Namibia’s Fiscal Policy Instruments and Measurements: A Strategic Analysis

Namibia’s Fiscal Policy Instruments and Measurements: A Strategic Analysis

Info: 2339 words Sample Literature Review
Published: 18th FEB 2023

Tagged: Finance

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Introduction

This chapter analyses past empirical studies conducted in developed and industrialised countries, including Namibia, and examines how fiscal policy tools affect unemployment and poverty reduction. Governments worldwide have proposed and put into place measures for taxation and public spending in the tumultuous economic environment. Additionally, research has demonstrated a direct connection between growth and eradicating poverty López et al. (2010), inequality, and unemployment (Bank, 2008). The rate and quality of economic growth have both been measured by numerous authors. The fiscal policy is one of the most potent tools that governments use to preserve macroeconomic stability for growth, as well as for intra- and intergenerational transfers of wealth and for addressing market failures. As a result, many policies have evolved to alleviate poverty and unemployment.

Theoretical Overview

The government adjusts its policies to avoid significant economic shocks and hopes these measures will bring about financial stability. They think these adjustments must successfully retain strength and continue growing. Two methods, namely fiscal and monetary policies, can be used to control the economy. The macroeconomic policy, which includes the three components of fiscal, economic, and exchange rate policy, is the most general. To fully coordinate with the other two sectors, any new directions in one of these areas must be planned and executed (O’sullivan & Sheffrin, 2003).

Theories of Fiscal Policy, Growth and Competitiveness

Keynesian and neoclassical economic theories can be roughly categorised as having fiscal policy implications. Keynesian theory is referred to as a demand-side theory since it offers a suggestive method to cover monetary policy in favour of consumption, which opens the door for more investments that spur growth. On the other hand, the neoclassical theory is known as the supply-side theory since it encourages producers to make investments that will improve their investment scenario, creating employment opportunities. Increased technical proficiency, advancements in ensuring technological production, and the gathering of resourceful resources are all examples of this, as stated by economists. Technological growth can be achieved by implementing new economic methods or utilising a foreign country's inventive mechanism through Foreign Direct Investment. Technical know-how reflects the proficiency of in-house processing resources (FDI).

Neoclassical Theory

Neoclassical theory typically suggests policy actions with the idea that the market functions through the market mechanism. While government involvement could upset the predicted equilibrium level, it generates expected welfare, growth, and productivity levels. Government involvement is necessary whenever there are harmful externalities in the market, such as environmental harm. The neoclassical theory also offers to suggest actions to achieve deficit accumulation. A balanced budget could be achieved by cutting government spending, as higher tax rates limit investment opportunities. Since tax policy is considered incremental, it cannot affect how income is distributed. Once more, a low corporate tax rate facilitates a more significant influx of investment into the economy. According to neoclassical theory, the prevention of crowding out makes their reduction in government spending the most incredible fiscal policy tool for achieving growth.

Endogenous growth theory and non-distortionary taxes

Contrarily, endogenous growth theory differs from neoclassical theory in that it suggests that not all forms of expenditure always result in worsening economic development; however some expenses may have the capacity to improve the business cycle. VAT is the best tax since it can be levied against consumers without requiring businesses to incur additional expenses. It also satisfies the requirements of non-discriminatory tariffs. According to the endogenous growth theory, more production and investments result from lower corporate costs, which raises the industry's competitiveness in the world market.

Keynesian Theory

Keynesian theory opposes one classical idea in terms of governmental involvement. On the other hand, Keynesian theory predicts that the market will eventually fall into an imbalance. In this case, the government may use monetary or fiscal policy to implement counter-cyclical demand stimulation. By increasing government spending and easing consumer-related tax laws, a budgetary policy could boost growth in investment and consumption during a recession. Budget cuts could lead to a situation that resembles a recession. According to Keynesian theory, demand might be generated by increasing government spending on infrastructure, communication systems, and other public sector investments and education. Since they spend the most on consumption, the poorest people are more affected by VAT. So, according to Keynesian philosophy, direct taxes should be the foundation of tax policy. Dem and keeps growing as long as the income of the poorest people is not unduly burdened, which encourages the internal market's expansion and, in turn, encourages investment and competition. Direct taxes must be used to finance this, which will produce development.

