditure

₁. To provide essential public goods and services like healthcare, education, and security.

2. To promote economic growth through infrastructural development.

3. To reduce inequality by supporting the poor through welfare and subsidies.

4. To ensure national security through military and police spending.

5. To help stabilise the economy during inflation or economic recession.

Examples of government expenditure in the budget include

a. Funding for Free SHS

b. Building of CHPS compounds

c. LEAP provides cash transfers to poor households

d. Building and maintenance of roads and highways

e. Expenditure on planting for food and jobs.

Activity 8.1:Tracking Ghana’s Spending – Where Does the Money Go?

QR code for Activity 8.1 Scan the QR code above to have access to Activity 8.1 (Your teacher or colleagues can help you scan the QR code) Step-by-step guide on how to scan a QR code.

📱 If using a Smartphone (Android or iPhone)

Step 1: Open the camera app and tap on the Google Lens

Step 2: Point the camera at the QR code

• Make sure the QR code is visible in the frame.

• Hold the phone steady.

Step 3: Wait for a pop-up link

• A notification will appear on your screen.

• It usually says “https://docs.google...” or something similar.

Step 4: Tap the link

• This will open the content (video, PDF, website, quiz, etc.) in the browser 💡 If the camera does not scan automatically

Step 1: Download a QR code scanner app

• Go to Play Store (Android) or App Store (iPhone).

• Search for: “QR Code Scanner” or “QR Reader”

• Download a free, trusted app (e.g., “QR Code Reader” by Scan or Kaspersky).

Step 2: Open the QR scanner app

• permit it to use your camera.

Step 3: Scan the QR code

• The app will read the QR code and open the content.

💻 If using a Tablet PC (Windows or Android)

Step 1: Open the camera or QR scanner app

• Most modern tablets support scanning through the built-in Camera or Google Lens.

Step 2: Point the camera at the QR code

• Hold it steady until it detects the code.

Step 3: Tap the pop-up link

• It will open the webpage, video, or file linked to the QR code.

Government revenue refers to the money the government receives to run the country and provide public goods and services. This money comes from several sources, such as taxes, fees, grants, and fines, which are typically referred to as a fiscal year. These monies are used to finance government activities and to promote national development.

Government revenue is a major component of the national budget.

Main Sources of Government Revenue

Tax Revenue

These are compulsory payments made by individuals and businesses to the government.

Tax revenue consists of direct taxes and indirect taxes.

1. Direct Taxes: These are levied on incomes, properties of individuals as well as companies, and are paid directly to the government. These include:

a. Income Tax: These are taxes levied on the incomes of individuals.

b. Corporate Tax: These are taxes levied on the profits of companies.

c. Property Tax: These are taxes levied on properties of individuals and companies.

d. Capital Gains Tax: This is a tax on the profit made from the sale of assets such as land, buildings, or shares.

2. Indirect Taxes: These are taxes levied on goods and services. The tax is included in the price of the commodity and transferred to the consumer in the form of higher prices. These include:

a. Value Added Tax (VAT): These are levied on the value added in each stage of production. It is paid by the final consumer but collected by businesses on behalf of the government.

b. Import Duties: These are taxes imposed on imported goods. It is meant to raise revenue and protect infant industries.

c. Excise Duties: These are special taxes the government places on specific goods, usually those that are harmful to health, luxury items or goods that use a lot of resources. These taxes are charged within the country.

d. Customs Duty: This is a tax imposed on imported goods to raise revenue and protect local industries.

Non-Tax Revenue

These are revenues the government receives from other sources apart from taxes. These include:

1. Fees: These are charges paid to the government for specific services it provides, such as issuing passports, business licenses, building permits, or land registration.

2. Fines: These are penalties imposed by the government for breaking laws or regulations, such as traffic offences, illegal mining, or environmental violations.

3. Dividends from State-Owned Companies: They are a source of government revenue that comes from the profits made by companies that the government owns. For example, GNPC (Ghana National Petroleum Corporation) earns money from oil deals and pays dividends to the government.

4. Licenses and Permits: These are official documents that individuals or businesses must pay for to be able to conduct certain legal activities. The money collected from these payments is a source of revenue for the government. Examples are a Mining permit and a driver’s license.

5. Rent from Government Properties: Rent from government properties is the money the government earns by leasing or renting out land, buildings, or other properties it owns. An example is renting from the state housing.

Grants and Donations

This is money Ghana receives as support from other countries or international organisations. They are for specific developmental projects. Examples include donations from the World Bank or the IMF Loans (Borrowing) This is money the government borrows internally or externally. These are not permanent revenue sources as taxes, but they are often used to support the national budget when revenue from other sources is not enough. Examples include loans from GCB Bank and other countries such as China.

Purposes of Government Revenue

1. To provide public services such as free SHS, building roads in rural areas or running hospitals like Korle-Bu.

2. To pay public workers, including teachers, doctors, police officers and also to pay the national debt.

3. To support national development, such as Building infrastructure like railways, roads, dams or factories.

4. To reduce inequality through programmes like LEAP (Livelihood Empowerment Against Poverty), which supports the poor and vulnerable.

1. Policy and Administrative Reforms

2. Simplify tax laws: Streamlining Ghana’s tax code—especially around VAT, income tax, and import duties—can reduce compliance burdens and close loopholes exploited in both the formal and informal sectors.

3. Broaden the tax base: By formalising segments of the informal economy (e.g., part-time self-employed) and reducing excessive exemptions, the Ghana Revenue Authority (GRA) can capture more economic activity within the tax net.

4. Strengthen property taxation: Local governments can improve internally generated funds by updating property registers and enforcing the collection of rates and levies.

Digitalisation and Technology

₁. Expand e-tax platforms: The GRA’s online portal should be made more user- friendly and accessible, especially for SMEs and self-employed individuals.

2. Integrate mobile money tax systems: With mobile money deeply embedded in Ghana’s financial ecosystem, leveraging it for micro-taxation and compliance tracking can be transformative.

3. Use biometric and digital ID systems: Linking tax records to Ghana Card data can reduce fraud and improve taxpayer identification Institutional Strengthening ₁. Invest in GRA capacity building: Ongoing training, ethical reinforcement, and performance-based incentives for tax officers can reduce leakages and improve service delivery.

2. Enhance inter-agency coordination: Linking GRA, Customs, SSNIT, and Registrar General’s Department data can help detect evasion and enforce compliance.

3. Decentralise revenue collection: Empowering Metropolitan, Municipal, and District Assemblies (MMDAs) with better tools and oversight can improve local revenue mobilisation.

Public Engagement and Trust

1. Improve taxpayer education: Campaigns in local languages, community forums, and school curricula can demystify taxation and build civic responsibility.

2. Demonstrate visible use of tax revenue: Transparent reporting and showcasing infrastructure, health, and education projects funded by taxes can build public trust.

3. Establish feedback and grievance mechanisms: Allowing citizens to report inefficiencies or corruption anonymously can improve accountability.

National Budget: A national budget is a financial plan prepared by the government that outlines its expected revenue and proposed spending for a specific period, usually a year. It outlines the government’s plans to raise funds (primarily through taxation and other sources) and how it intends to allocate these funds to areas such as education, healthcare, infrastructure, and security. The budget outlines the government’s priorities and its strategies for promoting economic growth.

Types of government budget ₁. Balanced Budget: This occurs when the government’s estimated revenue is equal to its planned expenditure.

2. Surplus Budget: This happens when the government’s revenue is greater than its expenditure. It may be used to reduce debt or save for future needs.

3. Deficit Budget: This occurs when the government’s expenditure exceeds its revenue, often used to stimulate economic growth during slow periods.

Activity 8.2 Understanding Ghana’s Revenue – How Government Gets Money Purpose: To help learners identify types and sources of government revenue and categorise them correctly using real data from Ghana’s 2024 National Budget.

Total Duration: 90 minutes (Two 45-minute sessions) Group Size: 4–5 learners Approach: Individual Reading ► Group Categorisation ► Group Discussion ► Presentation PART 1 (45 minutes): Extracting and Categorising Revenue

Step 1: Read the Budget Excerpt (Individual to Pair Work) – 15 minutes Instructions to Learners Use your notebook to write the types of revenue, amounts collected or projected, and changes from the previous year based on the data below.

Read the excerpt carefully. Identify each source of revenue, the amount expected in 2024, and whether it increased, decreased, or stayed the same compared to 2023.

Excerpt from Ghana’s 2024 Budget – Revenue Summary Revenue Source Projected Amount (GHS Billion) Change from 2023 Personal Income Tax 21.0 Increased VAT 24.2 Increased Import Duties 12.5 Same Dividends from SOEs 2.0 Slight Increase Fees & Charges 6.1 Increased Grants (Donor Support) 3.5 Decreased Domestic Borrowing 8.5 Increased Eurobond (External Loan) 2.2 Not Issued Total Revenue (excluding borrowing):

69.3 billion GHS Total Borrowing: 10.7 billion GHS

Step 2: Group Categorisation Task (15 minutes) Instructions to Learners:

Form your groups of 4–5. On a sheet of paper or flipchart, draw a table with four new categories:

1. Tax Revenue

2. Non-Tax Revenue

3. Grants & Aid

4. Borrowing As a group, use the data from the 2024 Revenue Summary Table and decide which revenues fit in to the four new categories. The first one has been done for you since VAT, Personal Income Tax and Import Duties are all sources of tax revenue.

Calculate the total amount estimate the overall change (increase or decrease) from 2023.

Example

Category Revenue Type Amount

(GHS) Change Tax Revenue VAT

Personal Income

Tax Import Duties

57.7 bn Increased Non-Tax Revenue Grants & Aid Borrowing

Step 3: Begin Planning Presentation (15 minutes) Each group starts preparing a short presentation using:

• Flipchart paper

• Coloured pens/crayons OR

• PowerPoint or Canva (if tech is available) Your first draft should include:

• Your categorised table

• A simple chart or graph showing revenue sources and amounts (bar chart, pie chart, or any format) PART 2 (45 minutes): Analysing and Presenting Revenue Patterns Purpose:

To help learners analyse Ghana’s main revenue sources and discuss how the country can improve revenue collection.

Step 4: Group Discussion: Analyse the Revenue Data (20 minutes) Instructions to Learners:

As a group, discuss the following questions. Write your answers as short points to use during your presentation.

1. What are the top three sources of government revenue?

2. Why do you think these sources are prioritised?

3. What are the advantages or disadvantages of relying on:

a. Tax Revenue

b. Non-Tax Revenue

c. Grants or Borrowing

4. Suggest two ways Ghana can improve revenue collection.

Step 5: Finalise your presentation (10 minutes) Groups add the following to their presentation:

a. Bullet points answering the discussion questions

b. One creative visual (e.g., pie chart, infographic, cartoon)

Step 6: Group Presentations (15 minutes) Each group presents for 5–7 minutes.

Presentation should include:

1. Categorised revenue table

2. Chart or visual showing sources and amounts

3. Answers to the four discussion questions

4. Group’s creative visual aid

National debt (also called public debt or government debt) is the total amount of money the government owes to lenders, both domestic and foreign. It consists of loans the government has taken over time, both from within Ghana and from outside the country.

Governments borrow money when the government expenditure is more than the revenue (budget deficit). Borrowing can promote national development or provide relief during crises, but if not properly managed, excessive debt may lead to long-term challenges.

Types of National Debt

₁. _(Domestic) Debt: This is money the government borrows from people or institutions within Ghana. Examples are treasury bills and government bonds purchased by banks, companies, or individuals in Ghana.

