South Africa’s Fiscal Policy Background essay


SouthAfrica’s Fiscal Policy


Everygovernment seeks its own unique ways of reducing poverty as well asstimulating both economic and social growth of the citizens. For thisto become practical, the government uses certain policies whichensure that there exists a suitable balancing of the income, theexpenditure, borrowing and taxation. This is critical in ensuring thesustainability of an economy both in the short and long-run(Horton &amp El-Ganainy, 2009).Again, the policies may not necessarily stimulate growth but to someextent, prevent any decline in economic situation of a country.However, a good financial policy should not only ensure economicprogress but also promote improvement and sustainability of theeconomy.

Fiscalpolicy can be defined as the systems used by a government throughtaxation, spending, and other forms of financial income with the aimof stimulating economic growth. The aspects of taxation and spendingare majorly used to influence the state of the economy, with thefocus at most times being aimed at a sustainable economy that isdevoid of losses and unwarranted inflation. The rate of inflationdetermines the flow of money within an economy and itssustainability. As such, the fiscal policies are aimed at controllingthe inflation, and hence the economy, thus a strong and sustainablegrowth is maintained(Blanchard &amp Quah, 1989).Thefiscal policy has its own unique ways of affecting the economy, themajor one being through the allocation of resources. The efficiencyand effectiveness of the economy is highly pegged on the usage of theavailable resources. An economy consists of various sectors which areknown to be great contributors for the economy. For the government toacquire considerable income and especially through revenues, then itis mandatory for it to heavily invest in the productive sectors. Theperformance of those sectors determines the money that the governmentconsequently gets in terms of revenue and as such, it is important toinject a portion of the resources to the respective sectors. Here,the fiscal policy becomes critical in determining the ratio at whichsharing of resources can be made. For instance, more resources shouldbe allocated to the most potential sectors, regardless of whetherthey are performing well at the moment or not. When a potentialsector is poorly performing, finances may be allocated to it so as toimprove the productivity, while a sector that is already doing wellmay have finances allocated to it in order to sustain theperformance, whose decline would adversely affect the economy. It istherefore through an effective fiscal policy that a government can beable not only to allocate resources to sectors, but also achievemaximum income and later redistribute it to the economy.

Fiscalpolicy as a Balancing Tool

Anunbalanced economy is deemed to fail. A fiscal policy is the majortool used by the government to ensure that an economy is wellbalanced to an extent that can stimulate growth and sustainability ofthe nation’s economy. As previously seen, inflation is one of thefactors that are known to shape and redirect the economy. Inflationinvolves either an increase in the supply of money within an economyor to the increase in the prices of the common commodities,regardless of whether they are products or services. It is howeverimportant to note that at most times, the increase in the price ofcommodities is a result of excess supply of money and again,inflation does not always affect the economy negatively. Inflationrequires certain measures and tools of control to ensure that theeconomic situation is favourable. Normally, the availability orscarcity of money in an economy makes the whole difference. Whenthere is less flow of currency within an economy, measures ought tobe put in place to increase the flow. However, excessive flow wouldcause high rate of inflation thus a need for a mechanism to reducethe flow. Basically, an effective fiscal policy is able to controland balance the flow, thus maintaining the rate of inflation at aconducive level, favourable for economic growth and sustainability(Campbell, 1994).

Fiscalcontraction is one of such control measures employed by the fiscalpolicy. At times, the rate of inflation may be too high due to a highflow of currency within an economy. As a result, the prices of basiccommodities are likely to go high. As the flow becomes high, demandalso rises due to the availability of currency. The price goes highand the value of the currency lowers. The fiscal contraction helps incutting the spending. Various mechanisms such as high interest ratesfor loans are imposed with an aim of reducing the flow of currency.Another mechanism used is the increment of the taxation rates. Whenthe taxes are raised, the flow is reduced and the rate of inflationconsequently slowed.

Scarcityof resources is common when the flow of currency within an economy isless beyond the average level. This situation at most times cause aperiod of recession in a country. Most of the commodities becomeunaffordable to most of the citizens, and may easily contribute tothe rise of poverty levels in the particular nation. Fiscal expansionis the main control measure employed by the fiscal policy to controlthe state of recession. At such a level, the economy rarely grows andbecomes non-sustainable. The demand for commodities is also low,meaning that most of the citizens cannot afford them and secondly,the low demand affects the profitability of the companies thusreducing the revenues collected by the government hence unfavourableeconomic condition. Here, the government cuts the taxes levied to thecitizens with an intention of increasing their income. As a result,the flow of currency goes up and the spending increases. This measureis critical in restoring the demand for commodities and in creationof the desired and most potential gross domestic product (GDP) in theparticular economy(Fischer, 1993).