Namibia's Fiscal Policy Structure

This section covers fiscal policy, one of the main strategies governments use to influence macroeconomic developments in their respective countries' economies (Taylor et al., 2010). The formulation, application, and implementation of this instrument significantly impact public acceptance, the dual goals of social welfare and stability, and economic progress. As stated above, fiscal policy is concerned with planning, collecting, allocating, and overseeing government spending and providing national advice on government priorities and direction through the annual and midterm budgets.

Namibia's fiscal policy and economic growth

Namibian fiscal management must increase revenues and outlays to spur demand. Better manufacturing and utilisation, as a result, would eventually boost revenues once more. Growth, aggression, and increased human investment can all be intended for better manufacturing. In Namibia, while broad demand-side policy will tend to improve growth, traditional supply-side fiscal policy may likely produce financial market benefits. Due to investing in literacy, a Keynesian budgetary policy can motivate investments over a longer time horizon; a framework and internal necessity would permit use. Positively, Saara Kuugongelwa-Amadhila increased the debt range from 25 to 30% and increased the expenses in the MTEF from 2011/2012 to 2013/2014. Lowering Namibian deflation is the goal.

Namibian state expenditure decomposed

Fiscal policy may effectively affect how thriving the economy will be in the future by bolstering human capital investments like health and education, investing in construction projects, and strengthening the legal activity framework of the sector (jurisdiction). These costs are thought to be worthwhile. For Turkey and Libya, improving the value of a human investment and developing the infrastructure are incredibly vital because these factors play a prominent role in attracting foreign direct investment. The technical conditions from this capital allow for the economy to flourish quickly. The first important thing to realise is that when it comes to purposeful spending, the amount of money spent does not necessarily translate into effectiveness.

Namibia's fiscal policy's contribution to the decline in unemployment.

The Medium-Term Expenditure Framework's Fiscal Policy Framework analyses fiscal changes and resource estimations (MTEF). The framework also specifies expenditure priorities above the MTEF and overall spending restraint in line with the fiscal targets. Targeted and timely budgetary growth also allowed the government to provide access to essential services and facilities for more Namibians. The Fourth National Development Plan's development goals are intended to be implemented, and the moderate fiscal expansion commits to maintaining current expenditure realistically (NDP4). The government knows that more work must be done to solve high unemployment issues, grow the economy's creative ability, and achieve inclusive growth.

Empirical Literature

This literature section reviews the research already conducted elsewhere, discussing the role of fiscal policy and its impacts on employment, economic expansion, and poverty alleviation. Previous academics presented several studies examining the link between unemployment and budgetary policy in different nations. However, other results were seen because of the research country or countries, the techniques, and the data used.

Developed Countries

The empirical research undertaken in industrialised nations is reviewed in this area of the literature. However, there is still disagreement regarding how fiscal policy affects economic growth (Muinelo Gallo & Roca Sagales, 2011). In their analysis, Muinelo and Roca-Sagalés found a negative correlation and demonstrated how fiscal factors slowed economic growth in high- and middle-income nations. Specifically, the study used an unbalanced panel of 43 upper-middle and high-income countries from 1972–2006 to analyse the effects of various fiscal policy instruments on economic development and income inequality.

The approach to fiscal policy that the Bush and Obama administrations have promoted through their policy initiatives and economics profession today (Tcherneva, 2011). Examining the labour market reveals how ineffective the current aggregate demand-management strategy is for achieving specific macroeconomic goals, such as creating and maintaining full employment, stabilising investment and investor expectations, and equitable income distribution. Finally, the study examines the effectiveness of various fiscal policy options. Finally, it makes the case that a strategy that specifically addresses the labour demand gap is significantly more effective in boosting incomes, encouraging investment, strengthening financial positions, and stabilising employment.

The period covered by the annual statistics is 1980–2010. Augmented Dickey-Fuller is used to look at unit roots, and the Johansen Approach was used to run a cointegration test (Simon, 2012). On average, short-run dynamics are handled by error correction models. The results show that government consumption spending and income taxes have a beneficial impact on economic growth during the coverage period but that capital spending by the government has a negative effect. The cointegration test was able to corroborate this association over the long term.

Heshmati and Kim suggested that poverty and education be considered when determining how successful fiscal policy tools are (Heshmati & Kim, 2014). Additionally, the authors claimed that economic growth would be less likely to reflect actual economic growth as measured by GDP, especially in developing nations like Namibia. As a result, they advised including poverty and unemployment as indicators to develop meaningful policies for Asian countries to achieve their goals of inclusive growth.

