EXECUTIVE SUMMARY ON FISCAL POLICY AND GROSS DOMESTIC PRODUCT.

CASE STUDY CAMEROON. MBU JAVIS ENOW

INTRODUCTION.

Prior to 1986, Cameroon sustained a very high economic growth rate partly because of
its rich diverse agricultural base coupled with petroleum production. The average annual
growth rate of the gross domestic product (GDP) was 8%. This permitted the country to
maintain a high level of per capita income despite the high population growth rate of 3%.
Cameroon was then classified as a middle income country. However, since 1986 almost all
the key economic indicators have been declining mainly due to the collapse of world
commodity prices and internal (structural) problems. The major weaknesses of the economy
of Cameroon were exposed, as the budget deficit increased despite many steps to reduce
public expenditures with the hope of increasing revenue and reducing deficits. These efforts
seemed to yield few positive results, partly because there has been no serious attempt at
systematically controlling the budget and using fiscal policy to promote sustained economic
growth. Also, there seems to have been no attempt to examine the relationship between
government spending and economic growth, so as to give better input for policy making, and
there is lack of rigorous analysis as input into public decision-making processesThe growth
rate of the Cameroonian economy slowed from 2.9% in 2008 to an estimated 2% in 2009.
This slowdown can be attributed to the deterioration of the trade balance, the sluggish
international economic climate and the country’s increasing fiscal difficulties due to the
combined effects of the global economic and financial crisis, the food crisis and the energy
deficit. The government has taken emergency measures to stimulate the agricultural sector,
assigning priority to products such as maize, rice, manioc, potatoes, palm oil and plantains.
Given the signs of recovery observed in developed countries, the real gross domestic product
(GDP) growth is projected to rise to 3.5% in 2010 and 4.6% in 2011. According
to projections, the improving international environment should strongly boost world demand
and thus stimulate commodities exports from developing countries.
On the supply side, the main growth drivers in 2009 were agriculture, construction and
telecommunications services. On the demand side, growth was led by domestic demand,
particularly household consumption, which was spurred by the increases in civil service pay
and staffing since 2008.

The government recently prepared a long-term development strategy known as Vision 2035.
In late 2009, to cover the first ten years of this strategy, it adopted a Growth and
Employment Strategy Paper (GESP), which will serve as a framework for its activities in
2010-20. The GESP focuses on boosting growth, creating formal sector jobs and reducing
poverty. Specifically, it sets the following targets: i) raising the average annual growth rate
to 5.5% over the 2010-20 period; ii) cutting the underemployment rate from 75.8% to under
50% in 2020 by creating tens of thousands of formal sector jobs annually for the next ten
years; and iii) reducing the monetary poverty rate from 39.9% in 2007 to 28.7% in 2020.
Thus the objective of this summary is to examine the relationship between fiscal policy and
gross domestic product (GDP) and how it can influence investment decision of a potential
investor.

Gross domestic product (GDP): here refers to the market value of all goods and services
produces domestically in a country for a particular period of time usually one year. This
figure is used to measure the economic performance of a country. The GDP of a country can
be calculated at either market prices of a based year or current market prices (real and
nominal GDP)

The measurement of GDP is done using three approaches that is;

The output approach, the income approach and the expenditure approach. These respective
approaches arrives in the same value of the GDP of a particular country but it has as short
comings in that; its positive value does not necessary mean good economic welfare thus it
can no longer be a good measure of economic growth of a country.
On the other hand, fiscal policy refers to government expenditure and the collection of
revenues to influence or stimulate economy activities. . Its effect on the economy is to
stimulate or slow down the economy by increasing or decreasing the amount of money
available for investment and spending by varying the tax rate. The higher the tax rate, the
lower the amount available for discretionary spending; conversely, the lower the tax rate, the
higher the amount available for discretionary spending and the greater the stimulating effect
on the economy. The impact of fiscal policy can be measured when the government decides
to increase its spending or reduces taxes within different sectors of the economy by adopting
an expansionary policy or a contractionary policy to solve either a budget deficit or surplus.

