Public finance, banking and stabilisation

Public finance follows collective choices

Public finance studies government revenue, expenditure, borrowing and the way those choices affect the economy. A budget is a plan for a stated period, not proof that every expected receipt or project has occurred. Revenue can include taxes and non-tax income; borrowing provides finance but creates a repayment obligation. Recurrent expenditure supports ongoing activities, while capital expenditure creates or improves longer-lived public assets under the relevant budget classification. The distinction concerns purpose and accounting treatment, not whether the spending is automatically useful or wasteful.

A tax is a compulsory levy imposed under public authority according to the applicable rules. Direct taxes are commonly levied on income or wealth, while indirect taxes are associated with spending or transactions in goods and services. The person legally responsible for remitting a tax may differ from the person who ultimately bears its economic burden. That distinction is tax incidence. Price changes, wages, returns and substitution can distribute the burden. A seller handing money to the revenue authority does not by itself prove that the seller bears the whole cost.

Tax structures and incidence

A progressive tax takes a rising average share as the tax base rises. A proportional tax takes a constant average share, while a regressive tax takes a falling average share. Marginal tax rate concerns the tax on an additional unit of the tax base; average rate is total tax divided by total taxable amount. Under a hypothetical schedule charging 10% on the first₦100,000 and 20% on the next₦100,000, tax on₦150,000 is ₦20,000, with an average rate of 13.33% and a marginal rate of 20% within that second band. These are teaching figures, not a current Nigerian tax schedule.

Tax incidence depends partly on responsiveness. In a basic competitive market, the side with less elasticity tends to bear more of the burden because it has less ability to adjust. A specific per-unit tax can create a wedge between the buyer's price and the seller's net receipt. The exact split requires demand and supply conditions. Do not assume a tax is always shifted fully to consumers or that its legal name reveals the economic result. Evaluation should also consider collection costs, compliance, equity and the policy objective.

Budget balances, debt and policy

A budget deficit occurs when expenditure exceeds revenue under the budget measure used. A surplus is the reverse. Public debt is a stock of outstanding obligations, while a deficit is a flow over a period. Borrowing to finance a deficit can add to debt, but changes in the debt stock can also reflect other accounting adjustments. Distinguish debt service, which includes required payments, from the whole outstanding principal. A large loan amount is not a current operating income simply because cash arrives.

Fiscal policy uses public spending and revenue measures to influence activity and other objectives. Expansionary measures can support demand when resources are underused, but effects depend on timing, supply capacity, financing and expectations. Contractionary measures can restrain demand but may also affect employment and service access. A policy is not judged by its label alone. Consider whether it addresses the source of the problem and whether implementation, leakages and distribution change the outcome. The same measure can have different effects in different circumstances.

Commercial banks and financial intermediation

Commercial banks accept deposits, facilitate payments and provide credit and other financial services within their regulatory framework. They connect savers and borrowers but also create deposit money through lending in the modern banking system subject to capital, liquidity, risk, demand and regulatory constraints. A simplified money-multiplier exercise illustrates one mechanism under restrictive assumptions; it is not a complete prediction of actual lending. Banks do not simply lend without limit, and deposits are not identical to the bank's physical cash holdings.

Liquidity means ability to meet obligations when due without unacceptable loss. Solvency concerns whether assets adequately cover liabilities under the relevant valuation. A bank can face short-term liquidity pressure even when its underlying asset value exceeds liabilities, while a solvent-looking cash position does not guarantee that all loans will be repaid. Interest compensates for time, risk and other influences, but the actual rate depends on market and institutional conditions. A good answer distinguishes the function of a bank from an unsupported claim about any particular institution's safety.

The central bank and monetary tools

A central bank commonly issues currency, supports monetary and financial stability, acts as banker to government and provides settlement or liquidity functions for banks within its mandate. Monetary policy influences financial conditions through tools such as policy rates, open-market operations and reserve requirements. Buying securities in a simplified model can add reserves; selling can withdraw them. The transmission from a policy decision to lending, spending and prices is not instantaneous or certain. Institutions, confidence, exchange rates and supply conditions affect the result.

Higher policy interest rates can raise borrowing costs and encourage some saving, potentially restraining demand. They can also affect exchange rates, asset prices and debt-service burdens. Lower rates can support credit demand when other conditions permit, but cannot by themselves guarantee productive investment or remove a physical supply shortage. Fiscal and monetary policies can reinforce or offset each other. Explain the causal chain and a relevant limitation instead of writing that one tool automatically solves inflation or unemployment.

Self-check and practical interpretation

Self-check: government revenue is ₦700 billionand expenditure₦820 billionunder a simplified budget. The deficit is ₦120 billionfor that period, not the total public debt. Self-check: if a household pays₦15,000 tax on₦100,000 taxable income, its average rate is 15%; this alone does not reveal the marginal rate. When evaluating a policy, name the objective, trace the mechanism, identify likely beneficiaries and costs, and state what evidence would test the result. All amounts and tax schedules in this lesson are hypothetical, and no contemporary legal rate or financial product recommendation is implied.

Further application

Principles of sound tax design include clarity, convenience, reasonable collection costs and attention to fairness. The principles can conflict: a system that is simple to administer may not reflect every difference in ability to pay. Explain the chosen criterion and the trade-off rather than calling a tax good solely because it raises a large sum.