Fiscal policy, unemployment and development

Fiscal policy

Government use of taxation and spending to influence the economy.

• Expansionary (higher spending, lower taxes) boosts AD and employment; contractionary reduces inflation.
• Budget deficit and national debt; crowding out of private investment.
• Taxes: direct (income tax, corporate tax) and indirect (VAT, excise duties); progressive, proportional and regressive systems. Canons of taxation: equity, certainty, convenience and economy.

Unemployment

• Types: frictional, structural (skills mismatch, deindustrialisation), cyclical (demand-deficient), seasonal.
• Measuring it is difficult where many work informally.
• Costs: lost output, poverty, brain drain, social problems.
• Policies: expansionary demand policies, education and training, support for SMEs, labour market reforms.

Supply-side policies

Improve productivity and the long-run capacity: education, infrastructure (power, roads), privatisation, deregulation and incentives for investment.

Economic development

Development is broader than growth: health, education, living standards and freedom. Measured by the Human Development Index (HDI). Obstacles include debt, weak infrastructure, dependence on primary exports, political instability and climate shocks. Strategies: industrialisation, value addition (beneficiation of minerals), agriculture, tourism, foreign investment and regional trade.

Check yourself

1. Distinguish between progressive and regressive taxes.
2. What is structural unemployment?
3. Name the three dimensions of the HDI.