COLLEGE OF EDUCATION-RUKARA

CAMPUS
SCHOOL OF LOWER SECONDARY EDUCATION
DEPARTMENT OF ARTS AND SOCIAL SCIENCES
SECTION OF ENTREPRENEURSHIP-EDUCATION
CLASS: ENE 2014 FT
MODULE TITLE: PUBLIC ECONOMICS
MODULE CODE: ECO2104
ASSISTANT LECTURER: Mr. SINDAYIGAYA Aimable Benjamin

INTRODUCTION
In economics, the word public is generally used to refer to what belongs or related to the
country or the community as a whole. Then public economics refers to economic activities
related to government, public or community as a whole.
Public economics is concerned with public finance that deals with public expenditure, public
revenue, budget and national budget, public debt, fiscal policy and monetary policy.

CHAPTER ONE: PUBLIC EXPENDITURE

1.0 Introduction
Public expenditure is commonly known as government expenditure and it refers to spending
made by the central government and local or regional governments in behalf of citizens and it
includes development expenditure and recurrent expenditure.
Therefore, it is any money that goes out of government coffers for various purposes.
1.1 Main types of government expenditure
As we have see in meaning of public expenditure, public expenditure or government expenditure
takes the following main forms:
Recurrent expenditure: This refers to expenses incurred by the government for the day
to day running of the state and providing public services. It is also called operating
expenditure. Examples of recurrent expenditure include salaries to civil servants, fuel,
drugs to government hospitals, and etc.
Development expenditure: This refers to expenditure that increases a countrys capital
stock. It is a set of expenses incurred by the government on durable assets that improve
the productive capacity of the citizens. Examples of development or capital public
expenditures are: construction of road, school, bridge, dams, water pumps, hydro
power centre, industries, and etc.
1.2 Major reasons for government expenditure
Generally we can identify the major objectives of government expenditure as below;
Providing public and merit goods: This means that public goods can only be paid by
the state since the individuals cannot provide or afford them. The examples of merit
goods are school, hospital, road, etc.

 Redistribution of income and wealth: This means that the major aim of the government
expenditure is to redistribute income and to reduce income inequalities by providing a
basic minimum level of income for the unemployed, old, disabled, and other low-income
groups through different incentives.
Influencing resource allocation: This is achieved by reducing regional economic
imbalance through providing grants and subsidies to selected sectors, firms, regions and
service providers so as to influence their economic performance.
Influencing the level of macro-economic activity: Public spending play a big role to
influence the aggregate demand where BOP problems and others were solved.
Regulating economic activities: The government spends to make standards set and
enforceable.
1.3 Principles of public expenditure
Principles, guidelines or standards of public expenditure are those consideration kept in mind
when government is spending its resources in behalf of the community as a whole and they are
as follows;
The principle of economy: the public expenditure must be incurred to minimize the
wastage of public resources.
The Principle of maximum social benefits: the majority of people must get maximum
benefits from government or public expenditure.
The principle of elasticity: The government expenditure should increase or decrease
depending on circumstances. In case of disaster the government expenditure increases
and after decreases during peaceful period.
The principle of Sanction: Government expenditure must be approved by a defined
authority like the parliament or any other policy making body before its implementation.
The principle of balanced budget: Every government must try to keep its budget well
balanced. Therefore, government spending should be in budget lines with aim of limiting
wastage of government resources.

 The principle of avoidance for unhealthy effects on production or distribution: the

public spending should stimulate productive activity so as to improve level of
productivity within a state.
There must be sound financial administration: Public accounts must be maintained
accurately and must be audited periodically in order to iron out differences.
1.4 Advantages of public expenditure
The advantages of public expenditure are as follow:
It increases the production of goods and services when they are incurred on state owned
enterprises.
Through public expenditure, the government provides subsidies to the poor which will
improve on the distribution of income.
The government is able to ensure maximum welfare through spending on provision of
social services.
Public expenditure can be used to maintain economic stability of prices and other
economic variables; for example during deflation, public expenditure is increased and
decreased during inflationary period.
Public expenditure can also be used to correct the balance of payment deficit. This can be
done by reducing expenditure on imports thereby improving on balance of payment
position of a country.
Public expenditure can be used to establish good relations with other countries for
example when the government spends on assistance to other countries.
1.5 Problems faced in effecting public expenditure.
The people who benefit more from public expenditure are different from those who
contribute to public or and it is difficult to balance the interest of this group.
There is a problem on balancing the regional allocation of public expenditure on public
goods like roads and hospitals.
There is a problem of insufficient funds to finance all the government expenditure since
policy makers face problems in allocating insufficient funds to ensure that all government
obligations are financed.

 Public expenditure is often faced with a problem of embezzlement and mismanagement

hence failure to meet the desired government goals
There is a problem of abrupt expenditure by the government due to disasters so that the
government actual expenditure exceeds the anticipated expenditure.
Thereafter, public expenditure is financed by the following public revenue: taxation, fees, rates,
grants, gift, markets dues, fines and penalties, gifts, license fees and public borrowings,
profits from government parastatals (companies), compulsory savings and sale of
government assets and so on but our concern among these sources of revenue is taxation and
public debts as explained in details follow;

CHAPTER TWO: TAXATION

3.1 Introduction

The term tax is from Latin word taxo to mean "rate", is a financial charge or other levy
imposed upon an individual or legal entity by a state or the functional equivalent of a state such
that failure to pay is punishable by law. Taxes are also imposed by many divisions. Taxes may be
paid in money or as its labor equivalent.
According to Black's Law Dictionary, a tax is a "pecuniary burden laid upon individuals or
property owners to support the government a payment exacted by legislative authority." It "is not
a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative
authority.
From the view of economists, a tax is a non-penal, yet compulsory transfer of resources from the
private to the Public sector levied on a basis of predetermined criteria and without reference to
specific benefit received.
3.2 Purposes or functions of taxes
There are many reasons to why government levies taxes and those reasons are as follows:
To raise revenue: The main purpose of imposing taxes is to raise income or revenue.
Taxes are considered as major sources of revenue to finance the maintenance of peace

and security n the country, to increase social welfare, to complete the development
projects like dams, roads, and power stations.
To maintain economic stability: Taxes are also imposed to maintain economic stability
in the country. During inflation, the government imposes more taxes in order to
discourage the unnecessary expenditure of individuals. Similarly, during deflation, taxes
are reduced in order to enable individuals spend more money. In this way, the increase or
decrease in taxes helps to check fluctuations in the prices and maintain economic
stability.
To provide fair distribution of income: Taxes are imposed at higher rates on rich
persons and the amounts are spent to increase the welfare of the poor persons. In this
way, taxes help to achieve the fair distribution of income.
To facilitate optimum allocation of resources: The amounts collected by the
government from taxes are spent on more productive projects. It means that resources are
allocated to achieve possible output in the given circumstances.
To provide protection policy: The government imposes heavy taxes on the imports to
favor locally produced commodities. In view of these taxes, the individuals are induced
to buy local products.
To provide social welfare: The government imposes taxes on the production of
commodities harmful for human health for example excise duty on wines and cigarettes.
To provide higher employment level: The government imposes taxes in order to
complete some public works programmes. The government employs individuals to
complete such programmes. It means that the government can solve the problem of
unemployment to a great extent by starting new projects. In this way taxes help to create
more employment opportunities.
To correct balance of payment problems: Taxes on imports limit the consumption of
imported products and hence reduce imports. So by reducing imports, taxes help improve
balance of payment position of a country.

