Answer to Question #212317 in Macroeconomics for Akhona Klanisi

Question

the government proposed reduced spending in form of a slashed public wage bill. Use the AD-AS framework to explain logically the potential effect of such a policy move on output and prices. [Make reference to what happens to the curves but NO drawings of graphs required].

a.      In the medium term

Answer 1

The public sector wage bill has been skyrocketing in many countries becoming a major concern in budget allocation. Lack of adequate control over government expenditure remains a problem in many countries. An assessment of more than 85 low- and middle-income countries in Africa, Latin America, the Caribbean, East, Central, and South Asia, Eastern Europe, and the Middle East shows that more than two-thirds of these countries have relatively weak systems of expenditure control. Their public sector wage bill is more than the recommended percentage of 35% of the government budget. As a result of weak expenditure controls, they are associated with higher levels of expenditure arrears and a lack of budget credibility.