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SA to curb spending when debt at 40%/GDP

Oct 05 2011 10:37 Reuters

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Johannesburg - South Africa would let debt rise to 40% of gross domestic product (GDP) if spending was on investment, but would then tighten the purse strings once debt reaches that level, Deputy Finance Minister Nhlanhla Nene said on Wednesday.

South Africa’s gross debt is expected to hit 43% in 2013/14 from around a third of GDP currently, but analysts are worried that large-scale unemployment may put pressure on the government to increase welfare spending.

“We will allow it to get to 40 provided that spending takes place where it yields the best returns,” Nene told Reuters on the sidelines of an auditors conference in Johannesburg.

“But again, we have a countercyclical fiscal policy which says when it gets to a certain level we actually need to exercise some restraint.”

The National Treasury will unveil its plans on how it will bring spending under control over the next three years when it releases its medium-term budget policy statement on October 25.

The government’s GDP forecast is 3.4% for this year, 4.1% for 2012 and 4.4% for 2013. It is widely expected to cut these targets in October.

The International Monetary Fund (IMF) has urged South Africa to stick to its spending plans over the next three years to help contain debt.

Out-of-reach growth

Nene said the 4% GDP growth forecast the government has set for the next few years was out of reach and the downside risks to the target were “quite serious”.

His comments were in line with those from Finance Minister Pravin Gordhan, who on Monday said the government’s growth targets were “too ambitious”.

Nene said South Africa’s trading partners were in turmoil and this was hurting prospects for the biggest economy on the continent.

“We need to be realistic; the 4% is also a bit out of reach, but we need to work hard at it.”

The government has said GDP growth needs to rise to 7% a year on a sustained basis to make a meaningful dent on unemployment that is at over 25% of the working force.

The poor growth prospects over the next few years mean the more than one million people that have lost jobs since the recession in 2009 will likely remain without work, raising the risk of social instability in the country.
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