Developing countries

Numerous studies have found that fiscal policy positively impacts economic growth. However, the overall level of government and tax spending in the region is far lower than that of advanced nations. However, as demonstrated by their empirical study, there are theoretical justifications for why a fiscal policy, which includes the distribution of government spending and taxation, can considerably impact growth.

The effects of fiscal policy on the economies of Turkey and Libya, and for future scientific research, developed a framework base to examine the impact of budgetary policy generally for other countries and to state the influence of economic linkages and factors affecting instruments of fiscal policy (Galalh, 2013). The study's findings indicated that taxing and expenditure by the government impact the economy, which in turn affects GDP in Turkey and Libya.

The expansionary fiscal policy can boost consumer and corporate confidence, spur private spending, and support economic growth (Konstantinou & Tagkalakis, 2010). According to the study's findings, direct tax reductions boost consumer and company confidence, which is also relevant to increase non-wage government consumption. However, more government spending on wages and investments may erode trust because they result in a stable expansion of the size of the public sector, which would eventually require funding from higher taxes.

Using an error-correction model, this study looked at the short- and long-term trends in government spending in Namibia relative to output. The availability of data and the results of using fiscal policy effectively are considered when choosing a country. Furthermore, given that a significant body of research has produced contradictory findings, it may be argued that different countries' fiscal policies have other effects. Therefore, it is intriguing to investigate the impact of Namibia's fiscal policies in more detail. Finally, the study aims to clarify how Namibia's fiscal policy affects unemployment and poverty reduction.

Research Gap

References

Ames, B., Brown, W., Devarajan, S., & Izquierdo, A. (2001). Macroeconomic policy and poverty reduction. International Monetary Fund Washington, DC. https://www.intussen.info/OldSite/Documenten/Noord/Internationaal/WB/PRSP Sourcebook/08 Macroeconomic Policy and Poverty Reduction.pdf

Ashipala, J. (2003). The impact of public investment on economic growth in Namibia (Issue 88). Namibian Economic Policy Research Unit. https://www.econbiz.de/Record/the-impact-of-public-investment-on-economic-growth-in-namibia-ashipala-john/10001888763

Bank, W. (2008). Annual Review of Development Effectiveness 2008 : Shared Global Challenges. https://openknowledge.worldbank.org/handle/10986/6553

Galalh, A. A. A. M. (2013). Fiscal Policy Impacts on Particular Economic Sectors in Libya - Case of Study Foreign Direct Investments. Czech University of Life Sciences Prague Faculty of Economics and Management Department of Economics. https://www.pef.czu.cz/dl/46000

Heshmati, A., & Kim, J. (2014). A survey of the role of fiscal policy in addressing income inequality, poverty reduction and inclusive growth. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2429598

Konstantinou, P., & Tagkalakis, A. (2010). Boosting confidence: is there a role for fiscal policy? (Issue April). https://www.bankofgreece.gr/Publications/Paper2010113.pdf

López, R. E., Thomas, V., & Wang, Y. (2010). The Effect of Fiscal Policies on the Quality of Growth. https://ieg.worldbankgroup.org/sites/default/files/Data/reports/eb9_web.pdf

Muinelo Gallo, L., & Roca Sagales, O. (2011). Economic growth and inequality: the role of fiscal policies. Australian Economic Papers, 50(2 3), 74–97. https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-8454.2011.00412.x

O’sullivan, A., & Sheffrin, S. M. (2003). Economics: Principles in action. https://www.academia.edu/download/63441999/Economics-Principles-In-Action-by-Arthur-O-Sullivan-Steven-M.-Sheffrin20200527-79904-3zxoue.pdf

Simon, M. (2012). Effectiveness of Fiscal Policy in Economic Growth: the Case of Zimbabwe. December, 93–99. https://www.ijeronline.com/documents/volumes/Vol 3 Iss 6/ijer 2012 v3i6 nd (9).pdf

Taylor, J., Blinder, A., & Zandi, M. (2010). Assessing the Federal Policy Response to the Economic Crisis. https://www.budget.senate.gov/hearings/assessing-the-federal-policy-response-to-the-economic-crisis

Tcherneva, P. R. (2011). Fiscal policy effectiveness: lessons from the great recession. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1760135