Question

Former President Jacob Zuma unveiled the free education plan on the 16th of December 2017. further to that, in the 2017 budget speech, former Finance Minister Malusi Gigaba announced that an additional R57 billion over the next three years had been allocated to fund free education for students who come from families with a combined income of R350 000. This was on top of the R10 billion provisionally allocated in the 2017 budget. furthermore, the value added tax (VAT) increased from 14% to 15% on the 1st of April 2018.

Discuss the demand and supply side effects of the developments on the performance of the South African economy.

a). at a macroeconomic level

b). at a microeconomic level

Answer 1

a. Government spending and taxes is a part of fiscal policy. Government implements it. When government increases spending tand decreases taxes hen it is expansionary fiscal policy . When government decreases spending and increases taxes then it is contractionary fiscal policy.

In this case, increased spending on education is being compensated by increasing value added tax(VAT) to balance fiscal spendings and earnings.

Hence at a macroeconomic level, aggregate demand will shift to right causing GDP to go up. This may lead to increased consumption and increased spending. Aggregate supply will also increase in short term. Investment in education is also building human capital and in the long run potential GDP will shift right. In short run inflationary pressures may be felt if aggregate demand exceeds demand.

At microeconomic levels individual firms which have elastic product sales will be affected badly with increase in taxes. Demand for education will increase and wages of people in eduaction will also rise. Those sectors which were getting more spendings will suffer as focus is more on education now. However, increased VAT may not impact those goods which have inelastic demand.