BEE Partner, South Africa Economy Watch

The government budget tends to move counter-cyclically. In a slump, incomes will be reduced and spending curtailed, so tax collections will fall, but welfare and related spending to support the unemployed will tend to rise. Other government budget items are likely to be unaffected. Hence, the overall effect will be to throw the budget into deficit. By contrast, in a boom, tax collections will rise and welfare spending will tend to decline, so a surplus will tend to emerge. In short, in an economy with demand-based cyclical fluctuations, the central government budget will tend to move in a counter-cyclical fashion.

Now consider the monetary implications of deficits and surpluses. A deficit arises when the government spends more than it receives in taxes; this means a net increase in money in the system. Such money will appear as excess reserves in the banking system. If allowed to remain, it will drive down interest rates. Looked at another way, it will drive up security prices. A surplus is just the opposite; it arises when the government spends less than it takes in, and it creates a reserve deficiency, tending to force interest rates up. Read the rest of this entry »

This stagnation tendency, the growing savings gap, has often been viewedas a problem. But why should one look at it that way? Isn’t the gap really a big resource? Should it not be encouraged? For the bigger the gap, the greater the scope for deficit financing of public spending. Indeed, the graver the stagnationist tendencies of the private sector, the lower the taxes can go, and the greater the scope for public borrowing and a growing debt. Instead of encouraging private spending as a remedy for stagnation, should we not promote private saving to widen the savings gap? For by so doing, we could deficit finance all the more, and enjoy the supply-side benefits of reduced taxation. Read the rest of this entry »

A necessary practical condition is that the government share of GDP be limited, that is — in the case of European welfare states — be cut back. This need not involve any reductions of the volume and quality of services provided by the government sector. If aggregate supply is relatively elastic with respect to the level of taxation, then tax cuts may provide for a great expansion of the private sector. A vigorously growing private sector will tend to reduce the share of the public sector in the economy, a reduction that might render unnecessary any actual cutbacks of the real size of government. Read the rest of this entry »

The International Labour Office (1999) argues:

[A]ny strategy for full employment must be based on a sound macroeconomic framework. To achieve this, unsustainable current account imbalances, or foreign debt accumulation, must be reduced and low rates of inflation achieved. This requires the continuous adjustment of policies, a realistic exchange rate, fiscal discipline and wage moderation (wage increases in line with labor productivity). But in times of global deflation this is not necessarily sufficient as a guide to policy, and a boost to demand may be needed, perhaps going so far as to generate expectations of inflation, in addition to the accepted policy of balancing budgets over the business cycle as a whole (International Labour Office, 1999). Read the rest of this entry »