 To strengthen foreign relations: Imposing taxes or removing existing taxes acts as a tool
of promoting foreign relations among countries. Removing or imposing taxes can either
promote or reduce economic co-operation among countries or states.
3.3 Three basic principles of a sound tax system
Fiscal adequacy
It means that the sources of revenue should be sufficient to meet the demands of public
expenditures.
Equality or theoretical justice
It means that the tax burden should be proportionate to the taxpayers ability to pay. This is the
so-called ability to pay principle.
Administrative feasibility
It means that tax laws should be capable of convenient, just and effective administration. Nature
and Limitations of the Power of Taxation
Nature or characteristics of the States power to tax
It is inherent in sovereignty; hence, it may be exercised although it is not expressly granted by
the Constitution.
It is legislative in character; hence, only the legislature can impose taxes (although the power
may be delegated).
It is subject to Constitutional and inherent limitations; hence, it is not an absolute power that can
be exercised by the legislature anyway it pleases.
3.4 Principles of taxation,

These are also called canons or maxims of taxation. They refer to the standards that the
government should follow when levying, collecting and administrating a tax. They define the
characteristics of a good tax. The principles of taxation were first proposed by Adam Smith in
1776, and they are as follow;
The canon of equality: This canon means that every person should pay the tax according
to his or her ability and not the same amount. It also means that everybody should not pay
at the same rate. The rich should pay more and at a higher rate than the other person
whose income is less. Thus this canon implies equality of sacrifice or ability to pay the
tax in proportion to the income of the taxpayer.
The canon of certainty: According to Adam Smith, there should be certainty in taxation
because uncertainty breeds corruption. This means that the time of payment, the manner
of payment, the quantity to be paid ought all to be clear and plain to the contributor and
to every other person. This principle requires there should be no element of arbitrariness.
It should be clear to every tax payer.
The canon of convenience: This means that a good tax system should be convenient to
the taxpayer in terms of place of payment, time of payment and method of payment.
The place of payment should be as near as possible to the taxpayer. If not the tax collection
agencies should appoint local agents or banks to collect taxes on their behalf. The taxpayer
should only be taxed when they are earning income and payment should be in a readily available
currency.
The canon of economy: A tax should be economical in terms of the costs engaged in
collecting it as compared to total revenue. The tax should also be economical to the
taxpayer; to say that he or she should have sufficient money left with him or her after
paying the tax.
The canon of productivity: This refers to the fact that a tax should bring large revenue
which should be adequate to the government. But the government should not tax people
heavily to get more revenue.

 The canon of elasticity: This canon requires that the government should be able to raise
the rate of taxes when it is in need of more revenue. But care has to be taken that the rates
should not be so raised that they may encourage inflationary pressures in the economy.
The canon of simplicity: The tax system should be simple, plain and intelligible to the
common taxpayer. This means that the tax should not be complicated. It should be simple
to understand so as to calculate it and how it must be paid. This canon is essential to
avoid corruption and oppressions on the part of tax department.
The canon of diversity: There should be a variety of taxes so that all citizens should
contribute towards state revenues according to their ability to pay.
The canon of flexibility: This means that taxes change with changes in income and in
economic conditions of taxpayers; there a good tax system should have mechanisms for
adjustment.
3.5 Characteristics of a good tax system
A good tax system should have the following features or characteristics,
Comprehensiveness: a good tax system should cover as many sources of income as
possible in order to maximize revenue, avoid over taxation of a few sources and
minimize evasion of taxes.
Imposition of minimum burden: A good tax system should impose a minimum
incidence to the taxpayer. This help to reduce the negative effects of taxation like
discouraging investment, saving and reducing standards of living of the taxpayer.
Efficiency: A good tax system should reflect administrative efficiency in terms of efforts,
time and financial resources involved in taxation.
Optimality: A good tax system should show a balance between revenue collected and
services rendered to taxpayers.
Double taxation: This means that a taxpayer should not pay more than once on the same
tax base.

 Elasticity: This means that government revenue from taxes should match with the level
of economic activities.
3.6 Classification of taxes.
Taxes are of the different types basing on the following basis: Rate of tax, and tax burden or
incidence
A. Classification basing on rates of taxes
An important feature of tax systems is the percentage of the tax burden as it relates to income or
consumption. The terms progressive, regressive, proportional and digressive are used to describe
the way the rate progresses from low to high, from high to low, or proportionally. The terms
describe a distribution effect, which can be applied to any type of tax system (income or
consumption) that meets the definition.
A progressive tax is a tax imposed so that the effective tax rate increases as the amount

to which the rate is applied increases.

Tax rate

Progressive tax curve

20%

15%

0
Y1

Y2

Income

The opposite of a progressive tax is a regressive tax, where the effective tax rate
decreases as the amount to which the rate is applied increases. This effect is commonly
produced where means testing is used to withdraw tax allowances or state benefits.

Tax rate
20%

15%

10%
Regressive tax curve
0
Y1

Y2

Y3

Income

In between is a proportional tax, where the effective tax rate is fixed, while the amount
to which the rate is applied increases.

Tax rate

20%

Proportional tax curve

0
Y1

Y2

Income

A digressive tax. The tax is called like when the higher incomes do not make a due
contribution or when the burden imposed on them is relatively less. This will happen
when a tax is only mildly progressive; to say that when the rate of progression is not
sufficiently steep. A tax may be progressive up to a limit beyond which the same is
charged. In that case, there may be lower relative sacrifice for the larger incomes than the
smaller incomes.
Another way in which a digressive tax may occur is when the highest percentage is set
for that given type of income on which it is intended to exert most pressure; and from this
point onwards, the rate applied proportionally on the higher incomes and decreasingly on
lower incomes, falling to zero on the lowest incomes.
Tax rate

20%

Digressive tax

curve

15%

Y1

Y2

Y3

Income

Merits and demerits of taxes under classification basing on rate of tax

Merits of progressive tax
The progressive tax satisfies the ability to pay since those with high income pay more and
it is productive since revenue increases as income increases.
It is economical since of collection are at minimum where tax rates change with income.
It is elastic since rates can increase or decrease as income changes.
It promotes social justice since those who get more from society contribute more to the treasury.
Demerits of a progressive tax
It ignores the benefit of service principle since the poor who may be getting more benefits from
the state pay less in taxes.
It discourages capital formation especially if it is imposed on savings and wealth.
I t increases tax evasion. This because taxpayers find it hard to pay more tax their income
increases.
It is based on unrealistic principle of diminishing marginal utility of income where marginal
utility cannot be measured.
Advantages of a proportional tax
It is certain where by the taxpayer can easily calculate his or her tax liability.
It is simple because it can be easily understood by both taxpayers and tax administrators.
It does not affect income distribution since tax liability changes at the same rate as tax income.
Disadvantages of a proportional tax
It may increase income inequalities since tax incidence falls more on the poor as
compared to the rich.

 It yields less revenue. This because it is not based on the taxable capacity of the
individuals.
Classification basing on the impact of taxes
It means to whom tax is imposed and who has to bear the burden of the tax. In this case the taxes
may be:
Direct and indirect
Taxes are sometimes referred to as "direct taxes" or "indirect taxes". The meaning of these terms
can vary in different contexts, which can sometimes lead to confusion. An economic definition,
by Atkinson, states that "direct taxes may be adjusted to the individual characteristics of the
taxpayer, whereas indirect taxes are levied on transactions irrespective of the circumstances of
buyer or seller. According to this definition, for example, income tax is "direct", and sales tax is
"indirect". Indirect taxes are imposed on events, rights, privileges, and activities. Thus, a tax on
the sale of property would be considered an indirect tax, whereas the tax on simply owning the
property itself would be a direct tax.
Direct taxes
Direct taxes are taxes imposed on incomes, profits and wealth of individuals and companies
where the incidence can not be shifted forward or backward.
Direct taxes include income tax, estate or death duty, gift tax, super profit tax, land tax, poll tax
property tax inheritance tax, capital gains tax, capital levy surtax and company tax.
The mentioned direct taxes can be explained as follows:
Super profit tax, are taxes levied on abnormal profit of companies. The tax is based on the
profits that a company has earned above a certain level.
Income tax is levied on people whose income is above thresholds. Income tax enjoys wide
support because is a good indicator of an individuals ability to pay. For example people with

permanent jobs in companies and government offices, the tax is usually deducted from their
salaries through pay as you earn arrangement.
Estate tax or death duty, when a person dies, the property that he or she leaves behind to others
may be subject to tax. The major aim of such taxes is to distribute incomes among the
population.
Property tax, this refers to the tax that is levied on an individuals wealth. The value of the
persons assets, both financial assets and real assets is considered. Financial assets to mean
stocks and bonds, and real assets to say houses and cars for example.
Surtax is a kind of tax on people with exceedingly high incomes.
Gift tax, this refers to a tax levied on the transfer of property between living people. It is
imposed on the person who receives the gift.
Capital levy, this refers to the special tax levied on the rich to finance the emergencies like wars,
famine, floods and earthquakes.
Land tax: It refers to a tax on land normally intended to target the big land owners who at times
let it out to farmers or tenants. It is intended to reduce monopoly of land by a few landlords.
Capital gains tax, this is a tax levied on the profits realized upon the sale of a capital assets.
Poll tax, is also called per capita tax or capitation tax, it is a tax imposed as a set amount per
individual with in the country and it is administratively cheap because it is compute, collect and
difficult to cheat.
Corporation tax or company tax is tax based on profits of a company. The profit is taxed once
when it is earned by the corporation, and is again taxed a second time when it is paid out to
shareholders as inform of dividends. Thus, company income faces a high tax burden than
personal income.
Advantages of direct tax,

Direct taxes are cheap to collect because they are directed deducted from the peoples income.
The government does not need, therefore, to employ tax assessors and collectors since firms and
government departments employ the people to this work.
Direct tax are inconvenient because they are spread over a long period. Salary income earners
they have a defined amount deducted from their salaries per month as tax instead of paying it in
lump sum, which makes tax convenient to the taxpayers.
It is flexible and easily increased or decreased. This means that the tax can be increased and
decreased at short notice to regulate the economy.
Direct taxes are simple and also simple to compute most directed taxes are simple to understand
since it is a percentage of taxpayers income.
Direct taxes are progressive since the rich people pay taxes at higher rates than the rates the poor
people pay.
Direct taxes are certain in terms of revenue to be collected. This means that taxpayers and tax
collectors are sure of the amount and time to pay taxes.
Direct tax are not inflationary. This means that direct taxes do not directly affect commodity
prices.
Direct taxes are effective at distributing national income among the population.
Disadvantages of direct taxes
The revenue generated from direct taxes are always low in developing countries
Cost of assessment are high when the taxpayers are scattered in different locations. The tax
assessors must go to the people to assess and collect taxes hence raising costs and making them
less economical.
It is very difficult to measure the taxable capacity of people to determine how much income they
have to pay and this leads to either over taxation or under taxation.

