Fiscal Consolidation and the Public Sector Balance Sheet in South Africa

Abstract

Between 1994 and 2008 the South African government reduced its debt/GDP ratio from almost 50% to 27%. Unfortunately this reduction was accompanied by a significant decrease in government's fixed capital/GDP ratio from 90% to 55% - fiscal sustainability might have been restored, but government's balance sheet did not improve. A similar story can be told for State Owned Enterprises. Since the Great Recession the fiscal situation worsened markedly - the public debt ratio again approaches 50%. To restore fiscal sustainability this article suggests that the government faces two options: (1) to create room for future countercyclical policy, the government must cut current expenditure and reduce the public debt/GDP ratio to its pre-crisis level, or (2) substitute much-needed infrastructure capital expenditure for current expenditure while stabilising the debt/GDP ratio at its post-crisis level. Given that the much lower fixed capital/GDP ratio inhibits economic growth, the latter option...