Question

Question 8 [10]

According to Calitz, E, Siebrits, K and Steenkamp, T (2019) Public Economics. Oxford

University Press, South Africa, Chapter 18: “Some commentators criticised the

authorities for budgeting for a surplus in the 2008/09 financial year, arguing that it would

have been better to increase government spending further to address various social

needs” The outlook turned out to be a blessing in disguise given the effect of the financial

crisis in 2009. Discuss how it could cushion the South African against the world- wide

recession. How is it now different given recession prospects during and after the Covid-

19 pandemic?

Subject: Governmental Economics 20 A

Answer 1

In fiscal year 2007-08 the South African economy saw a GDP growth of around 3% and also a budget surplus of 1% of the GDP.

Running budget surplus for a developing country was criticized by many. However, in the next fiscal year when the world was hit by the great financial crisis, the government had more funds at its disposal to spend in order to revive and stimulate economic growth. That is why the budget surplus in 2007-08 was considered as a blessing in disguise.

Again the world has plunged into an unprecedented recession due to the COVID-19 pandemic. However, economists warn that the country is not in a very strong position financially to cushion the recession and its after effects. The country's GDP growth in the last 6 years has not even averaged 1% whereas the economy has been running continuous large budget deficits of more than 5% of GDP.

Therefore, the country may need to look at other options such as large liquidity infusion through monetary policy and IMF loans in order to mitigate the negative impact of the pandemic on the economy.