Fiscal policy — practice question

Study the source material thoroughly before you answer Question 1. Source material: The difficulties facing the Tunisian government Tunisia fact file For several years, Tunisia had a government budget deficit. From 2015 to 2020, the Tunisian government introduced reforms intended to cut the tax burden, depend more heavily on indirect taxes and make the tax system more efficient and more economical. In addition to taxing a variety of products, the Tunisian government also controls the prices of some goods, such as flour and milk. Keeping the prices of flour and milk under government control can help to lower poverty and stop monopoly firms using their market power to exploit consumers. The Tunisian government also provides subsidies for electricity production. The subsidy changes the cost of producing electricity, and any movement in the price of electricity influences the costs faced by other firms. This type of government expenditure can help to ease inflationary pressure, although it may also influence how efficiently electricity is produced. Although some firms gain from the subsidy for electricity production, they also go through periods in which their other production costs rise. Tunisian shoe producers have recently faced higher wage costs and a fall in the number of workers they employ. The average wage paid to Tunisian workers and the Tunisian inflation rate changed between 2014 and 2020, as shown in Fig. 1.1. Unemployment has been a difficulty in Tunisia for many years. In 2020, the government passed a law promising that workers who had been unemployed for ten years or more would be taken on by the public sector. To reduce the time spent moving from one job to another, it expanded labour market information available to workers and employers and did not increase unemployment benefit in line with inflation. The Tunisian foreign exchange rate moved up and down in 2020. This influenced the prices of the country’s exports and imports. It also affected the current account of its balance of payments, economic growth, inflation and unemployment.