economic groth

How economic growth is affected by the business cycle and budget deficit.

Economic growth is the expansion or the outward shift of an economy’s production possibility frontier which leads to an up rise to the living standards and welfare of the economy,. economic growth is measured by real Gross Domestic Product (GDP), this being the value of total income earned by factors of production in an economy in a year / quarter.
When all the factors of production of an economy are fully employed the value of the economy’s production is potential GDP, (Parkin et al, 2010: 442). Realistically real GDP fluctuates around the potential GDP in a business cycle and a business cycle is an unpredictable periodic yet uneven fluctuation of output in an economy. According to Lieberman and Hall (2009: 532) a business cycle is so due to the up and down movements of economic growth over time. Below is a typical illustration of a business cycle:

From the diagram the diagonal line illustrates potential GDP, As already mentioned and as can be seen on the above illustration real GDP fluctuates up and down along potential GDP. When real GDP is less than potential GDP this means there are resources that are lying idle i.e. unemployed labour and underutilised capital, in essence when GDP is greater than potential GDP this means resources are either over used or over utilised i.e. people are forced to work longer hours that they themselves are not willing to and capital is being used intensively, (Parkin et al, 2010: 442|). From the above illustration a trough is a turning point of expansion from a recession and a peak is a turning point to recession from expansion,). Recession being a period in which real GDP declines which therefore leads to a negative economic growth rate for the economy in question and the latter, expansion, is an increase in the total output (GDP) of an economy, which leads to a positive economic growth rate, (Parkin et al, 2010: 443).
As already mentioned GDP is the total income earned from factors of production. A part of the income earned is tax collected by the government so is to fund government expenditure, (Lieberman and Hall, 2009: 725). If the government exacts less tax and spends more than the aggregate tax then the economy is said to have a budget deficit. That being said it is understandable that a budget deficit is the amount by which government expenditure exceeds tax revenue, (Parkin et al, 2010: 457). According to Lieberman and Hall (2009: 726) this creates debt (treasury bills and government bonds) which lead to future sacrifices of expenditure and investment for the debt will eventually need repayment, therefore in the long run capital that could have otherwise been bought to create economic growth (expansion) is foregone. There is thus opportunity cost because interest payments too could have been used in a more productive manner.
That being said, a budget deficit can be linked to a business cycle because the economy’s GDP has a direct relationship with the tax revenue earned by the government, however spending by the government has an inverse relationship to tax collected, (Lieberman and Hall, 2009: 725). This meaning when at the lowest point of the business cycle, there will be a high level of unemployment therefore tax revenue will be low together with GDP but social security, pensions, unemployment benefits etc. will be high which then leads to the government spending more than they actually have. Conversely, at the peak of the cycle, will be low unemployment, an increase in GDP, a high tax revenue and decreased demand of services such as unemployment benefits and social security.
South Africa and many other countries have been experiencing budget deficits for a long period of time to such an extent that “the rating agency, Moody’s downgraded South Africa’s debt in 2012 by one level and kept the outlook at negative”, according to Business Report (2013:1), however according to (Keeton:2012) the Minister of finance had predicted that the deficit in ‘2011-2012 was to be 4.8% of GDP down from 5.3% and a another fall to 4.6% in 2012 -2013”. Since the article was written the economy’s budget deficit is expected to increase than that anticipated, i.e. the growth rate declined to 2.5 % in 2012 from 3.5% in 2011 according to Maswanganyi (2013:1). On top of this the borrowing requirement is anticipated to increase to 7.4% of GDP in 2012-2013, (Business Report, 2013:1).That being said this data shows that the investor agency Moody’s was indeed right to argue that the commitments intended will be hard to meet due to nationalisation of mines which today are suffering off low production due to strikes.