Dell Case Study

1 INTRODUCTION

The aim of this assignment is to consider the South African National Budget 2012 and develop the suitable economic principles and criteria that can be used to assess it. Identify and list the revenue and expenditure proposals of the South African National Budget 2012. Evaluate any revenue proposal in terms of the economic principle equity and distinguishing between the horizontal and vertical equity. Finally to use an AD-AS model to analyse the macroeconomic effect of the South African National Budget 2012 on real GDP, the level of employment, the interest rate, the wage rate and the price level.

The role of government is to contribute towards stimulating and strengthening sustained economic growth, Black, Calitz and Steenkamp (2008).Economic growth is described as the annual rate of increase in total production or income of the country and is measured by the gross domestic product (GDP), Mohr and Fourie (2007).

Mohr and Fourie (2007) stated that the main instrument of fiscal policy is the budget and the main policy variables are government spending and taxation. The minister of Finance, Pravin Gordhan presents the budget annually. The budget entails government spending expenditure for the financial year and shows how government proposes to finance its expenditure.

South Africa's budget policy framework is influenced by the challenges of growth, job creation and poverty reduction, National Treasury (2012).The 2012 Budget outlines a fiscal framework that will narrow the gap between spending and revenue, support the economy, strengthen capital investment and improve the performance of the public service. The aim of the South African government is to create a more equitable future by expanding construction of economic and social infrastructure, improving economic competitiveness, moderating remuneration and consumption, sustaining investment in people and skills, supporting rural development and job creation.

2 ASSESSING GOVERNMENT BUDGETS

According to Case, Fair and Oster (2009), there are four criteria applied in judging the economic outcomes. The very same criteria are used in this assignment to assess government budgets. The following are the criteria:

2.1 Efficiency

Case, Fair and Oster (2009) describe efficiency as allocative efficiency and went on to say that an efficient economy is the one that produces what people want at the lowest possible cost. An inefficient economy is the one where the system appropriates resources to the production of goods and services that nobody wants. According to Case, Fair and Oster (2009), there are three basic questions that must be answered in order to understand the functioning of the economic system (1) what gets produced? (2) how is it produced (3) who gets it? These questions can be answered with the help of production possibilities curve which illustrates the principle of constrained choice, opportunity cost and scarcity, Case, Fair and Oster (2009). Economic efficiency can also be defined as dynamic efficiency in terms of given increases in the quantity and (or) productivity of factors of production in the form of technological inventions and innovations, physical and human capital formation and increases in the form of labour of different skills, Black, Calitz and Steenkamp (2008). This efficiency is illustrated in the 2012 Budget by allocating R12.1 billion for science and technology and R207 billion in education. The net effect of sustained economic growth can be illustrated as an outward shift to the right in the production possibilities curve. The 2012 Budget is efficient as it has made provisions for goods and services that people want, for example the health sector is provided with an additional R12.3 billion over the next three years ,R105 billion is allocated for social grants and R120 billion is allocated for human settlement and municipal infrastructure.

2.2 Equity

This means an equal of income and wealth to reduce poverty, Case, Fair and Oster (2009).Two ways of fairly distributing tax burdens, (1) Horizontal equity which implies that people with equal capacity to pay the same amount of tax, thus giving the same treatment to people in identical situation.(2)Vertical equity means people with greater capacity to pay more, thus higher income should pay more tax, Black, Calitz and Steenkamp (2008). The 2012 Budget illustrates the equal distribution of wealth by proposing a personal income tax relief of R9.5 billion, tax credit for contributions to medical schemes at a rate of R230 a month for the first two beneficiaries and R154 each for additional beneficiaries and individual savings of R30 000 and a lifetime limit of R500 000 would be free of tax on interest, dividends and capital gains.

2.3 Growth

There are five macroeconomics objectives which can be used to judge the performance of the economy, Mohr and Fourie (2007),namely (1) Economic growth means is an increase in the total output of an economy, Case, Fair and Oster (2009).It takes place when a society acquires new resources or learns to produce more with existing resources. (2) Employment meaning all factors of production of the country should be fully employed. Unemployment poses a serious threat to social and political stability.(3)Inflation meaning keeping inflation as low as possible (4) Balance of payments meaning that it should be fairly stable (5) Equitable redistribution of income as a highly unequal distribution of income generate social and political conflict. The South African economic growth slowed to an estimated 3.1% in 2011 to 2.7% in 2012 and increasing to 4.2% by 2014.The South African government has chosen to sustain economic growth by allocating an additional R4.8 billion over the next three years for expanded public works programme, which will reduce unemployment by creating jobs.

2.4 Stability

This refers to a state where national output is growing steadily, with low inflation and full employment of resources (Case, Fair and Oster2009).

Employment

Job creation is the central priority of government. The South African government has allocated R4.8 billion for the expanded public works programme.

Inflation

An increase in consumer price index from an average of 5% in 2011 to 6.2% in 2012 as a result of high food prices, rising administered prices and higher prices of imported goods due to the weaker rand.

Balance of payments

Mohr and Fourie (2007) describe the balance of payments as