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South Africa Pleased By Its Fiscal Policies During Global Crisis

by Lorys Charalambous,, Cyprus

27 August 2012

During a speech to the board of Woolworths Holdings Limited, the South African Deputy Finance Minister Nhlanhla Nene reviewed the evolution of the country's tax policy through the recent global economic crisis since 2008.

With regard to its fiscal policy, he pointed out that the National Treasury has received much praise for its management of fiscal policy over the past 15 years, whereby the government “undertook a successful fiscal adjustment in the mid-1990s to avert a debt crisis by taking strong steps to reduce government dissaving and broaden the tax base through more efficient tax collection.”

“Strong revenue growth through this period,” he added, “allowed government to consolidate debt and provide tax relief for households and companies … The unusually large tax receipts arising from windfall gains in commodity prices and strong consumption growth were used to pay down debt and accumulate foreign exchange reserves to reduce the country’s external vulnerability.”

South Africa’s fiscal deficit declined from almost 8% of GDP in the early 1990s, to a small budget surplus before the onset of the global crisis. This allowed its gross debt ratio to decline sharply from 49.5% of gross domestic product (GDP) in 1995/96 to a low of 27.1% in 2008/09.

“The buffer that was built up as a result of countercyclical fiscal policy during the boom put the economy in good stead when the financial crisis struck in 2008,” Nene confirmed. When the economy fell into recession and tax revenues plunged, the government was able to sustain spending by increasing borrowing, while “the fact that taxes were not increased to make up for the shortfall in revenues supported the recovery in business confidence.”

The consolidated government deficit increased from 1.1% of GDP in 2008/09 to 6.5% of GDP during the recession in 2009/10, before falling to an estimated 4.5% in 2011/12. The medium-term estimates published in the 2012 Budget see the deficit falling back to 3% of GDP in 2014/15.

Despite these large deficits and rising debt levels, he expressed the government’s confidence that it is on a sustainable fiscal path. One of its long-term principles on fiscal policy is counter-cyclicality, where it needs “to get back to a position where the budget can be flexible to adjust to shocks to the economy in the future.”

TAGS: individuals | South Africa | Finance | tax | economics | business | fiscal policy | budget | Africa

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