Question

How does the national budget affect economic growth? Give examples with respect to Zambia. ( write not more than 2000 words)

Answer 1

The national budget affects the economic growth in various aspects.

Money that is spend and invested affects the fiscal deficit, The defecit will then affect the money supply and interest rates because it depends on how the defecit is financed.

High interest rates mean higher cost of living & less savings.

For example-an increase in direct taxes would decrease disposable income, which will lead to reduced demand for goods. This decrease in demand will convert into a decrease in production, therefore affecting economic growth.And an increase indirect taxes would also decrease demand as because  indirect taxes are usually  partially or completely passed on to consumers in the form of higher prices and Higher prices = A reduction in demand .

Zambia-

First, there is budget negative effect on tax revenue.

In Zambia, tax revenue developed in line with economic growth, although preliminary data for 2009 pointed to a decrease. Zambia’s revenue performance about 18% of GDP was also consistently two percentage points above the average in low-income countries in sub-Saharan Africa. Nevertheless, there was more leeway to increase the tax–to–GDP ratio by broadening the tax base and bytaxing the mining sector more heavily.

Second,the existence of ‘Dutch Disease’ effects, leading to a reduction of exports.

Despite of the favourable economic development, poverty levels did not decrease significantly.

In 2009, the Mid-Term Review of the FNDP concluded that during the review period, overall povertylevels in the country were marginallyreduced (from 73% in 1998 to 68% in 2004 and to 64% in 2006).132 The improved poverty figures were mainlythe result of reduced poverty in urban areas. Rural povertylevels remained more or less stable (between 77% and 80%). Nevertheless, even in urban areas, one in three or four households could be regarded as poor . On a more positive note, extreme poverty and the poverty gap have decreased in urban and in rural areas.133 While povertylevels have not gone down, extreme poverty has.