Cape Town – South Africa’s current circumstances raise the possibility of a low growth trap, according to the medium-term budget tabled in Parliament.
“In this scenario, government, facing the need to stabilise national debt, introduces consolidation measures that ultimately prove selfdefeating. A tighter fiscal position reduces GDP growth, leading to lower revenue and higher deficits.
“This creates a dilemma. Aggressive fiscal consolidation may bolster investor and business confidence, but will likely add to the difficulties facing the economy. Taking no remedial action, however, may result in a ratings downgrade, higher interest rates and capital outflows, which could precipitate a recession. In either scenario, a slowing economy makes it more difficult to stabilise the debt-to-GDP,” the medium-term budget reads.
Reducing debt in a world of lower growth, which is the international experience, is obviously a major challenge.
The fiscal fiscal policy proposals are expected to stabilise net loan debt – the difference between gross debt and government’s cash balances – at 47.9% of GDP in 2019/20. This Budget Review projected that net debt would stabilise at 46.2% in 2017/18.
The upward revision of the debt-to-GDP ratio reflects lower nominal GDP, higher borrowing and currency depreciation.
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