Innovation and invention. Most direct taxes are collected by local chief and leaders who lack
competence to assess and collect taxes.
Direct taxes affect negatively the rate of capital inflow because foreign investors will be scared
by direct taxes.
Direct taxes are easy to evade because people cannot conceal their incomes, others get income
from other sources and yet others are not resident in a single place.
Direct taxes in form of company profit hinder expansion of firms since the profit that would have
been ploughed back into the firm for expansion is taken away in form of taxes.
Direct taxes are directly noticeable by the public and therefore can cause political and social
resentment.
High direct taxes scare away foreign experts from working within the country and also cause
brain drain of highly skilled and scarce labour-force.
Direct taxes have a big impact on the workers standard of living, moral and output of the firm
because they lead to lower wages and less benefits for them.
Indirect taxes
They are also called expenditure taxes or outlay taxes. Such taxes are paid when an individual or
firm spends on commodities. They are collected through producers and suppliers of commodities
and the tax burden may rest on the producer or consumer of the commodity, depending on the
elasticity of demand and elasticity of supply of the commodity.
The following are example of indirect taxes:
Custom duties. These refer to taxes paid by importers and exporters basing on the commodity
being traded.

Excise duty. This refers to tax paid on selected locally produced commodities whether the
commodities are for local consumption or export. Goods liable for excise duty are cigarettes,
beer, spirits, wines, soft drinks, airtime, cement, fuel and sugar.
Sales tax or turnover tax. This is a tax on commodities sold within a country, irrespective of
whether the goods have been produced locally or imported.
Sumptuary tax. this is a prohibitive tax on specific commodities to discourage their
consumption. For example taxes on cigarettes with purpose to discourage smokers.
Octoroi tax. This is a tax on goods crossing or in transit through a country. For example Rwanda
may charge octoroi tax on goods passing through Rwanda to Burundi.
Value added tax. It is also called goods and services tax or turnover tax. It is a tax on the value
added on commodity at each stage of production. At each stage the producer adds value to the
commodity by processing it with capital and labour.
The value added tax is administrated by requiring the company to complete a value added tax
form, giving details of the value added tax it has been charged by its suppliers (referred to as
input tax) and the value added tax it has charged its customers (referred to as output tax), and the
difference between is the tax payable to the tax authority. If input tax is greater than output tax,
the company can claim back money from the tax authority. Then the value added tax is an add
valorem tax because it is levied as a percentage of the value added to the commodity.
Advantages of indirect taxes.
They are convenient because they are levied when someone has money to spend.
Indirect taxes generate more revenue for the government because they cover a wide variety of
goods and services.
Indirect taxes are helpful in directing consumption behavior of the population by taxing highly
harmful products.

Indirect taxes are cheap to collect since they are collected through a few producers and sellers.
Indirect taxes are less harmful to work since they influence people to work hard to be able to
continue consuming the goods and services they were consuming before taxes. So, they
encourage work.
Indirect taxes protect domestic industries by imposing taxes on imported goods.
Indirect taxes are more flexible and easily adjusted upwards or downwards to achieve desired
goals, according to changing economic conditions.
Indirect taxes are less to cause political unrest because they are not easily noticeable.
Disadvantages of indirect taxes.
Indirect taxes are regressive. This means that they take the same amount from the rich and the
poor and in the process the poor spend more amounts of their income on taxes than the rich.
Indirect taxes discourage international trade since taxes on locally produced commodities make
them very expansive for foreign markets while import duties make imports too expensive for the
local market.
Indirect taxes cause inflation by increasing transport costs, labour costs and costs of raw
materials. Then they cause general increase in prices.
The revenue from indirect taxes are less certain and difficult to estimate and this makes planning
difficult.
Another demerit of indirect taxes is that they discourage demand through higher prices, and then
discourage production and investment.
Indirect taxes interfere with consumers sovereignty and divert production and consumption
habits of people. People will left the highly taxes goods and consume less taxed.
Indirect taxes increase the cost of living by increasing prices of commodities.

Indirect taxes may cause exploitation of customers when producers increase the price more than
the increase in tax.
Effects of taxation
In particular economist study how taxes affect peoples behavior, including their choices in
working, saving, consumption and investment as follows,
Taxes affect the labour supply by influencing peoples decisions on whether to work hard or not.
Taxes influence prices in the economy. This means that any increase or decrease in taxes cause
an increase or decrease in price.
Taxes have a impact on savings. This means that when a tax is levied on interest or dividends, it
reduces the reward for saving.
Taxes affect physical investment since they reduce the income and the benefit of making
investment.
Problems of taxation in lower developed countries.
The process of taxation is faced with a number of problems in lower developed countries as
follows,
Poorly trained tax collectors. Most tax collectors are not professionally trained to assess and
collect taxes.
Lack of sufficient logistics. Tax collectors lack computers to help analyze and store data.
Insecurity. Due to insecurity, some areas are not accessible to tax assessors and collectors.
High rate of tax evasion. This refers to the fact that people refuse to declare incomes while for
import and export duties, people smuggle the goods across national borders so as to evade taxes.

Unemployment. Most of labor force is unemployed leading to low taxable capacity and low tax
revenue.
Inflation. Because of inflation, expected benefit cannot be realized as money loses value.
Political interference. This involves government officials using their positions to favor their
companies from taxation.
Large subsistence sector. A large subsistence sector with low incomes means that a large part of
the economy cannot be taxed. This means little revenue us collected in form of taxes.
Unstable and scattered population: Much of the population moves from place to place and
therefore difficult to trace and tax.
Narrow tax base: This means that high rate of unemployment of labor in lower developed
countries narrows tax base.
Insufficient data: This refers to lack of accurate information and statistics about peoples
incomes and economic activities that makes difficult to determine the peoples taxable capacity.
Corruption and embezzlement: Corrupt tax collectors are big problem to taxation in most
lower developed countries.
Poor infrastructure: Due to poor road networks and communication facilities, tax assessors and
collectors are unable to reach certain areas.
Politicizing of taxation: Politicians tend to use taxation as tool to get votes during their
campaigns by promising to reduce or completely to remove certain taxes. This reduces peoples
willingness to pay during and after elections.
Language and communication barriers: In many cases, tax laws, policies and terminologies
are difficult to be understood by the local population or people who pay the taxes.
Over taxation: Sometimes government imposes taxes which are too high for individuals and
leads to high tax evasion and avoidance.

Improving taxation in lower developed countries

The following are suggestions of improving taxation within such countries:

Expanding the tax base by encouraging foreign and domestic investors

Intensive taxpayer education.

Improvement in infrastructure.

Training tax collectors.

Putting up stringent measures against corruption and improving accountability for tax
revenue.

Encouraging more indirect taxes that are difficult to evade.

Empowering the anti-smuggling agencies.

Re-activating industrial court or tax tribunals.

Diversification of the economy.

Better monitoring and supervision of both taxpayers and tax collectors.

Improving the tax system by computerizing and professionalizing it.

Tax base
Tax base is the economic activity, commodity or income upon which a tax is levied in order to
raise revenue. For example, if a tax is imposed on imported goods, then those goods are the tax
base.
Taxable capacity. This refers to the extent to which an individual taxpayer is able to pay taxes
imposed on him or her without affecting the standard of living that he/she is used to.

For the economy as a whole, tax capacity is the total amount of money that can be raised from
taxation without causing adverse effect on the economy.
The taxable capacity may be low because of the following:

Low income

Big subsistence sector.

Lack of data on personal incomes and economic activities.

High levels income inequality.

Political instability.

Dominance of agricultural sector.

