'Fiscal policy, not rates, is key'

Johannesburg - Cutting interest rates may soothe some of the pain, but it is fiscal policy which has to carry the game, says Sanlam's chief economist, Jac Laubscher.

He was speaking at an economic summit arranged prior to the DA publishing its own economic policy, which follows the ANC mandate released last weekend and ahead of the upcoming Budget on February 11.

Laubscher feels that despite this, he is rooting for a 100 basis point cut in rates come February 12 as the cuts need to be "front-loaded" if it is known there will be a big fall in inflation to come.

"This will bring relief, but not bliss," he said.

On fiscal policy, Laubscher is not in favour of what he sees as politically difficult tax cuts, but rather other measures like once-off rebates, an acceleration in the extension of social grants and unemployment benefits, as well as things like food vouchers.

"But that must be controlled as there is the possibility of corruption," he said.

On rate cuts, Laubscher makes the point that this will be the first time since the introduction of the National Credit Act that South Africa goes into a rate-cutting cycle, and this makes it difficult to base this one on what has happened in the past.

He also pours cold water on the idea that lower rates will drastically affect foreign investors' local investing activities, instead noting that foreigners are far more concerned about growth. This was evidenced by the equity sell-off by foreigners last year despite rates being high locally.

"We can be a bit experimental and need to be fleet-footed," advised Laubscher.

On the global crisis, Laubscher said: "When you over-indulge you have to take the medicine."

He added: "You cannot solve the economic crisis without first solving the financial crisis." He said the economic measures could just weaken the blow, but the solution still lies in fixing the financial system.

- I-Net Bridge