CHAPTER ONE

In this first chapter we are going to look at the background of the study, the statement of the problem, main and specific research questions, main and specific objective, hypothesis, significance of the study lastly the organization of the project.

1.1 Background of the Study

1.1.1. Fiscal Policy at Global Level

Consideration of the evolving meaning of fiscal policy is preliminary to understanding both the rise of Macroeconomics and the development of modern Public Economics. In brief, fiscal policy was conceived very differently in the period before 1936, and it was only in the 1930s that the meaning of “fiscal policy” even began to approach the modern narrow definition – macroeconomic stabilization through the manipulation of taxation and government spending. What is apparent from a survey of the early literature is that fiscal policy was analytically protean, it’s meaning varying to encompass an amalgam of topics including taxes, international trade policy, and public debt financing. Fiscal policy was intuitively understood to refer to the government purse and implied government action or intervention in the economy. What constituted fiscal policy at any point in time was highly responsive to the external pressure of politics and the public’s view of what economics is/was and should/could do. Thus, the history of fiscal policy is, in part, the history of changing conceptions of the government’s role in the economy.

Fiscal policy developed out of the Great depression which ended the laissez-faire approach to economic management, and began a means of monitoring and influencing macroeconomics through government intervention. Fiscal policy is largely based on the ideas of British economist John Maynard Keynes (1883-1946), who argued that economic recessions are due to a deficiency in the consumer spending and business investment components of aggregate demand. Fiscal policy describes changes to government spending and revenue behavior in an effort to influence the economy. By adjusting its level of spending and tax revenue, the government can affect economic outcomes by either increasing or decreasing economic activity. Fiscal policy is of two main types. That is expansionary fiscal policy and contractionary fiscal policy.

1.1.2. Fiscal Policy in Africa with Sample of; South Africa, Angola, Madagascar

South African Fiscal Policy

As a developing country, South Africa over the year tend to conduct an expansionary fiscal policy. This fact is not a surprise for a country that has more than half of its population under the poverty line according to the last available data of the world bank (2014). According to these data 55,5 % of the South Africa are included to the category.  In such country, the government needs to boost the economy supporting unemployed peoples by subsidies, workers by decrease of taxes and companies decreasing taxes and giving subsidiaries to improve the level of production. The government needs to invest in human capital in terms of education, health care and other social services. Redistribute the most part of what is taken from one category of people to the other one that is mostly in need. This is nothing else than expansionary fiscal policy.

Over the year the government spending and subsidiaries in South Africa have drastically increased. Subsidiaries and other transfers were multiplied by 6,7 from year 2000 to 2018. The general government spending, according to world bank data increased by 44,73%. The corporate taxation dropped from 37,8 % to 28%. The increase in government spending and the decrease of government revenue have throughout to be compensated somehow. This is the main reason of the increase in government debt of South Africa. Even if there was a decreasing trend of government debt from the beginning of 2000 to 2008, it drastically has increased for the last decade till year 2018.

Angola’s Fiscal Policy

Angola’s government has put a lot of effort in reducing the government deficit and in keeping a sustainable fiscal policy. With an unemployment rate that can be considered as low and decreasing for a developing country (moving around 10%) and the 98th highest GDP per capita in the world, Angola’s government has kept for some years an important budget surplus till the year 2014. From that time while started reducing the government subsidiaries and the general government expenses, it started experiencing a budget deficit with a reduction of the corporate tax rate at the same time, that pass from 35% to 30%. The existing budget deficit was moving around 5% of the total GDP before to get a surplus level in 2018 with the decreasing trend of government spending and government subsidiaries.

The government debt, even if it was quite low before 2014 (around 30% of the total GDP), it started exponentially to increase from 2014 and get a high level (75% two years later) consequently above the average of the region.

Madagascar’s Fiscal Policy

As one of the poorest countries, with 75% of its population that is estimated living under the international poverty line34 and a high level of unemployment, Madagascar’s government naturally understand that there is a need of supporting the population to increase their net income. This is the reason, why for many years the government decided to execute an expansionary fiscal policy increasing the government spending in infrastructures and other social services. Such kind of fiscal policy is not easy in a country as Madagascar which has a low tax burden estimated by the central bank around 10,4%. This low tax income is not a surprise in a country with an economy dominated by the informal sector and the reduction of some taxes because of the free trade agreements. “The low level of budget revenues in Madagascar may be explained, on the one hand, by the relatively large size of the informal sector, as well as by tax evasion, which became more prevalent during the political crisis between 2009 and 2013”35.

The heaviness of public investment that is needed during expansionist fiscal policy combined to the low budget revenue of the government is the main reason of the budget deficit in Madagascar.

As we can see in the following figure, during last years the government budget deficit in relation to the GDP is increasing consequently.

The government can use fiscal stimulus to spur economic activity by increasing government spending, decreasing tax revenue, or a combination of the two. Increasing government spending tends to encourage economic activity either directly through the purchase of additional goods and services from the private sector or indirectly by the transfer of funds to individuals who may then spend that money. Decreasing tax revenue tends to encourage economic activity indirectly by increasing individuals’ disposable income, which can lead to those individuals consuming more goods and services. This sort of expansionary fiscal policy can be beneficial when the economy is in recession, as it lessens the negative impacts of a recession, such as elevated unemployment and stagnant wages. However, expansionary fiscal policy can result in rising interest rates, growing trade deficits, and accelerating inflation, particularly if applied during healthy economic expansions. These side effects from expansionary fiscal policy tend to partly offset its stimulative effects. The government can use contractionary fiscal policy to slow economic activity by decreasing government spending, increasing tax revenue, or a combination of the two. Decreasing government spending tends to slow economic activity as the government purchases fewer goods and services from the private sector. Increasing tax revenue tends to slow economic activity by decreasing individuals’ disposable income, likely causing them to decrease spending on goods and services. As the economy exits a recession and begins to grow at a healthy pace, policymakers may choose to reduce fiscal stimulus to avoid some of the negative consequences of expansionary fiscal policy—such as rising interest rates, growing trade deficit.

Investment on the other hand requires a sacrifice of some present assets, such as time, money or effort to attain an increase in value over a period of time. Investment is therefore aimed at obtaining profit or income on the invested asset. They are four main types of investment: growth investment, shares investment, property investment and defensive investment. In Cameroon we look at the public and the private sector of investment. In Cameroon private investments like in agriculture have contributed greatly to the GDP of the country.

Cameroon has experienced periods of economic growth and decline. During the growth period public expenditures increased the size of the public sector. The decline period, which started in 1986, has been characterized by government expenditures that outstripped revenues. The government’s recovery program has meant drastic reduction in public expenditure and desperate efforts to raise revenue. Since the program started, Cameroon’s key macroeconomic indicators of performance have continued to show adverse trends. There are few single country studies relating government budget to growth through private investment. More so nothing has been done on Cameroon. This study analyzes the effects of fiscal policy on the dynamic of investment.

1.2. Statement of the Problem

As seen from the topic of this research we can have enough reason to look at investment being so dependent on fiscal policy. Before that, we will discuss some factors that affect investment as.

Interest rates: Investment is financed either out of current savings or by borrowing. Therefore, investment is strongly influenced by interest rates. High interest rates make it more expensive to borrow. High interest rates also give a better rate of return from keeping money in the bank. With higher interest rates, investment has a higher opportunity cost because you lose out the interest payments.