Unemployment.

Low levels of investment.

Poor administration.

Ignorance about the importance of taxation.

Tax Evasion and Tax Avoidance

Tax evasion is failing to pay legally due taxes while tax avoidance occurs when people change
their behavior to reduce the amount of taxes they are legally supposed to pay; for instance, when
individuals relocate their businesses to the region with lower taxes, they are in practicing tax
avoidance.

CHAPTER THREE: TAXATION SYSTEM IN RWANDA

The mandate to levy and collect taxes is vested with Rwanda Revenue Authority (RRA) and
collects both direct and indirect taxes.
Direct taxes
The major direct taxes are as follows:

Pay As You Earn (PAYE), is a tax imposed on incomes, salaries, emoluments and other

earnings including those of transport, accommodation and allowances.

The current pay as you earn rates in 2013 are as follows:

Monthly deductions
Tax bands

Tax rates

Rwf 0 -30,000

0%

Rwf 30,001 100,000

20%

Rwf 100,001 and above

30%

Annual deductions
Tax bands
Rwf 0 -360,000

Tax rates
0%

Rwf 360,001 120,000

20%

Rwf 120,001 and above

30%

Person income tax: Person income tax rates in Rwanda are progressive to 30%.
Residents are taxed on worldwide income, that is income from any part of the world but

non residents are taxed only on income earned from Rwanda. Capital gains are also taxed
at the normal person income tax rate and tax deductions are allowed for variety of items
such as retirement contributions, pension payments other retirement contributions paid by
the employer or Rwanda Social Security Board (RSSB).

Corporate income tax: Corporate income tax or rate simply company tax rate in
Rwanda is currently 30% of taxable income. Registered investors may enjoy discounts
based on the number of employees and the amount of the income derived from the export
of goods and services. Corporation tax is imposed on companys total income after
deduction of normal business expenses. Dividends received by Rwandan-resident
company from another Rwandan company are exempt from such tax. Other dividends are
subject to tax of 15%.

Indirect taxes
The major indirect taxes are as follows:

Excise tax: This tax charged on imported and locally manufactured goods. Locally
manufactured goods that are subject to excise duty pay it whether they are for local
consumption for export. The taxable value on locally manufactured products is
calculated according to the selling price exclusive of taxes.

The following are products subject to excise duty:

Products
Juice from fruits

Tax rate
5%

Soda and lemonade

39%

Mineral water

10%

Beer

60%

Wine

70%

Brandies, liquors and whisky

70%

Cigarettes

150%

Telephone communication

5%

Fuel (excluding benzene), gas oil, fuel and lubricants

76%

Powdered milk

10%

Value Added Tax (VAT): Is an indirect tax paid by final users of taxable goods and
services. The registration threshold for VAT purposes is Rwf 20,000,000 of annual
turnover.

Voluntary registration is possible for taxpayers with turnover under the

threshold. The standard VAT rate in Rwanda is 18%.

Goods and services exempt from VAT in Rwanda:
Agricultural products.
Health services and supplies.
Educational services and materials.
Funeral services.

CHAPTER FOUR: FISCAL POLICY

Fiscal policy refers to the use of public finance operations especially taxation, government and
public debt to achieve development and full employment. By means of fiscal policy, government
influences what takes place in an economy using its revenue and expenditure.
Instruments of fiscal policy
However the most instrument of fiscal policy is taxation, expenditure and borrowing are also
tools that can be use to achieve the objectives of fiscal policy.
Objectives of fiscal policy. Fiscal policy is used to increase production and create employment,
for example giving subsidies to farmers, attracting foreign investors by taxing them less and
protecting their industries usin import taxes.
The government can spend on employment, generating sectors like public works for example the
construction of roads, power projects, agriculture and industry.
Progressive taxation can be used to distribute incomes and reduce income inequalities. This
increases the number of people participating in investment, production and job creation.
The government can spend on infrastructure like roads, hospitals and schools to participate in
production through parastatal bodies.
Fiscal policy can be used to get revenue to finance projects through both external and internal
borrowings.
Fiscal policy helps the government to check on population growth by reducing child allowances
and taxing those with many children.
The government through fiscal policy can finance training and orientation on facilities to
increase skills of labour and reduce unemployment.

The fiscal policy can be used to overcome inflation. Taxes can be used on peoples incomes so as
to reduce their demand. The fall in demand results into a fall in prices. However, the aim of fiscal
policy is not only to overcome inflation but also maintain stability in general price level.
The fiscal policy has the objective of overcoming the balance of payment deficit though taxation.
Direct taxes reduce the disposable income leading to a fall in demand for all goods including
foreign goods. This improves the balance of payment position, since there is a fall in demand for
foreign exchange.
The fiscal policy has the objective of maintaining the desirable price level. This means that
prices must not fall because the profits of the producers are minimized. Similarly, the prices must
not rise because the fixed incomes are greatly decreased in value. The general stability of prices
is associated with the stability of the economy.
The other main objective of fiscal policy is to attain desirable level of consumption. To achieve
this, consumption patterns are evaluated on the basis of the degree to which satisfaction is
maximized, the effect on quantity of savings and the effect on efficiency of human productive
activity.
Briefly the success of fiscal policy in achieving its objectives depends on the amount of public
revenue that can be raised. The greater the amounts, the more likely will the fiscal policy achieve
its objectives. It also depends on the amount and direction of expenditure. If the amount of
expenditure is substantial and is directed towards productive ventures, fiscal policy is likely to
achieve its objectives.
Forms of fiscal policy
Fiscal policy is described in two forms or types which are expansionary fiscal policy and
contractionary or restrictive fiscal policy.
Expansionary fiscal policy or loose means increasing aggregate demand by lowering taxes and
rising government spending. Expansionary fiscal policies encourages more spending, hence

increasing aggregate demand and boosting the economy. Expansionary fiscal policy occurs when
the government lowers taxes and increases spending to expand output or national income.
Contractionary or restrictive fiscal policy refers to a deflationary fiscal policy or tight fiscal
policy; to mean raising taxes and reducing government expenditure. This is intended to
discourage spending and economic activity. Such policy is adopted, for example to reduce
inflation.
Objectives of fiscal policy in lower developed countries
The main objectives in under developed countries are as follows,
To increase the rate of investment by checking consumption.
Encouraging the flow of investment into channels which are most desirable from the
point of view of society.
To regulate the flow of purchasing power in accordance with the requirement of the plan.

CHAPTER FIVE: NATIONAL BUDGET

Budget is a statement outlining anticipated an organization or a person receipts and expenditure

as well as measures proposed to be taken in coming year.
It is also the money that is available to an organization or person, or a plan of how it will be
spent (Longman Dictionary of contemporary English 5thEducation).
National budget is a financial statement that gives an estimates of the planned revenue and
planned expenditure of a country for a given year, national budget provides an analysis of how

the government plan to raise revenue, how much is expected from each source and how the
money will be spent in a given financial year.
Information provided by National budget
The following are information provided by national budget:
How the revenue is going to be realized and ways of expending it.
The socio economic policy to be implemented.
Projection about the rate of economic growth.
Priority areas of major government expenditure.
Estimated volume of foreign exchange earnings from exports.
Give position and policy about the public debt.
Spell the fiscal monitory and direct policies to be implemented.
The volume of output of the major sectors
The national budget for being implemented should be presented to parliament by the Minister of
finance in order to be approved.
Types of budget or National budget
There are two types of budget, these are: Balanced budget and unbalanced budget.
Balanced budget is where government anticipated revenue is equal to anticipated expenditure.
The implications of balanced budget are:
Constant money supply.
Other factors remaining constant, constant general price level.
No government borrowing.
Constant level of aggregate demand, employment and general economic activities,
However economic activity may increase through the government expenditure multiplier.
No printing of more money.
No seeking for grants to raise money for spending.

