Budget 2023
Share

Fiscal stimulus can become counter-productive

Cape Town - In the mini budget (Medium Term Budget Policy Statement) Finance Minister Nhlanhla Nene has outlined concrete plans to consolidate South Africa’s public finances and restore macroeconomic balances, according to Kenneth Creamer, an economist at Wits University.

"The proposed adjustments - lower than planned spending and increased tax revenues - will be challenging and require some understanding and support from ordinary South Africans, but doing the right thing now will open the way for increased levels of investment-led growth and job creation," said Creamer.
 
Background
 
Creamer explained that the government has been running a counter-cyclical fiscal stimulus for the past five years since the global recession. This has assisted in stimulating demand and limiting job losses, but it is not a stance that can be carried on indefinitely.

"As growth remains low, the fiscal stimulus has the potential to become counter-productive.  It risks pushing South Africa’s national debt and debt repayments to unacceptable levels," said Creamer.
 
"Nene appears to have a clear grasp of this problem and he has signalled a clear intention to change the fiscal policy stance from stimulus to consolidation. This is not an easy task and will require determined action by government and clear communication with all stakeholders in South Africa."

The pain of the consolidation must be shared. The relatively well-off should be prepared to shoulder much of the burden, as Nene stated, the budget should not be balanced “on the backs of the poor”.
 
Fiscal consolidation
 
Fiscal consolidation, which will be measured by a reduction in the budget deficit over the next few years, will require the reduction of planned growth in government expenditure and increased tax revenue, Creamer pointed out.

Limits on government expenditure are likely to result in lower than hoped for public service wage increases, service delivery bottlenecks and a slow-down in certain aspects of public infrastructure expansion.
 
"In the context of an ongoing low rate of economic growth, increased tax revenues will require a broadening of the tax base, increased tax compliance and morality and possibly increased tax rates on consumption and wage earners, particularly high wage earners," said Creamer.

"Such tax increases will pose difficulties and adjustments for South Africans, but as Nene has indicated, such a step may be essential if the country is to avoid falling into a debt trap. The sale of non-strategic state assets assists in raising funds for the fiscus, but this may not be enough to avoid raising some taxes in February next year."
 
Increase role for private sector investment
 
A central problem that needs be overcome, in Creamer's view, is that government’s fiscal stimulus and infrastructure-led programme has failed sufficiently to stimulate, or crowd-in, private sector investment in the manner envisaged when the policies were first implemented.

State-led economic transformation does not imply that the state can go it alone in driving development. Rather, successful state-led investment must serve as a catalyst for increased levels of private sector investment.
 
"The state’s role is to drive infrastructure programmes and expand access to services so as to open up new economic opportunities and change the economy’s inherited racialised patterns," said Creamer.

"The private sector’s role, both big business and small, is to thrive in the space created as the economy’s opportunities expand, to deploy new know-how and technologies and to operate efficiently and competitively in such a way as to benefit consumers, employees and, ultimately, the fiscus."
 
Engagement with business and labour
 
The vision of investment-led growth can be achieved if South Africa can get the public and private sectors working together more effectively," according to Creamer.

He said Nene’s budget statement has opened the way for a range of increased private sector investment initiatives, such as, special economic zones, independent power projects, cogeneration power projects and renewable energy projects.

It has also laid a solid basis for President Jacob Zuma’s engagement with the private sector, later this week, on how best to increase investment in South Africa and Deputy President Cyril Ramaphosa’s engagement with labour early next month on how to improve labour relations in the country.
 
"While being absolutely necessary, increased investment is unlikely to be sufficient, given the scale and historical damage wrought by South Africa’s structural unemployment problem," said Creamer.

"Redistributive activities, including quality public education and public health services, as well as social security safety nets are all necessary for stability and social cohesion."

Remuneration adjustment

Jannie Rossouw of Wits said in looking at Nene's mini budget he noticed that the budget for civil service remuneration has been adjusted, but not sufficiently to allow for the employment numbers in the civil service to grow at the same rate (3.1% per year) as since 2008.

"Going forward to 2017/2018, the budgeted figures give the impression that employment growth in the civil service will be curtailed, which is to be welcomed. These figures also show that government is clearly not agreeing to trade unions’ demands for an increase of 15% in civil service remuneration," Rossouw told Fin24.

"This is also to be welcomed, as South Africa cannot afford increases of that size in its civil service remuneration account. The budgeted increases in remuneration in the period to 2017/2018 gives a clear impression of tax increases, as these growth rates (9.7% in 2015/2016, 10% in 2016/2017 and 8.4% in 2017/2018) can clearly not be achieved only from inflationary increases and economic growth."

- Fin24

* Visit Fin24's Mini Budget Special for all the news.

ALSO READ: Mini budget - as it happened


We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.99
-0.2%
Rand - Pound
24.14
-0.1%
Rand - Euro
20.64
-0.2%
Rand - Aus dollar
12.39
+0.2%
Rand - Yen
0.13
+0.5%
Platinum
911.88
-1.3%
Palladium
1,019.74
-4.3%
Gold
2,159.43
-0.1%
Silver
25.10
+0.2%
Brent Crude
86.89
+1.8%
Top 40
66,252
0.0%
All Share
72,431
0.0%
Resource 10
53,317
0.0%
Industrial 25
100,473
0.0%
Financial 15
16,622
0.0%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders