(a) Distinguish between the following pairs of terms: i. capital expenditure and recurrent expenditure: ii. fiscal policy and monetary policy. b. Explain fo...

Answer Details

(a)(i) Capital expenditure and recurrent expenditure.

• Capital expenditure is government spending on durable assets and projects that yield benefits over many years, such as building roads, bridges, schools, and dams. It is non-recurring and adds to the nation's stock of capital.
• Recurrent expenditure is government spending on the day-to-day running of government that recurs regularly, such as salaries of civil servants, maintenance, and consumables. It does not create lasting assets.

(a)(ii) Fiscal policy and monetary policy.

• Fiscal policy is the use of government taxation and public spending (the budget) to influence the level of economic activity. It is operated by the government/treasury.
• Monetary policy is the use of instruments that control the money supply, credit, and interest rates (open-market operations, bank/liquidity ratio, discount rate). It is operated by the central bank.

(b) Four reasons why a government imposes taxes.

• To raise revenue. Taxes finance government spending on public goods and services such as defence, roads, and education.
• To redistribute income. Progressive taxes take more from the rich to fund services and transfers for the poor, reducing inequality.
• To control consumption. Heavy taxes on harmful goods (tobacco, alcohol) discourage their consumption.
• To protect infant/local industries. Import duties make foreign goods dearer and shield domestic producers.
• To manage the economy (stabilisation). Taxes are raised to curb inflation (reduce demand) or lowered to fight unemployment (boost demand).
• To correct a balance of payments deficit by taxing imports.

Examination takeaway. Keep the two policy tools separate by their operator and instrument: fiscal policy is government + budget (tax and spend), monetary policy is central bank + money and credit.