Unbalanced budget is statement where expected revenue from taxes is not equal to expected
expenditure. There are two forms of unbalanced budget, these are: Surplus budget and deficit
budget.
A surplus budget is where anticipated government revenue is greater than anticipated
government expenditure of the financial year. The implications of a surplus budget are:
Reduction of money supply.
Reduction of general price level.
Reduction of the revel of economic activity, for example; employment, economic
growth and aggregate demand.
The surplus may be used to give gifts and grants to other countries
A deficit budget is when anticipated government receipts are less than anticipated government
expenditure of the financial year. Its implications are:
An increase in money supply.
An Increase in general price level (inflation).
An increase in aggregate demand,employment and the general level of economic
activity.
The government to borrow from the central bank (print more money) or borrow
from within or outside the country.
The government to get grants from other countries.
The government to sell its assets to raise money for spending.
Characteristics of National Budget
Predictability: The preparation of the budget, according to the social and economic development
is expected to predict how much revenue can be collected, according to the needs of social
management and development arrangement expenditure.
Management: Budgeting is an executive or managerial function. As an effective tool of
management, budgeting involves planning, coordination, control, evaluation, reporting and
reviewing. Many of the budgetary innovations such as: functional classification, performance
measurement through norms and standards, accounting classification to correspond to functional
classification, costing and performance audit and use of quantitative techniques have become

important aids to management. Various budgetary systems like performance budgeting and zero
base budgeting are specifically management-oriented systems.
Legal nature: the national budget is different from the general sense of the budget, the general
sense by the parties to decide the budget to the state budget preparation and determination of the
proceedings must be conducted in accordance with certain. Under normal circumstances, are
prepared by the Government by the State authorities for approval. The budget can only be said
that the government draft, only after the approval authority, the budget was able to set up. After
the approval of authority, it becomes a legally binding document, the implementation of the
enforcement authority must do the same, without due legal process, shall not be changed.
Integrity: National budget is the governments basic financial revenue and expenditure plans; in
general, all government revenues and expenditures must be in corporates.
Hours of: the government budget must be planned within the coming period, not every few days
for approval to the authority. Long as the state continues to exist, will need to be kept in balance
to maintain its normal operation, to achieve its functions. However, in order to facilitate
accounting and management, people tend to set a certain period of time, this time a year for the
sector generally. Budget year of the start and end time varies across countries adopt the calendar
year from January 1 each year until December 31 only, some are from April 1 each year until the
second year ended March 31, Some are from July 1 each year until the second year ending June
30. As other countries of East Africa Community (EAC); the government of Rwanda is adapting
this budget year starting from July 1 each year until the second year ending June 30.
Openness: As the state budget revenues and expenditures are associated with the close relations
between the people, so the general requirements of the open and transparent. Whether the
process of examination and approval authority of, or approved after the budget and budget
implementation should be made public.
Control: Control essentially implies a hierarchy of responsibility, embracing the entire range of
executive agencies, for the money collected and expenditure, within the framework of overall
accountability to the legislature. In a democracy, control assumes new dimensions and gives rise
to exceedingly difficult problems. The basic concern in a truly representative government is to
bring about suitable modifications in the sign and operation of the financial system so as to

ensure executive responsibility to the legislature which is the law-making, revenue determining
and fund-granting authority.
Accountability: The government is responsible for budget implementation and budget execution
results must be reported to the authorities and with the recognition of authority. Legislative
control and accountability were the primary functions of the government budget. This arose from
the legislature's desire to control (impose, amend and approve) tax proposals and spending. The
executive was accountable to the legislature for spending-within limits approved by the latter,
under several heads of expenditure, and only for approved purposes. Similar accountability was
to exist within the executive on the part of each subordinate authority to the one immediately
above in the hierarchy of delegation. Accountability continues to be an important function of the
government budget even today owing to its usefulness in budget execution and plan
implementation.
In general in most Organization of Economic Cooperation and Development (OECD) Countries,
Comprehensiveness and transparency are achieved by designing a budget system with three key
characteristics, these are:
Annuity: A budget is prepared every year, covering only one year, voted every year, and
executed over one year.
Universality: All resources should be directed to a common pool or fund, to be allocated and
used for expenditures according to the current priorities of the government.
Users of national budget,
National budget information helps users to make better financial decisions; users of financial
informational may be both internal and external to the organization.
The national budget users include the following:
Management: For analyzing the organization's performance and position and taking appropriate
measures to improve the company results.
Employees: For assessing company's profitability and its consequence on their future
remuneration and job security.

Owners: For analyzing the viability and profitability of their investment and determining any
future course of action.
National budget information is presented to internal users usually in the form of management
accounts, budgets, forecasts and financial statements.
Creditors: For determining the credit worthiness of the organization. Terms of credit are set by
creditors according to the assessment of their customers' financial health. Creditors include
suppliers as well as lenders of finance such as banks.
Tax Authorities: For determining the credibility of the tax returns filed on behalf of the company.
Investors: For analyzing the feasibility of investing in the company. Investors want to make sure
they can earn a reasonable return on their investment before they commit any financial resources
to the company.
Customers: For assessing the financial position of its suppliers which is necessary for them to
maintain a stable source of supply in the long term.
Regulatory Authorities: For ensuring that the company's disclosure of accounting information is
in accordance with the rules and regulations set in order to protect the interests of the
stakeholders who rely on such information in forming their decisions.
Generally budget is primarily used by management team to ensure that plans are done and
achieved. Secondly budget can be used by employees to understand where they are going.
Thirdly budget can be used by outside members who wish to learn, or can be used by
competitors to measure efficiency, used of National budget
Uses of National budget
The budget is major tool by which the government regulations the economy by allocating
expenditure and revenue in way that ensures the achievement of desired micro economic
objectives,
The following are uses or importance of National budget.

To achieve price stability: A surplus budget controls inflation while a deficit budget solves
deflation. A proper balance puts the economy at desired price levels.
To redistribute incomes among individuals sectors and regions of the economy. For example,
income inequality among individuals is solved through the budgeting process by raising revenue
in form of taxation from high income groups and then spending the raised revenue on low
income groups.
Protect domestic industries from foreign competition: This is normally done by subsidizing
local industries and taxing imports
Creates employment opportunities: This is done by reducing corporate taxes on labor intensive
firms, subsidizing wage bills and setting up investment that absorb execs labor.
Promote economic growth: By allocating more money to infrastructure, export, promotion
education and industrial sector.
A budget is used as a tool to correct balance of payments disequilibrium. High taxes on imports
subsidies to exporters and export promotion initiatives are used to achieve this.
Raise sufficient revenue from internal and external sources to fund government expenditure.
The national budget is used as a tool of national accountability. The leaders explain how funds
are to be used and how national resources are being used and managed.
The national budget attracts foreign investors: because they are able to know how the economy
is performing, what incentives are available, what sectors are being promoted and the regulatory
policies in place.
National budget leads to reduction national poverty levels: by insuring proper allocation of
resources.
Ensure the efficient and sustainable allocation of national resources towards sectors that assist
the poor.

Donors support poor countries based on their budgetary needs. A good budget therefore
enables the country to obtain foreign financial assistance. Donors assistance is at times referred
to as a budgetary support.
It should be noted that, the uses/importance of a national budget vary, depending on the goals of
the government at particular time.
Structure of current budget of Rwanda (2013-2014)
In Rwanda, the budget is passed on an annual basis to ensure that the government continues to
operate. Normally, the budget process timeline is governed by a budget calendar that categorizes
the whole process into four key stages of Preparation, Approval, Implementation, as well as
Audit and Oversight. The following figure provides a general overview of the budget process in
Rwanda.
Stages of Annual Budget
Ministry of

Budget tabled Funds distributed among Oversight audit organs (Office of

Finance issues to the Cabinet the Government

Auditors General, Office of

guidelines to

and later to spending agencies to

Accountant General, National

spending

Parliament

implement agreed

Budget Directorate etc) assesses

activities;

spending agencys accounts and

agencies
Spending

Consideration

Ministry of Finance

performance
Annual Audit reports published and

agencies

by

monitors spending

reviewed by parliament (Public

Prepare

parliamentary

&submit draft

budget

budgets
Negotiation

committee
Parliament

Ministry of Finance

&final

accepts,

receives budget

decisions

amends

reached by

rejects the

from spending agencies

executive

budget

if necessary;
Requests for

Accounts Committee)

or reallocations requests

reallocations
approved or rejected by
Parliament
Preparations

Approval

Implementation

July-March

April-June

July-June

Audit &Oversight
Sept-April

Before the beginning

Fiscal year

Following end of

Of relevant fiscal year

starts and ends

fiscal year

According to the Minister of Finance and Economic Planning Ambassador Claver GATETE,
when presenting National budget of the 2013/2014, He said that, the total budgeted resources for
the 2013/14 fiscal year are RWF 1.653 trillion, which is RWF 103 billion higher than the
2012/13 revised budget.
The total domestic revenues for the period are estimated at RWF 994.9 billion which is 60.2% of
the total budget. External resources account for only 39.8% of the total budget or RWF 658.6
billion.
Total recurrent expenditures are projected at RWF 735.7 billion or 44.5% while development
projects account for RWF 802.7billion which is equal to 48.5% of the total budget.
Net lending accounts for the remaining 6.9% or RWF 114.8 billion. The amount of RWF 84.4
Billion will be allocated to the completion of Kigali Convention Center.
Tax revenue collections are projected to rise by 0.2 per cent of GDP from RWF 641.2 billion
(13.7 per cent of GDP) to RWF 749.1 billion (13.9 per cent of GDP). The increase in revenue is
expected through taxes on goods and services, which are expected to generate RWF 399.9
billion.
The revenue projections do not envisage any substantial changes in the tax regime, Minister
Gatete told law makers. He noted that projections are underpinned by several on-going as well as

new measures to be implemented by the Rwanda Revenue Authority such as e-filing and epayment, Electronic Single Window and Electronic cargo tracking equipment among others.
Revenue Sources for Fiscal year 2013/14 in Billion Frw
Sources of revenue
Total Tax & Non Tax Revenue
Tax revenue
Non-tax revenue
Disposal of Assets
Total grants
Budgetary grants
Capital grants
Loan Borrowings
Domestic
Foreign
Grand Total

