Public debt and post-crisis fiscal policy in South Africa

Abstract

Almost nine years after the onset of the global financial crisis, South Africa is still struggling to consolidate the public debt it accrued with countercyclical fiscal policy. Large deficit spending necessitated by the downturn in growth and upturn in unemployment-induced social spending caused South Africa’s public debt level to escalate to 43.9% of its GDP by 2014. This rapid increase in South Africa’s level of public debt has caused great concerns from many camps about the sustainability of South Africa’s debt path. This study identifies and analyses the key components of South Africa’s debt sustainability and short-term fiscal policy effectiveness. It judges South Africa’s countercyclical fiscal stance in response to the crisis against the major theoretical debates and empirical evidence in the literature. The risks of South Africa running large fiscal deficits are then evaluated with regard to both the level of public debt, and its associated interest payment burden. The study finds that South Africa’s debt dynamics are a cause for concern, where a situation of debt which does not decrease, or even explodes, are possible outcomes unless serious fiscal consolidation is undertaken. Despite low post-crisis interest rates on public debt, the study also finds that the interest payment burden of South Africa’s debt is crowding out other forms of government spending. The study ends by highlighting the need for fiscal consolidation in South Africa and briefly investigating the role fiscal policy rules can play in achieving consolidation goals.