Essay Junk South Africa 's Economic Growth
South Africa 's government bond yields have risen to their highest levels in almost five years as worries grow that the rating agencies could bar the country 's to junk status(-BBB) (Frankel, 2005), this is due to the ongoing drought, civil service wage increase and most of all corruption (Chand, 1999).
South Africa’s economic growth has been slowing down and yet the finance mister Pravin Gordhan reduced deficit by cutting down government which means a further GDP slowdown (Sachs, 1997). Our country is in need of strong economic growth and a way in which to create and increase international and local investments. For this reason, cutting spending to avoid being downgraded to junk status was a good decision (Onaran, 2010).
A down grade to a –BBB means our country is not a safe place to investment (Gärtner, 2012). A decrease in investment leads to an increase in interest rate (Boskin, 1983).
Why reducing deficit is contractionary in the short-run
In the short run a budget deficit reduction is implemented alone without any change in the central bank monetary policy (Alesina, 1992), this will lead to a decrease in output. In stable growth, investment is the sum of private and public saving (Khan, 1997). If public saving is negative the government is running a budget deficit. When the government decreases its deficit, either by increasing taxes or by cutting government spending that public spending goes up, that implies that investment will increase, this is…