Amount
843.4
775.4
68.0
0
470.7
170.7
300
339.4
151.5
187.9
1,653.5

Percentage %
51.0
46.9
4.1
0
28.4
10.3
18.1
20.6
9.2
11.4
100

As shown in the above table, most of the money that the government uses to pay for services
comes from taxes.
The tax revenue collections are approximated to be Frw 775.4 billion or 46.9 % in 2013/14. Non
tax revenue in 2013/14 budget equal to Frw 68 billion or 4.1 %.
Other sources of revenue are grants where total grants in 2013/14 budget is estimated to be Frw
470.7 billion of which Frw 170.7 billion is direct budget support. Total domestic revenues will
increase from Frw 737.6 billion in 2012/13 revised budget to Frw 994.9 billion in 2013/14
budget. The Government is committed to progressively increase the share of domestic revenue
financing of the budget with a view to become self-reliant in future.
How are these funds going to be spent?
Economic Development and Poverty Reduction Strategy II (EDPRS II) thematic areas
On the budget allocation and prioritization front, the resource allocation has been aligned to the
implementation of the four thematic areas outlined within the Economic Development and

Poverty Reduction Strategy II (EDPRS II). Minister Gatete told law makers that the thematic
areas have been allocated 50% of the total budget. The foundational issues have been allocated
37% while the support functions have been allocated the remaining 13%.
About Frw 826.7 billion or 50% of the total budget will be used to fund Economic Development
and Poverty Reduction Strategy II (EDPRS) thematic areas while foundational sectors have been
allocated Frw 612 billion. The remaining Frw 214.3 billion is earmarked for support function.
There are four EDPRS II thematic areas, the leading one being economic transformation.
The key objective of economic transformation is to ensure a sustainable rapid economic
growth and facilitate the process of economic transformation by increasing the internal and
external connectivity of the Rwandan economy. In 2013/14 budget, the Government has
allocated over Frw 511.4 billion to economic transformation that will increase over the medium
term. Spending in Energy and roads dominate this area.
The second thematic area is rural development aimed to achieve sustainable poverty reduction by
improving land use, agriculture productivity; enabling graduation from extreme poverty as well
as connecting rural communities to economic opportunity through improved infrastructure.
Rural development is allocated Frw 161.3 billion that is projected to increase to Frw 184.4
billion in 2015/16.
Productivity and youth employment is another important thematic area that will be given much
attention in order to transform Rwanda from an agriculture based economy to an industry and
services- based economy. In 2013/14 budget, this priority gets Frw 104.4 billion that will
continue to increase in subsequent years.
The fourth and the last EDPRS II thematic area is accountable governance. The objective is to
enhance good governance by promoting citizen participation and mobilization for better service
delivery and strengthening public accountability. Over Frw 39.6 billion is allocated to this sector
in 2013/14 budget.

To build on our successes of previous years the foundational sectors such as health and basic
education, macroeconomic stability, public finance management, justice, peace and stability,
food security, nutrition and decentralization is allocated Frw 612 billion in 2013/14 budget and is
projected to increase to the tune of Frw 717.4 billion in 2015/16 fiscal year.

How big is recurrent and development budget?

Government expenditure can be divided into recurrent and development expenditures. The
recurrent budget refers to governments expenditures to support day to day operations such as
paying salaries and wages, rent, materials and supplies, transport expenses, simple repairs and
maintenance of equipment. Development expenditures are expenses made for acquisition of new
assets. Such expenses include construction of roads, schools, hospitals, rehabilitation or
construction of water installations. In the 2013/14 budget recurrent budget is equal to Frw 851.7
billion a decrease of 9% when compared to 2012/13 recurrent budget. Development budget is
equal to Frw 803.7 billion in 2013/14 budget, equivalent to 22% increase when compared to
2012/13.
How big is our capital investment according to sectors?
During this fiscal year, the government investment plan in capital projects equal to Frw 803
billion is distributed in sectors.
How much money has been allocated to different sectors?
Energy
In 2013/14 budget the Government has allocated 192.4 billion Rwf to this sector compared to
Frw 129.4 billion in 2012/13 budget to improve electricity generation, transmission and
distribution.
Key projects to be undertaken will include rural electrification roll out programme, Lake Kivu
methane gas, Nyabarongo, Rusumo, Rusizi II, Rukarara I hydropower plants. In addition, 9
Micro hydro power stations will be constructed together with construction of national wide-

transmission line, electrification of 6 districts in Eastern Province and upgrading 110 KV

Mururu-Kirinda- Gikondo.
Transport
The government has allocated Frw 195.2 billion, compared to Frw 124.6 billion in 2012/13. The
allocation in 2013/14 is about 11.8% of the total budget, and has increased by Frw 70.6 billion
from 2012/13 allocation. The Government will continue to maintain, rehabilitate and upgrade
various roads throughout the country to provide farmers with easy access to markets. About
398.5 km will be maintained, rehabilitated or upgraded. The key roads to be rehabilitated in
2013/14 are: Kivu belt (144.8 Km), Kigali-Gatuna (80 Km), Crete Congo/Nil- Ntendezi (30Km),
Cyangugu-Ntendezi-Mwityazo (50km), Kitabi-Crete Congo/Nil (30Km), CIMERWA-Bugarama
(10Km), Gitarama-Ngororero-Mukamira (55Km) and Huye-Kitabi (53Km).
Water and Sanitation
To enhance access to safe water and hygienic sanitation, the government has allocated Frw 28.4
billion for water and sanitation compared to Frw 27.1 billion that was allocated in last fiscal year.
More efforts will be made to increase access to water countrywide by drilling more boreholes,
improve water supply in Kigali city and other urban areas. Key projects include Kirehe
watershed management project, National rural water supply and sanitation programme, Lake
Victoria water supply and sanitation programme (Phase II), rural water supply in Eastern
Province, Optimized
Production of Nyabarongo ground water treatment plant, Rural drinking water quality control
project, Rural water sustainability support, as well as various sewage system for Kigali Business
District.
Information, Communication and Technology (ICT)
To increase access to Internet across the country, a world-class ICT network was installed and
about 98 government institutions are already connected. For this fiscal year, a budget of Frw 28.3
billion has been allocated to ICT sector compared to Frw 24.5 billion in 2012/13 budget. Key
ICT projects in 2013/14 budget are E-government project, ICT skills development project, ICT

private sector development, ICT for community development, Regional ICT centre for
excellence as well as Regional communication infrastructure program
Agriculture
The government has allocated Frw 52.4 billion this year to support agricultural sector in a bid to
complete strategic food reserves, to multiply and improve distribution of seeds, breeds and
fertilizers. Irrigation schemes and protection of soil erosion will continue to increase long term
productivity. Furthermore, mechanization centers will be established to facilitate commercialized
agriculture as well as farmers cooperatives. It is in this regard that tractors and other agricultural
equipment have been subsidized.

Trade and Industry

In 2013/2014 fiscal year, the government supports the implementation of the new Private Sector
Development Strategy, the establishment of 4 provincial industrial parks together with the
relocation of Gikondo industries to Kigali Special Economic Zone. The government will reduce
common external tariffs on buses and other motor vehicles to facilitate movement of goods and
people as well as lowering trade related costs in East African region. This year the government
allocated the sum of Frw 21.9 billion to this sector. The government will continue to boost
savings, Credit and Saving Cooperatives (U m u r e n g e SACCOs) as well as support
prospective entrepreneurs to start up small business enterprises to unlock their potential through
Hanga Umurimo and Kuremera programs.
Tourism
Local communities today have a very important voice in the way in which tourism is developed
and resources allocated. The Government will to continue to promote this sector with
construction of Kigali Convention Center, Diversification of tourism products and development
of existing products, quality management and standardization of new accommodation
establishments, construction of guest houses in various Districts among others. In addition, roads
that lead to tourist sites will be upgraded in an effort to increase accessibility to tourist sites in
the country.

