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Is Public debt completely detrimental to Economic growth in South Africa?
Is Public debt completely detrimental to Economic growth in South Africa?
Is South Africa in deep public debt?
There is a general consensus that South Africa has approached uncomfortable levels of public debt.
No equation or indicator has been developed in public literature to determine whether an economy has approached dangerous levels of debt (Van de Merwe, 1993).
In the new democratic era of 1994, The South African government inherited a large amount of debt acquired during the apartheid regime (Mhlaba & Phiri, 2019).
in the period of 2008, there had been a global recession which had a detrimental effect on the South African economy
According to Trading Economics (2019) South Africa’s debt to GDP ratio has reached 55.8% in 2018,
Public debt is intended to stimulate the economy; however, the increase of debt is a general concern (Mhlaba & Phiri, 2019).
The relationship between public debt and economic growth
It could be said that public debt may have a detrimental impact on GDP
Empirical evidence shows a strong negative relationship between public debt and economic growth within a certain period (Baaziz, 2015)
This is due to the impact of a crowding out effect where public debt reaches high levels and deters economic growth (Baaziz, 2015).
In contrast to this, empirical results also show a strong positive relationship between public debt and GDP in a period where public debt was significantly lower.
If public debt goes beyond a certain threshold, it will only be detrimental to economic growth (Ncanywa & Masago, 2018)
For further analysis we run a regression to observe the relationship between the GDP and public debt over the last decade.
The p-value appears to be less than 0.05 and the t-stat is greater than 2
The R-squared value is quite strong sitting at 0.99%
Therefore, we can conclude that this regression is statistically significant and dependable.
Exploring South Africa’s budget deficit and tax revenue
South African government could be collecting insufficient tax revenue to drive economic growth
According to Stats SA (2019), South Africa spends much more than it earns, there is a large gap between government expenditure and Revenue
However, budget deficits are common across the world, countries generally take on public debt to cover financial deficits (Stats SA, 2019)
The increasing absence of investment could translate to a lack of tax revenue in the future - which will make it even more challenging to pay back the funds that were spent on programs intended to improve the economy (George et al, 2015)
Corruption and public debt
Increasing Public Debt in South Africa is linked to high levels of corruption in government spending
According to the Corruption Perceptions index retrieved from Transparency International (2019), in 2018 South Africa was ranked 73 out of 180 countries
According to Butkus & Seputiene (2018), there is empirical evidence that shows that governments in countries that are considered highly corrupt, acquire more public debt.
Good public debt management may reduce public debt servicing costs and curb financial risks, however such strategies more likely appear in countries with better institutional environments and lower levels of corruption (Melecky, 2012)
The efficiency of public debt
Not all of South Africa’s debt is bad debt, debt can be used efficiently to help drive the economy
According to the National Treasury (2019) midterm budget policy statement, Government allocates funds to its central policy objectives, reducing poverty and inequality
government has the tendency to allocate an increasing number of borrowings to consumption rather than investments which could stimulate the economy
Government is making a considerable effort towards improving spending efficiency and reducing wasteful expenditure.