2. External (Foreign) Debt: This is money borrowed from outside Ghana, such as from foreign governments, international organisations, or global financial markets. Examples include Eurobonds issued by Ghana, or loans from the IMF or World Bank.

Why Do Governments Borrow?

₁. To build infrastructure like roads, schools, and hospitals.

2. To pay salaries and keep essential services running when revenue is low.

3. To respond to emergencies, such as the COVID-19 pandemic.

4. To repay or refinance old loans (debt servicing).

Effects of National Debt

Positive Effects:

1. It can promote economic growth if used wisely (e.g., building productive assets).

2. It helps the government to manage short-term financial gaps.

Negative Effects:

1. High interest payments may reduce funds for education, health and roads.

2. Too much debt can cause loss of investor confidence and reliance on foreign aid.

3. Poor debt management can lead to inflation, currency depreciation or a weaker cedi.

Examples in Ghana

In recent years, Ghana’s national debt, which is made up of both domestic and foreign debt, has been very high. This has caused:

1. Rising interest payments on the debt.

2. The need for IMF bailouts and debt restructuring plans.

3. Public concern about debt sustainability, whether Ghana can continue to pay back its debt without any problem, such as an increase in taxes.

Activity 8.3 Exploring Ghana’s National Debt Using Real Budget Data The purpose of the Activity is to help learners identify and distinguish between different types of public debt (domestic and external) organise and present national budget debt data using appropriate tools.

This activity is in two phases (Phase 1 and Phase 2).

Duration: 60 minutes Resources/Materials

• Printed summary of Ghana’s national debt data (2019–2023)

• Exercise books or worksheets

• Pens/pencils

• Laptops with Microsoft Excel (or graph paper if Excel is not available) or any other means for data representation.

Phase 1: Individual Work (15 minutes) Title: Interpreting National Debt Figures (2019–2023) Instructions Study the table below. Then answer the short-answer/supply-type questions that follow.

Ghana’s National Debt Summary (2019–2023)

(Data simplified for classroom use) Year Total Debt (GHS Billion) Domestic Debt (GHS Billion) External Debt (GHS Billion) Debt-to-GDP Ratio (%) 2019 218.2 105.4 112.8 62.4 2020 291.6 149.8 141.8 76.1 2021 344.5 181.8 162.7 80.1 2022 434.6 248.3 186.3 88.1 2023 567.3 328.2 239.1 91.3 Individual Questions (Short Answer/Supply Type) Fill in the blanks or answer in brief:

1. What was the total national debt in Ghana in 2020? __________

2. In which year was Ghana’s debt-to-GDP ratio highest? __________

3. What was the value of external debt in 2021? __________

4. Which year recorded the highest increase in total debt compared to the previous year? __________

5. Identify the year in which domestic debt was less than external debt.

__________ Phase 2: Group Collaboration (40 minutes) Title: Analysing and Visualising Ghana’s Debt Trend Instructions for Group Work:

Form small groups (3–4 learners). Using the data above, perform the following tasks:

Step 1: Record and Organise Data

Enter the data from the table into Microsoft Excel under these headings:

• Year

• Total Debt (GHS billion)

• Domestic Debt (GHS billion)

• External Debt (GHS billion)

• Debt-to-GDP Ratio (%) (If Excel is unavailable, sketch out the table.)

Step 2: Create Visual Charts

1. Create a line graph showing the trend in total debt from 2019 to 2023.

2. Create a clustered bar chart comparing domestic and external debt each year.

3. (Optional) Create a pie chart showing the share of domestic and external debt in any one year of your choice.

Step 3: Group Discussion and Analysis

Discuss and answer these guiding questions:

1. What trend do you observe in Ghana’s national debt over the five years?

2. Which type of debt (domestic or external) contributes more to the total debt?

3. What economic or social factors may have influenced the increase or decrease?

4. How could a rising debt-to-GDP ratio affect Ghana’s development (e.g., education, roads, jobs)?

Step 4: Presentation

Each group will present:

a. Your two charts

b. A brief oral summary (5–7 minutes) of your interpretation of the data and your answers to the questions

The incidence of taxation refers to who carries the burden of a tax. It is not about who pays it to the government, but about who carries the tax burden. It helps us understand how the burden of a tax is shared between consumers, producers, or workers.

