South Africa’s economic policies have failed

South Africa’s recent economic policies have failed to increase economic growth, with increased government spending and consistent budget deficits resulting in a fiscal crisis. 

This is feedback from the head of the budget office at the National Treasury, Edgar Sishi, who told Parliament’s two finance committees last week that the government has to reduce its spending to prevent its debt burden from becoming unsustainable. 

Sishi presented to Parliament in response to various submissions made during public hearings on the Medium-Term Budget Policy Statement. 

He dismissed the opinion of civil society organisations and others who criticised the Treasury’s attempt to reduce spending and those who argued that the government should instead increase spending to boost economic growth. 

Sishi said this policy had failed in the past to positively impact the South African economy. Instead, the country has been saddled with a massive debt burden. 

“Increased fiscal spending on servicing debt reduces funds available for social wage spending with negative implications for reducing poverty and inequality.” 

“Since the 2008 global financial crisis, higher public spending and persistent fiscal deficits have not bolstered economic growth,” Sishi said. 

In contrast, South Africa’s economic problems stem from a failure of government-run services, such as electricity from Eskom and logistics services from Transnet. 

These structural problems inhibit economic growth and raise the cost of doing business in the country, contributing to elevated inflation. 

“A demand-led growth strategy would be a misdiagnosis of South Africa’s growth problem because supply-side constraints in our network industries, along with weak private investment, generally explain poor economic growth performance,” Sishi said. 

“Expansionary fiscal policy in the face of these supply side constraints will not structurally raise economic growth, but it will instead worsen debt levels and sovereign credit risks, leading to higher inflation and debt service costs.” 

The National Treasury is considering tapping into the Reserve Bank’s R459 billion gold and foreign exchange reserves account to alleviate some of the government’s fiscal problems. 

Sishi said the Treasury is having discussions with the Reserve Bank about potentially accessing some of the R459 billion. 

The Reserve Bank oversees the gold and foreign exchange reserve account, which contains unrealised profits or losses on the reserves that are incurred due to exchange rate fluctuations.

While the gains – and losses – accrue to the government, the Treasury has refrained from tapping them so far.  

Pressure has been placed on the Treasury to tap these reserves to address the country’s severe fiscal challenges, particularly its growing debt burden and interest payments. 

“It will not be correct for me to create the impression now that there is something new for us to say, but there are engagements in this regard going forward, which hopefully should be able to produce some results at the appropriate time,” Sishi said.