Exam (elaborations)
ECS3704 - Public Economics Assignment 02 S1&S2 Year 2021
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ECS3704 - Public Economics
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[ECS3704][ASSIGNMENT TWO S1&S2]
YEAR 2021
, “Discuss South Africa’s focus on the public sector wage bill as an expenditure
control measure”
INTRODUCTION
The public sector wage bill accounts for a significant fraction of South Africa’s GDP.
National Treasury reports that compensation spending on the consolidated budget
accounts for about 12% of GDP. The consolidated budget, however, is not the sum
total of the public sector because, though it includes national and provincial
government as well as the public entities, it excludes local government (except insofar
as local government receives fiscal transfers from national and provincial government)
and the state-owned companies (Eskom and Transnet being the largest of these).
CONCEPTUAL FRAMEWORK
Peacock and Wiseman’s displacement effect
Peacock and Wiseman (1967) used a political theory to explain the influence of
political events on public expenditure. They acknowledged a point made by Wagner,
that is, that ‘… government expenditure depends broadly on revenues raised by
taxation’ (Peacock & Wiseman, 1967: 26). Governments would therefore be in a
position to continue increasing their own expenditures and expanding their role in the
economy, provided their economies continued to grow through industrialisation. On
the other hand, individuals may not be prepared to continue paying higher taxes in
order to finance this increased expenditure. In a democracy, government has to
respect the wishes of the majority (50% of voters plus one). Under normal
circumstances, government expenditure would therefore only increase when it is
strictly necessary and it can be expected that governments would take the possible
resistance of taxpayers against higher tax rates into account.
However, social upheavals or disturbances may change the established conceptions of
the public. Examples of upheavals of this nature are the two world wars, the Great
Depression of the 1930s, the recent Global Financial Crisis and the Covid-19
pandemic. National and international crises of this magnitude may cause a rapid
increase in government expenditure, since they may convince taxpayers that higher
taxes are necessary to prevent a disaster. Peacock and Wiseman called this
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