Example 1

For instance, if the government imposes a tax on petrol, petrol stations may increase their prices to cover the added cost. As a result, consumers end up paying more at the pump. Although the tax is paid to the government by the petrol stations, the actual burden is shared between the consumers (who pay higher prices) and the businesses (who may see reduced sales or lower profits).

Example 2

Suppose the government places a tax on soft drinks. To maintain their profit margins, manufacturers may raise the price of their products. Retailers then sell the drinks at higher prices. In the end, consumers pay more, bearing part of the tax burden, while producers may also absorb some of the cost through reduced profits if they cannot pass on the full tax.

Economists, therefore, look at who legally pays the tax and who bears the cost. These are called legal incidence and economic incidence.

Key Concepts

₁. Legal Incidence This is the person or business required by law to pay the tax to the government. For

example, an oil company is legally required to pay fuel tax.

2. Economic Incidence

This is the person or group that eventually bears the cost of the tax. For example, if the oil company increases fuel prices, then drivers and passengers bear the real burden of the tax.

How Tax Incidence Works

When a tax is imposed, the person who pays it initially may not be the one who feels the full cost. The tax burden can shift between producers and consumers through price changes. If a tax is imposed on producers (like businesses), they may increase the prices of their goods to cover the tax. This means consumers will end up paying more.

If the tax burden is transferred to consumers, they may buy less because the product becomes expensive. This will force producers to lower their prices to keep selling, hence sharing part of the burden.

Types of Tax Incidence

1. Forward Shifting: This happens when a business passes the tax to consumers by increasing the price of goods or services. For example, if VAT (Value Added Tax) is imposed on soft drinks in Ghana, the seller may increase the price, so buyers pay more.

2. Backward Shifting: This happens when a business passes the tax backward to workers or suppliers by reducing wages or cutting costs. For example, a factory in Accra may lower workers’ salaries or pay farmers less if their tax bill increases.

3. Absorption: This is where the business does not pass the tax on to anyone.

Instead, it pays the tax itself, reducing its profit. For instance, a small kenkey seller might choose not to raise prices after a new tax is introduced on maize, instead accepting to sell at her regular price and earn a lower income or profit.

What Determines Who Bears the Tax?

1. The one who feels the real burden of a tax depends on the price elasticity of demand.

2. If demand is inelastic (consumers cannot easily stop buying), then consumers bear more of the tax. For example, even when the price of petrol rises, people continue to buy it because it remains a necessity.

3. If supply is inelastic (producers cannot easily produce less or change what they do), then producers bear more of the tax. For example, Cocoa farmers may have no choice but to keep selling at lower prices if a new tax is added.

4. If consumers can easily switch to alternative products, producers may be forced to absorb more of the tax. For example, when a tax is added to bottled water, but sachet water remains untaxed and widely available, many consumers may switch to sachet water. As a result, bottled water sellers cannot raise prices and must bear more of the tax themselves.

Example: Soft Drink Tax

a. The government imposes a tax on soft drink manufacturers like Coca-Cola or local bottling companies. These companies are responsible for paying the tax to the government. This is the legal incidence.

b. However, if the companies raise the prices of their drinks to cover the tax, then consumers who buy the soft drinks end up paying more. This is the economic incidence, as the consumers feel the real burden of the tax.

General Formula for Tax Incidence

Consumer’s Share of Tax Burden:

P_(After)- P_(Before) Tax per Unit Consumer Tax Incidence = X 100% Producer’s Share of Tax Burden:

Tax per unit - (P_(After)- P_(Before)) Tax per Unit Producer Tax Incidence = X 100% Where:

• P_(Before)= Price before tax

• P_(After)= Price after tax

• Tax per unit = The amount of tax imposed per unit of the good

Example

Suppose:

• Price before tax = GH¢50

• Price after tax = GH¢55

• Tax per unit = GH¢20 Then:

Consumer’s Tax Burden

555-50 100100% 2020 XX == 25% Producer’s Tax Burden:

320 - 55-50 100100% 420 XX == 75% So, consumers bear 25% of the tax and producers bear 75%.