FiscalPolicy and Trends in South Africa

SouthAfrica is one of the leading economies in Africa, and probably thebest of them all. It is important to realize that, the country hasnot enjoyed stability for long enough like the other countries havedone, thus raising a need to know why its economy is standing outamongst the other African countries and which have enjoyed peace andindependence for the last close to sixty years. Despite acquiringindependence, South Africa continued with periods of restlessness dueto the apartheid rule until it acquired its full democracy in 1994.Most scholars in this field have tried to study the nation’sperformance in contrast with the period of time that it has enjoyedfull democracy. Despite the richness in minerals and naturalresources being cited as one of the key contributors to the nationaleconomy with much focus on more valuable resources such as gold, ithas been noted that, there are other nations which equally have largedeposits of valuable minerals such as gold and oil yet their economicsituation is not as good. For instance, a number of Asian countrieshave large deposits of oil yet economic recessions have become anorm. As such, it would be right to make a conclusive statement thatregardless of the sources income, the fiscal policy is thedeterminant to the economic performance since it is not solelydependent on income but rather several other aspects such as how itis collected, the spending and the redistribution of the income.

Thesuccess of South Africa’s economy has been as a result of thetechniques used in controlling the economy. Over the time, the nationhas used a countercyclical approach as the main framework(Siebrits, 2003).Just as the lead word suggests, this technique involves counteringthe unwanted economic situations through effective control ofrevenues and expenditures. The policy involves increasing the revenuecollection base through an empowered economy while keeping in checkthe expenditures, especially that of the government entities. Thetechnique has been concentrating more on the social and economicpillars to ensure that they are properly empowered to the extent thatthey can give back adequately in terms of revenues. It also ensuresthat value for money is created. This approach can either be reactiveor proactive. Despite it being designed in a way that ensuresproactive response, it is not always that the forecasts will beright. The approach is designed in a way that in such a scenario, anadequate reactive solution can be made.

Thenation’s fiscal framework has been instrumental in narrowing downthe budget deficit over the years. An excessive deficit affects theeconomic situation negatively and must therefore be always kept undercheck. Looking at the trend, the approach has helped drasticallyreduce the deficit, and that is best explained by the chronologicalanalysis of the deficit percentages over the years(Easterly &amp Schmidt-Hebbel, 1993).In the financial year 2012/13, the budget deficit was 4.3 per cent.Moving on to the next financial year, that is, 2013/14, the budgetdeficit further narrowed down to four percent. Various strategiessuch as expenditure ceiling have been used to achieve this. Clearpolicies have been put in place regarding how the revenues acquiredby the government can be spent. Further, the deficit has beennarrowed down through investing in the potential sectors and as aresult, the revenue base has drastically improved. Through the fiscalpolicy in South Africa, there has been clear guidelines in regards tothe spending by the various government entities. The entities have attimes been required to under-spend, where necessary. The financialstrategic plan in the country aims at further reducing the deficit toabout 2.8 percent of the gross domestic product by the financial year2016/17, which starts in less than a month’s time.

Since1994, the fiscal policy has been instrumental in rising the economicsituation from a deplorable condition. The very first democraticgovernment was faced by a very weak economy with the gross nationaldebt being half of the total gross domestic product by 1995 and thedeficit still remaining at an approximated fifty percent. However,through the policy, the government addressed the economic situationthrough carrying out an improvement on the tax base. Beginning fromthe year 2000, the government opted for an increased governmentspending which increased the capital of the public sector andconsequently the revenues collected. The economic situation improvedto the extent that the financial years 2006/07 and 2007/08experienced massive budget surplus(Lusinga &amp Thornton, 2009).

However,the recent depreciation of the value of rand has led to costpressures. Between the year 2007 and 2009, the budget balance hasdrastically declined. With a surplus of 1.7 percent in 2007. Thebudget balance declined to a deficit of 6.3 percent of the grossdomestic product in 2009. This has as a result led to the increase inthe ratio of debt to the GDP. In this situation, the governmentreacted by reducing the government expenditure and also reducing thecontingency reserve. The country has also opted back for the globalmarket and open economy. When these two aspects were fullyoperational between 1995 and 2004, the GDP grew at a rate of threepercent per annum(Van Der Berg, 2011).

Presently,the government empowers its people with an aim of improving theireconomic situation and consequently that of the country. About twentyseven percent of the population, that is, 13 million people, receiveone form of social grants or the other from the government. Despiteaccounting for about 12 percent of the total spending by thegovernment, it has proved to significantly contribute to the longterm growth(Van Der Berg, 2011).

KeynesianFiscal Policy

Thispolicy was brought about by a British economist John Maynard Keynes.During the prolonged recessions and depressions that occurred in the1930s, he advised that the governments ought to increase the spendingso as to increase the circulation of money and at the same time, cutthe taxes so as to have the citizens acquire more money(Sweezy, 1946).According to this policy, the gross domestic product is determined bythe aggregate demand in short run. It gives the solution to economicrecessions and depressions through using various strategies tostimulate demand. It has for a long time been incorporated in fiscalpolicies so as to help reduce the fall of demand(Cowen, 2011).


Theeconomic situation in any government is dependent on a number offactors, without any aspect standing out solely. Notably, thecollection of adequate revenues cannot determine the economicsituation of a country on its own, as the expenditure and othermeasures are critical in determining the stability and growth. Thisaspect brings in the importance of a fiscal policy, which spells outthe various issues in regards to revenue generation and expenditure.South Africa, having enjoyed a full democratic state for only twentytwo years, is a good study on the importance of an effective fiscalpolicy. The fiscal trend in the nation has seen the economicsituation grow drastically, superseding the economic situation ofmany other nations that have enjoyed stability for the longest timepossible.


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