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GOVT SHOULD ADOPT REDUCTION OF ENTITLEMENT PROGRAMS TECHNIQUE

By Qondile Ntiwane | 2019-11-24

Having considered both sides of cutting government spending and hiking taxes, it can be argued that reduction in social security programmes is less harmful during the economic reform period.

In compliance to economic growth, the country can adopt the technique of reducing in its entitlement programmes and other government transfers as they are less harmful to growth than tax increases.

This is one of the recommendations by the Southern African Research Foundation for Economic Development (SARFED) following a cross sectional time series study of the implications of government austerity measures that might led to cutting spending and increase of tax.

Also recommended was the liberalisation of labour market to stimulate the private sector to reduce private investment uncertainty.

“SARFED recommends that in a short term, it is prudent to regulate government spending in favor of capital projects, as well as reduce in tax as measures to stabilize the economy in order to attract the implementation of expansionary fiscal adjustments policies.

“This would increase economic competitiveness and efficiency in both short and long term basis.

This assumption is based on the findings of IMF analysis over 173 countries that engaged in fiscal consolidation whose conclusion was that countries that mostly raised taxes suffered about twice as much as nations that mostly regulated or cut spending,” it stated.

It stated that the fact that Eswatini economy was growing at less than three percent for past period of 5 years sent many signals for catalyzing the economy’s growth trends in strategic areas.

However, the challenge might be within the government’s fiscal policy intervention strategy, particularly the spending and taxation aspect in light of whether to cut spending at the same time increasing tax. “This economic article articulates the implications for high government spending and high taxation in economic recovery. Empirical findings are drawn from various studies around the world.

In reaching the recommendation, it was highlighted that tax increase had a negative impact on private investment in both short and long term basis and that i the event taxation was increased, business confidence was likely to be lost as this would attract less prominent FDIs in the country.

It was also stated that tax-based fiscal corrections were mainly associated with large and long-lasting recessions which in turn can even cripple the economy to the point of stagnation this being the state of no economic growth.

“This is so because according to research, a tax-based plan amounting to one percent of GDP was followed, on average, by a two percent decline in GDP relative to its pre-austerity path.

This large recessionary effect tends to last several years and many not be recommended for Eswatini at the moment; the understanding is based on the fact that while it might be good for short periods, but not sustainable in the long run,” reads the report. In summary was stated that the bottom line was that if a surplus was increased by raising taxes, the downturn in growth may be so large that it raises rather than reduces the debt-to-GDP ratio.

Also Deficit reduction policies based on spending cuts on recurrent expenditure, typically have almost no effect on output at least in the long run, so they can be a sure bet for a reduction in debt to GDP for Eswatini.

Also highlighted was that spending-based adjustments were much less costly in terms of output than tax-based ones. In fact, when government tries to reduce their debt by raising taxes, the policy was more likely to result in deep and pronounced recessions, possibly making the fiscal adjustment counterproductive.

“Finally, there is evidence that expansionary fiscal adjustments are more likely to occur when they are accompanied by growth-oriented policies, such as liberalizing both labor regulations and markets for goods and services, in addition to a monetary policy that keeps interest rates low,” it reads.

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