Education
236.3 billion will be spent on providing quality education and training to children and youths,
compared to 207.7 billion in 2012/13. This money will be spent to improve education sector
infrastructures and equipment, welfare of teachers, build more pre-primary schools, scale up
school feeding program, hire new teachers, acquire new textbooks, and scale up inspection and
supervision of schools as well as operational zing one university project and education loan
subsidy scheme to students from financially weaker families. The government will continue to
provide quality universal 12 year basic education as well as provide vocational skills to the youth
through Technical and Vocational Education and Training (TVET). To increase opportunities for
youth skills development, Integrated Polytechnic Regional Centers (IPRC) as well as two
technical schools of excellence in each administrative sector will be constructed and
rehabilitated.
Health
To ensure the continued good health among the citizens and equitable access to health services
Government have allocated Frw 155.4 billion for prevention of diseases, skills improvement and
salaries of medical personnel. The government will continue to construct and upgrade hospitals
and health centers. Among these are Kibuye, Kirehe, Nyabikenke, Rutare, Byumba and
Muhororo hospitals. In addition, five new health centers will be completed across the country
such as in Rulindo, Mukura and Mbogo. Medical equipment such as malaria testing kits, cold
chain equipment and x-ray machines, and constant medical supply will be purchased. To better
address the increasing health care risks facing the citizens, the government will continue to
increase the coverage rate of community health insurance commonly known as Mutuelles de
sante.

Social Protection and Justice

Social welfare remains one of Government most pressing challenges. Frw 70.9 billion is
allocated to social protection Programmes in 2013/14 budget which is about Frw 45.9 billion
increase in 2012/13 budget. Key interventions include among others pension schemes, support to
genocide survivors and vision 2020 Umurenge. In addition to social protection the government
has embarked on providing legal aid services to reduce backlog of court cases by training and
deployment of judicial personnel to local communities
Governance and Decentralization
To continue to increase better service delivery to the community and decentralization, in 2013/14
budget, the government will hold parliamentary elections; revise the Organic Budget Law to
allow agencies not considered as procuring 25 entities to be given responsibility to manage their
public funds and continue to fight crimes and corruption.
Gender Equality
A close look at the 2013/14 budget through the gender lens manifest the Government
commitment to promote gender equality and equity, to protect the rights of men, women, boys
and girls. In this year the government has allocated Frw 3.4 billion to gender machinery
institutions to support specific gender and family promotion related programs.

As conclusion, a budget is a powerful instrument with manifold objectives in the hands of

government. Primarily it was viewed as an instrument of legislative control and accountability.
In the modern times, however, budgeting has become management-oriented and various
budgetary innovations have specific managerial objectives. Budget also serves as a vehicle for
implementing the developmental plans of the nation.

CHAPTER SIX: MONETARY POLICY

Monetary policy refers to the manipulation of money supply, credit, interest rates, and other
monetary variables by the central bank to influence economic activity and achieve predetermined
policy goals.
The goal of monetary policy is set out in the National Bank of Rwanda (BNR) by Law
which requires the national bank of Rwanda to conduct monetary policy in a way to deliver price
stability and in low inflation environment. Law no 55/2007 of 30/11/2007 governing the Central
Bank of Rwanda assigns to the national bank the responsibility of formulating and implementing
monetary policy.
The article 5 of the same law, presents the main missions or objectives of the National Bank.
Objectives of monetary policy
To ensure and maintain price stability by reducing its fluctuations;
To enhance and maintain a stable and competitive financial system without any exclusion;
To support Governments general economic policies, without prejudice to the two above
missions.
To stimulate the economic growth,
To solve balance of payment problems by encouraging exports and discouraging imports,
To minimize interest rates that finance government securities,
To reduce income inequalities,
To create sound financial institutions within the economy,
To increase the level of foreign exchange,
To achieve these objectives or implementation of monetary policy the central bank of Rwanda
uses some tools or instruments. These instruments include open market operations,

reserve requirements, foreign exchange intervention, instrument of public debt, bank rate,
selective credit control, margin requirement and moral suasion.
Tools of monetary policy
These refer to instruments used by the central bank to achieve the objectives of monetary policy.
These tools can be used depending on objectives to achieve. They can be used expansionary; to
increase money supply when there is deflation due to insufficient money supply and
contractionary ; to reduce money supply.
Those tools are used as it follows,
Open market operations
This consists of the central bank intervention on the money market to increase or reduce money
supply or credit availability. If the government wants to increase money supply and credit
availability, it buys securities from the public and this avails money to the public for economic
activity. So in doing this, the central bank controls inflation and deflationary pressures.
These open market operations include notably repos or reverse repos operations, treasury bills
issuance, standing deposits facility and standing lending facility and refinancing window.
Reserve requirements
Reserve requirements stand for money reserved in the central bank by other banks. These are
called legal reserve requirement because they are mandatory and stated as a percentage of the
deposits.
Depository institutions (commercial banks) are obliged to hold minimum reserves against their
liabilities, predominantly in the form of balances at the central bank. The imposition of reserve
requirements implies three reasons such as monetary control, liquidity management and
prudential. The current reserve requirement ratio is 5%. Changes in reserve requirements affect
the liquidity of the banking system and its capacity to create loans.

The central bank manipulate reserve requirement to influence money available to commercial
banks and the public.
To reduce money supply, the central bank increases reserve required and when it wants to
increase money supply it reduces reserve required. It is why it referred to as reserve ratio.
Foreign exchange intervention
The National Bank of Rwanda intervenes in the foreign exchange market, among other reasons,
in order to defend the exchange rate and to achieve a desired amount of international reserves.
The intervention in the foreign exchange market directly affects reserve money and hence has a
direct impact on overall liquidity in the economy and the stance of monetary policy.
The instrument of public debt.
It takes the form of government bonds or securities of various kinds. Such securities are drawn as
a contract between the government and the lenders. By issuing securities the government raises a
public loan and incurs a liability to repay both the principal and interest amount as per contract.
Bank rate
This tool refers to the percentage at which the central bank charges the commercial bank. It
extends credit to them at an interest rate called bank rate. This is not called direct loan but a
top up.
When commercial banks are charged at a higher bank rate, they also charge their borrowers at a
higher charge rate and this is done when the central bank wants to reduce money supply.
The central bank reduces the bank rate to enable commercial banks to reduce interest rate for
availing sufficient money supply and credit from commercial banks.
Selective credit control
This instrument refers to the limiting of credit to a few chosen sectors or regions. The central
bank instructs commercial banks to avail credit only to sectors of priority so as to control money

supply within the economy. For instance, agriculture and industrial sectors may be allowed credit
while others are denied.
This selective treatment may be in complete of credit or unfavorable terms being set for the less
priority sectors like high interest rate, short-term loans and more security.
Margin requirements
This refers to the difference between the value of the security and the value of the loan advanced.
Before lending commercial banks ask the prospective borrower to provide collateral security in
the form of land, house, car, or shares in a company. The central bank raises this value to limit
credit availability with the same purpose of reducing money supply so as it can decrease the
value to avail credit and money in circulation.
Moral suasion
This refers to the fact that the central bank appeals to the commercial banks to reduce their
lending during inflation and requests them to increase lending during deflation .this tool is
implemented through persuasion.
Special deposits
These refer to the amount of money kept with the central bank by commercial bank. The central
bank has all powers over the commercial banks. Whenever it wants to limit credit availability, it
calls for special deposits; to say commercial banks are ordered to keep a certain amount with the
central bank.
It is not easy to use such tools and the failure of monetary policy can occur because of some
factors,
Reasons for ineffectiveness of monetary policy are attributed to inherent weaknesses of
individual tools used, nature of economics and financial institution involved as follows,

Monetary policy can fail because most of commercial banks in developing countries are foreign
owned or act as branches of other banks abroad and their liquidity are addressed by the parent
bank abroad. And this makes inefficient bank rate as a tool of monetary policy.
Monetary policy may fail because people lack collateral securities to act as guarantee for loan
acquisition. Even if the central bank wants commercial banks to increase the level of lending
people may not qualify for loans.
Poorly developed money market causes the failure of monetary policy because when the money
markets are not well developed like they are in most developing countries, issued securities will
not be bought and the central bank cannot use them to reduce or increase money supply.
Monetary policy can fail because of limited investment opportunities compounded with
unfavorable investment laws that discourage people to get loans. There is high competition in
business and high business loan interest rate lead to low returns.
Monetary policy fails due to low interest given on deposits discourages depositors to have their
money banked and prefer to have it in real assets like houses, animals and land.
Corruption and lack of commitment among bankers makes some instruments like selective credit
control to fail as they give loans to none priority sectors. This because the main aim of the
commercial bank is to make profits; hence they may not fully back the central bank in
implementation of monetary policy.
Existence of large subsistence sector limits the operation of monetary policy, as some of the
transactions are still carried out through barter trade.
Monetary policy is rendered ineffective by the ignorance of people against banking services.
This by the tendency to keep money in hand.
Conflict between political interest and monetary policy can cause the failure of monetary policy.
The government in most cases wants to increase the incomes of people through increased wages,
prices of agricultural products and credit programmes. Such policies may conflict with existing
monetary policy.