Relationship between fiscal policy and gross domestic product .

The intension of the government to adopt a fiscal policy is usually to stabilize the economy
in order to attain economic growth which has an effect on the GDP of the economy. This can
be illustrated using changes in government spending and taxes to influence GDP using the
diagram below

Discretionary policy Discretionary government spending and tax policies can be used to
shift aggregate demand. Expansionary fiscal policy might consist of an increase in
government purchases or transfer payments, a reduction in taxes, or a combination of these
tools to shift the aggregate demand curve to the right. A contractionary fiscal policy might
involve a reduction in government purchases or transfer payments, an increase in taxes, or a
mix of all three to shift the aggregate demand curve to the left.
 In Panel (a), the economy produces a real GDP of Y1, which is below its potential level of
Yp. An expansionary fiscal policy seeks to shift aggregate demand to AD2 in order to close
the gap. In Panel (b), the economy initially has an inflationary gap at Y1. A contractionary
fiscal policy seeks to reduce aggregate demand to AD2 and close the gap

Changes in Government Purchases One policy through which the government could seek
to shift the aggregate demand curve is a change in government purchases. We learned that
the aggregate demand curve shifts to the right by an amount equal to the initial change in
government purchases times the multiplier. This multiplied effect of a change in government
purchases occurs because the increase in government purchases increases income, which in
turn increases consumption. Then, part of the impact of the increase in aggregate demand is
absorbed by higher prices, preventing the full increase in real GDP that would have occurred
if the price level did not rise. A reduction in government purchases would have the opposite
effect. The aggregate demand curve would shift to the left by an amount equal to the initial
change in government purchases times the multiplier. Real GDP and the price level would
fall.

Changes in business taxes .A change in investment affects the aggregate demand curve in
precisely the same manner as a change in government purchases. It shifts the aggregate
demand curve by an amount equal to the initial change in investment times the multiplier.
An increase in the investment tax credit, or a reduction in corporate income tax rates, will
increase investment and shift the aggregate demand curve to the right. Real GDP and the
price level will rise. A reduction in the investment tax credit, or an increase in corporate
income tax rates, will reduce investment and shift the aggregate demand curve to the left.
Real GDP and the price level will fall.

Changes in Income Taxes Income taxes affect the consumption component of aggregate
demand. An increase in income taxes reduce disposable personal income and thus reduces
consumption (but by less than the change in disposable personal income). That shifts the
aggregate demand curve leftward by an amount equal to the initial change in consumption
that the change in income taxes produces times the multiplier. A reduction in income taxes
increases disposable personal income, increases consumption (but by less than the change in
disposable personal income), and increases aggregate demand

The table below summarizes the main changes in government spending and tax revenues
during recent years in Cameroon.

  Govt Spending Exp % of GDP Tax re % of GDP Real GDP

From 2005-2009 there was a huge fiscal stimulus to the Cameroon economy through
substantial increases in government spending on transport, energy, and in particular heavier
spending in the twin areas of health and education. The real level of government spending
grew from 2276 billion in 2007 to 2301.4 billion in 2009. The share of GDP taken up by
government spending has also increased from 15,7% in 2007 to 19.1% in 2004. This
significant increase in government spending has helped to maintain cameroon’s short-term
economic growth at a time when some components of AD (notably export demand and
investment) have been weak.
relationship between government spending,tax revenues and real
GDP
50

45

40

35

30

25

20

15

10

0
2005 2006 2007 2008 2009

govt spending real GDP tax revenue

Conclusively, from the analysis above it can be observed that there is no direct relationship
between fiscal policy and gross domestic product. For an increase in tax revenues and
government spending leads to an insignificant increase in real GDP of Cameroon from 2005
to 2009 under the area of study. Therefore for an investor to invest in any sector in
Cameroon or a country it is worthwhile to examine the various economic projections like
growth and strategic document (Cameroon vision 2035) to see priority sectors of the
government rather than dwell on only the GDP figures.