South Africa's Economy and Fiscal Objectives

Topics: Macroeconomics, Monetary policy, FIFA World Cup Pages: 6 (1810 words) Published: March 31, 2011
Research Question: How appropriate is the recently announced fiscal policy in terms of the state of the economy since 2007, the outcomes of ASGISA and the economic growth path envisaged by government?

In measuring the appropriateness of the South African fiscal policy stipulated in the general budget for the 2011/2012 period, one must look not only at South Africa’s current economic position but rather the state of the economy over the last five years as well as the context of the ASGISA outcomes and the overall economic path of the government.

Before one can measure their appropriateness in relation to past years and other measures, one must first fully understand what these fiscal policies were. The fiscal policy stipulated in the recent general budget of South Africa for the 2011/2012 period included an increase in government expenditure and a decrease in taxes: “The Budget expanded spending…For the business sector, it expanded investment” [1] (shown in Figure 3.1). “For the small business sector, there were… tax relief measures.” [1] (R8.1 billion in personal income tax relief). This decrease in tax can be seen in Figure 3.2.

Fiscal policy includes two main measures, government expenditure and taxation. One can see that a clear expansionary fiscal policy has been adopted in 2011. This is to counter the monetary restrictive policy that has simultaneously been announced, "Monetary policy, operated by the SA Reserve Bank, will continue to be focused on controlling inflation, and… fiscal policy is countercyclical." [1]

Once one has a clear understanding of the current fiscal policy, one is then enabled to measure it’s appropriateness in terms of the last five years and other measures. One must begin by comparing certain financial indicators over the last five years (2007 – 2011) in order to gain a greater picture of the economy and then a safe deduction in terms of the effectiveness of the fiscal policy can be made. These indicators include the real gross domestic product; final consumption by households; economic activity and employment

The first indicator to be analysed is the real gross domestic product of South Africa from 2007 until 2010. From Table 1.1; Table 1.2 and Table 1.3 one can recognise that South Africa’s real gross domestic product has decreased from 5.1 in 2007 (Table 1.1) to 3.9 in the first half of 2010 (Table 1.3). The reasons for this decline in real GDP over the last five years vary from year to year, with one underlying recession as the main driving force. This decrease could be used to understand the expansionary fiscal policy of the government in 2011. Government expenditure stimulates the economy and helps the GDP to strengthen; a logical step when one looks at the GDP decline over these five years.

The second indicator to be analysed is the household’s real final consumption expenditure, this indicator too shows a strong decrease from 2007 to 2009 (shown in Figure 1.1; Figure 1.2 and Figure 1.3), with a slight increase in 2010 due to the FIFA Soccer World Cup in South Africa and the beginning of South Africa’s recovery from the global recession. Once again an expansionary fiscal policy is required in a situation like this, as the government needs to in some way encourage spending by households. This is done by decreasing tax, which was done in 2011, and is therefore an extremely appropriate measure.

The third and final indicator one must analyse is the economic activity along with employment. This indicator also shows a decrease over this five year period due to the recession and the economy slowing down and therefore unemployment rising and economic activity decreasing as a result. (This can be seen in Figure 2.1; Figure 2.2 and Figure 2.3)

The decline of these three indicators over the past five years is due to both the recession that occurred in this period as well other factors.

In 2007 the beginning of the decline of these three indicators can be seen. The first...
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