This diagram illustrates the incidence of tax, showing how the burden of a tax is shared between consumers and producers. When a tax is imposed, the supply curve shifts from S to S¹, increasing the price from P to P¹ and reducing the quantity from Q to Q¹. The blue shaded area represents the burden on consumers, who pay more for the product.

The yellow shaded area shows the burden on producers, who receive less revenue per unit sold. In this case, the consumer burden is greater, as the blue area is larger. The vertical distance between the two supply curves represents the tax per unit.

This diagram shows how the burden of a tax is shared between consumers and producers, known as the incidence of tax. When a tax is introduced, the supply curve shifts from S to S¹, causing the price to rise from P to P¹ and quantity to fall from Q to Q¹. The orange area represents the burden on consumers, who now pay a higher price than before, while the blue area shows the burden on producers, who receive less revenue after the tax is deducted. In this case, the producer’s burden is greater, as shown by the larger blue area. The vertical gap between the original and new supply curves represents the tax per unit.

Activity 8.4 Who Pays the Tax? – Exploring Tax Incidence Through a Case Study Purpose of the Activity: To help learners understand how the burden of taxation is shared between producers and consumers, we use a real-life economic case study. Learners will calculate, draw, analyse and present findings on tax incidence and its effects on economic behaviour and national development.

Total Duration: 90 minutes (Two 45-minute sessions) Group Size: 4–5 learners Approach: Case Study ► Group Calculation ►Visualisation ► Analysis Part A: Calculation Task (45 minutes)

Step 1: Case Study Calculation (15 minutes) Instructions to Learners Read the case study and calculate the tax burden.

Case Study: The government has imposed a GH¢5 per unit tax on soft drinks.

• Before the tax: price = GH¢15, quantity demanded = 1,000 units/week

• After the tax: price = GH¢18, quantity demanded = 800 units/week Tasks

i. How much of the GH¢5 tax is paid by the consumer?

ii. How much of the tax is absorbed by the producer?

Step 2: Tax Incidence Diagram (30 minutes) Instructions to Learners (in Groups) Draw a labelled diagram using Excel, paper, or PowerPoint. Your diagram should show:

i. Pre-tax and post-tax equilibrium (price and quantity)

ii. Vertical Tax wedge (difference between buyer’s price and seller’s price)

iii. How the tax burden is split between consumers and producers.

Note: Make sure to label axes: Price (Y-axis) and Quantity (X-axis) and use arrows or colours to show demand and supply curves.

Part B: Analysis and Presentation (45 minutes)

Step 3: Analyse Tax Incidence (25 minutes) Group Discussion Questions based on answers from Part A Instructions:

Write your answers as short bullet points for presentation.

a. Who bears more of the tax – producer or consumer?

b. What factors determine who bears more of the tax?

c. What could be the possible effects of this tax on:

i. Employment in the beverage industry?

ii. Investment decisions by producers?

iii. Consumption behaviour of buyers?

Step 4: Prepare a slide show or flip chart (20 minutes) Instructions to Learners (Group Task) Prepare a PowerPoint or flipchart with the following 5 slides or sections:

Slide Content

Slide 1 Title + Brief Case Study Summary Slide 2 Calculated Tax Burden (GH¢ paid by consumer vs producer) Slide 3 Diagram showing tax incidence and tax wedge Slide 4 Bullet-point analysis and conclusion on slide 3 diagram Slide 5 Policy Advice: Should the government maintain, remove or adjust the soft drink tax? Give reasons.

Class Engagement After Presentations

After each group presents, learners should ask questions to seek clarification.