Solidarity: Govt finances, economy at crossroads – market reforms needed

From Solidarity

Government’s dire financial position, and the consequent damage to the local economy can be overturned if market friendly reforms are implemented. This is according to a new report by the Solidarity Research Institute. The report, which considers the current trajectory of government finances in light of the October 2015 mini budget documents, was released today.

This follows after the extent of the government’s poor financial position has once again been confirmed by revisions to South Africa’s sovereign credit ratings. The ratings agency Standard & Poor’s on Friday revised its outlook on South Africa’s BBB minus rating from stable to negative. Concurrently, Fitch Ratings has downgraded its rating from BBB with a negative outlook to BBB minus with a stable outlook. Fitch specifically based this downgrade on the South African government’s policies that are not conducive to economic growth.

South African Finance Minister Nhlanhla Nene
South African Finance Minister Nhlanhla Nene

Gerhard van Onselen, researcher at the Solidarity Research Institute, says the lower credit ratings come as no surprise.  “Government debt has been growing steadily for the past several years while the sustainability of government finances keeps on weakening. Since the economic recession of the late 2000s, the government’s budget has been underpinned by fiscal deficits, attempted ‘countercyclical policy’, substantial social welfare transfers and some highly questionable large scale state-driven capital projects. This state of affairs is set to continue,” Van Onselen said.

Read also: Van Vuuren: SA’s ‘Zombie’ economy. A Zuma recession on the cards.

“Over the last number of years an increasing number of damaging policies and pieces of legislation, aspiring to enlarge Government’s role in the economy, while increasingly undermining the private sector, were introduced. It is our contention that such structural impediments to economic growth, brought on by government’s encroachments into the economy, are mounting. These could expand further, overturning any likelihood of benefits from a, now unlikely, short- to medium-term cyclical recovery,” Van Onselen warned.

Solidarity warned that the Treasury’s projected improvements of debt levels and fiscal deficits as a percentage of GDP are overly optimistic. “These estimates in themselves are reliant on uncertain, probably overly rosy assumptions about slowed expenditure growth, increased revenues and GDP growth,” Van Onselen said.

Read also: Nene in fiscal straitjacket – cannot support economy now that it’s needed

“The South African economy is now at a crossroads. The unfavourable economic prospects could be reversed if the government adopts real reforms to strengthen investment and business activity. Without a reversal of the current situation, the continual worsening of government finances will reach a crisis level detrimental to all people in South Africa. Unfortunately, the possibility of a crisis now appears higher than before.”

Van Onselen added that the present adverse situation holds the opportunity to consider reforms to encourage business activity and investment. “This could set in motion the creativity and energy of free human interaction and collaboration. This is what underlies true economic progress. Our hope is that this option will be considered and implemented,” Van Onselen said.

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