The existence of insecurity leads to excessive government expenditure on financing wars and
subsequent failure of monetary policy. Many developing countries spend a lot of money on
security so as to maintain their thrones and this has adversely affected success of monetary
policies.
Insufficient supervisory capacity of the central bank over commercial bank leads to excess
liquidity with commercial banks.

CHAPTER SEVEN: PUBLIC DEBT.

A debt is any money owed by an individual, a group of individuals or an organization by way of
borrowing, which must be paid back to the lenders at a future date with interests.
So, the public debt refers to money owed by any level of government on behalf of the citizens,
either central government, federal government or municipal or local government by the way of
borrowing which must be paid back to the lenders at a future date with interest. It arises out of
the failure of the government to raise revenue to finance its expenditure.
Causes of public debts
Colonialism: it is argued that developing countries debts are partly because of the unjust
and unfair transfer of the debts of the colonizing powers to them.

 Exportation of primary products: Lower developed countries export primary products at

falling prices which leads them to the accumulation of debts instead reducing them.
Refinancing of loans: This implies to taking on new debts to service old ones.
Profit repatriation: In fact, the large part of the borrowed money is taken back by the
lenders in form salaries, consultancy fees and interest.
Reducing burden of taxation: Most government resort to borrowing as a way of avoiding
high taxes which would reduce savings, discourage work and consumption and make the
government unpopular.
Scarcity of foreign exchange: Borrowing from external sources is a source of a scarce
foreign exchange because foreign debts are given in foreign currencies which local
sources of revenue cannot do.
Government looks at debts since it is difficult to finance large projects like construction
of dams, roads and airports with locally generated revenue.
Public debts are classified under two main categories external and internal public debt
under which they are also classified in respect of the source, purpose, time of repayment,
method of covering liability. Thus the debt may be classified into following types.
Classification of public debts according to the source of borrowing.
According to the source of borrowing public debts are divided into two types as follows;
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.
The various internal sources from which the government borrows include individual persons,
commercial banks, business firms, mutual funds and sale of bonds and treasury bills. The various
instruments of internal debt include market loans, bonds, treasury bills, ways and means
advances.
Internal debt is repayable only in domestic currency. It implies a redistribution of income and
wealth within the country and therefore it has no direct money burden.
External debt

External public debt refers to money owed by the government from foreign lenders.
The international monetary fund defines external debt as outstanding amount of factual liabilities
that require payment of principle and interest by the debtor at some point in the future that are
owed to none residents by resident of the economy.
External loans are raised from foreign countries or international institutions like world bank and
international monetary fund. 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.
An external loan involves, initially a transfer of resources from foreign countries to the domestic
country but when interest and principal amount are being repaid a transfer of resources takes
place in the reverse direction.
Under classification basing on purpose we find,
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.
As Dalton puts, productive debts are those which are fully covered by assets of equal or greater
value, if the borrowed money is invested in the construction of railways, roads, irrigation
projects, power generations, education and industrial sector. It adds to the productive capacity of
the economy and also provides a continuous flow of income to the government. The interest and
principal amount is generally paid out of income earned by the government from these projects.
Productive loans are self liquidating. Generally, such loans should be repaid within the lifetime
of property. Thus, such loans do not cause any net burden on the
community.
Unproductive debt or dead weight debt,

Unproductive or dead weight debts are those which do not add to the productive capacity of the
economy. Unproductive debts are not necessarily self liquidating. The interest and the principal
amount may have to be paid from other sources of revenue, generally from taxation, and
therefore, such debts are a burden on the community.
Public debt used for war, famine relief, social services, is considered as unproductive debt.
However, such expenditures are not always bad because they may lead to well being of the
community. But such loans are a net burden on the community since they are repaid generally
through additional taxes.
Voluntary and Compulsory Debt
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, and bonds.
The Government makes an announcement in the media to obtain such loans. The rate of interest
is normally higher than that of compulsory debt, in order to induce the people to provide loans to
the government.
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. Compulsory deposit scheme is an example of compulsory debt.
Classification in respect of time.
Under this classification we find, Short-Term, Medium-Term and Long-Term Debts
Short-term debt

Short term debt matures within duration of one year or less than a year. Generally, rate of interest
is low. For instance, treasury bills of 91 days and 182 days are examples of short term debts
incurred to cover temporary shortages of funds. The treasury bills of government, which usually
have a maturity period of 90 days, are the best examples of short term loans. Interest rates are
generally low on such loans.
Medium-term debt
The Government may borrow funds for medium term needs. These funds can be used for
development and non development activities. The period of medium term debt is normally for a
period above one year and up to 10 years. One of the main forms of medium term debt is by way
of market loans.
Long-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.

Classification in respect of method of covering liability.

Under this classification we find, redeemable, irredeemable, funded and unfunded debts.
Redeemable debt
The debt which the government promises to pay off at some future date is 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 and the interest on the due date.
Irredeemable debt
It may be short-term, medium and long-term. Such debt has no maturity period. In this case, the
government may pay the 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.
Funded debt
Funded debt is repayable after a long period of time. The period may be 30 years or more.
Funded debt has an obligation to pay fixed sum of interest subject to an option to the government
to repay the principal. The government may repay it even before the maturity if market
conditions are favorable. Funded debt is undertaken for meeting more permanent needs, say
building up economic and industrial infrastructure. The government usually establishes a
separate fund to repay this debt. Money is credited by the government into this fund and debt is
repaid on maturity out of this fund.
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.
Roles or importance of public debts
Public debt helps to reduce the burden of taxation. Most government resort to borrowing as a
way of avoiding high taxes which would reduce savings, discourage work and consumption and
even make the government unpopular.
Public debt allows the required funds to be available in lamp sum rather than trickle in as is the
case with other sources of revenue like taxation. Urgent spending and large-scale project can be
implemented with certainty like construction of dams, roads and airports.
Public debt helps the government to control inflation by selling government securities to the
public. The government proceeds like to reduce money supply in purpose of maintaining price
stability.

Internal public debt helps the government to borrow from the private sector and enables this to
earn the interest after the maturity period.
Public debt allows the government to refinance loans, to say that the government takes on new
debts to service the old ones. When old debts become due, most countries afresh to pay. This
means that they are not reducing their debt obligations but instead switching from one lender to
another.
Public debt helps to avoid dis-investment, to say that the government borrows to refinance its
investments and paying other debts instead of selling off some of them for purpose of paying
those debts.
Public debt allows the government to finance the budget without printing more money which can
cause inflation due to the increase of money supply.
Public debt plays an important role in financing fruitful investment and creative capability in the
financial system.
Public debt is important in achieving the well being of the community. This by using it for war,
famine relief, social services and health care.
Public debt helps to meet temporary needs of the government.
Public debt helps to have access to foreign currencies that are important in foreign exchange.
Public debt helps the government in correction of balance of payment problems. This by
borrowing for financing local productivity to raise exports.
Disadvantage of borrowing.
The demerits of borrowing can be summarized as follows;
Despite the evident merits of borrowing as a source of revenue, they are many disadvantages
associated with borrowing like high rates of interest, dependence on the lender by the borrower,
conditions attached to debts, excess money supply from external loans that causes inflation,

debts repayment deprive the paying country of foreign currency and future increase in taxation to
repay debts.

References

1. NISAR AHMED SALEEMI(2008) ,Taxation simplified, Saleemi Publications, Nairobi

2. ASIIMWE MUTAMBA Herbert(2013),senior secondary economics, MK Publishers,
Kampala-Uganda,
3. Ministry of Finance and Economic Planning, The Budget of Rwanda, a Citizens Guide

2013/2014
4. Ministry of Finance and Economic Planning, Budget Speech Financial Year 2013/14
5. Premchand A, 1983. Government Budgeting and Expenditure Control: Theory and

Practice, IMF: Washington DC

6. TAYEBWA MUGISHA Bernard, Basic economics,
7. ASIIMWE MUTAMBA Herbert (2009), fundamental economics, MK Publishers,
Kampala-Uganda.
8. TAYEBWA MUGISHA Bernard (2004), model questions and answers in Economics,2nd
edition,grapet traders, Makerere-Uganda.