THE IMPACT OF PUBLIC DEBT ON THE SOUTH AFRICAN ECONOMY.

INTRODUCTION

Economics can be defined as a social science concerned with the production, distribution, and consumption of goods and services. It studies how individuals, businesses, governments, and nations make choices on allocating resources to satisfy their wants and needs, trying to determine how these groups should organise and coordinate efforts to achieve maximum output. It is broken down into macroeconomics, which concentrates on the behavior of the aggregate economy, and microeconomics, which focuses on individual consumers and businesses.

Public debt, sometimes also referred to as government debt, represents the total outstanding debt (bonds and other securities) of a country’s central government. It is often expressed as a ratio of Gross Domestic Product (GDP). Public debt can be raised both externally and internally, where external debt is the debt owed to lenders outside the country and internal debt represents the government’s obligations to domestic lenders. According to Hadhek and Mrad (2014), public debt exists independently outside the public finances and budget. Therefore, public debt is a universal phenomenon that can be found in any economy in the world. This is because a loan is considered mainly as a component of modern public finance. In fact, public debt is closely related to the budget deficit. However, it appears that debt accumulation is necessary to finance investment projects.

In both academia and policymaking, the issue of how public debt affects economic growth has remained a concern (Mohanty and Mishra, 2016). The burden of public debt is an economic issue, dominating debates in different sectors of our society. The post-financial crisis era has been marked with an increasing level of public debt at an international, national and sub-national level (Masoga, 2018).  According to Focus Economics (2019), public debt is an important source of resources for a government to finance public spending and fill holes in the budget. Public debt as a percentage of GDP is usually used as an indicator of the ability of a government to meet its future obligations.

Humberto, Tadas, and Ausrine (2012) argue that public borrowing is a non-avoidable nor is it a reprehensible phenomenon of economic growth. Rather, it is regarded as a way to boost economic growth. This is because of money injection from foreign investors to the economy, and distribution of assets among those in possession of enough to utilise at present moments and those in need of assets to develop economic initiatives or other needs. Among the macroeconomic indicators, public debt is the main indicator forming an image of the countries in the international markets (Humberto, et al, 2012)

This essay seeks to determine whether public debt has an impact on the economic growth of The Republic of South Africa.

NATIONAL DEVELOPMENT PLAN

South Africa has drafted a National Development Plan (NDP) stating the vision for 2030. In the plan, it seems that the main focus is to reduce poverty and inequality. It is mentioned in the National Development Plan that the growth of the economy must be accelerated in such a way that all South Africans are benefited (National Development Plan, 2011). Therefore, rapid economic growth is said to be key in broadening opportunities for everyone. As proposed by the National Development Plan (2011), the accelerated economic growth is also one of the required priorities to raise employment in order to achieve the objectives of the National Development Plan. However, it seems to appear that the plan does not state much about public debt as an impediment to achieving the anticipated economic growth. In this study, it is important to bring to light the idea that achieving an economic growth rate will reduce poverty and inequality by 2030 and that it requires the government to deal with growing public debt. It is notable that many variables in the economy may restrict the likelihood of achieving some of the objectives of the National Development Plan by 2030 (National Development Plan, 2011). However, in this essay, the primary focus is on public debt so as to reveal its impact on South Africa’s economic growth. The National Development Plan suggests that the economy should grow by 5 percent a year to ensure the acceleration of employment and economic transformation (National Development Plan, 2011).

ECONOMIC GROWTH

Goal number 8 of the United Nation’s Sustainable Developmental Goals (SDGs) outlines the importance of achieving economic growth for 193 countries before 2030. (United Nations 2018). As the global economy is adapting to the fourth the industrial revolution, countries have been mandated to invest in what is deemed critical areas such as technological development, human capital, artificial intelligence and machine learning. Without these important investments, economic growth will be stagnant, and the countries will become less competitive with investment being channeled into traditional methods (World Economic Forum, 2017).

The South African economy is the second-largest economy in Africa, after Nigeria. Since the dawn of its international sanctions in 1996, South Africa’s GDP has almost reached a peak of $400 billion in 2011 but has since declined to roughly $385 billion in 2019. During this period, foreign exchange reserves increased from $3 billion to nearly $50 billion thus expending a diversified economy with a growing middle class, within two decades of ending Apartheid while recording its highest yet public debt equating to 62.2% of the country’s GDP. This followed an incline of 5.5% from 2018.

In September 2019, the country’s GDP contracted by 1.4 percent in its fourth quarter, following an increase of 0.8 percent contraction in the previous period and a 0.1 decrease. In the same quarter South Africa, experienced its worst rolling blackouts which harshly affected seven industries, being, government services (-0.4% vs 2.4% in Q3); utilities (-4% vs -4.9%); agriculture, forestry & fishing (-7.6% vs -4.5%); trade, catering & accommodation (-3.8% vs 2.6%); manufacturing (-1.8% vs -4.4%); storage & communication (-7.2% vs -5.4%) and construction (-5.9% vs -6.9%). Nevertheless, output for mining bounced back (1.8% vs -6.1%) which was boosted by iron ore, gold, and platinum group metals. The financial sector grew (2.7% vs 1.6%). In March 2020, the South African economy was confirmed to be in a recession and with an increase of 6.5% in poverty levels.

PUBLIC DEBT EFFECT ON ECONOMY

Previous research done on government debt indicates that affects a country’s economy in either a positive or negative manner. This effect mainly lays with the amount of debt and its purpose. The amount of debt to be borrowed by a state is typically measured using the debt-to-GDP ratio. In contrast, Reinhart, Reinhart, and Rogoff (2015) claim that the ratio should be at most 90%. The economy would be able to grow with the debt threshold of less than 90 percent. Beyond the threshold, public debt will cause an adverse effect on the economy. It is proven empirically by looking at the case of developing countries, in which the debt threshold was found at 88.2% (Karadam 2018). The economy can grow positively when the debt level is below the threshold. However, when public debt to GDP exceeds the threshold, the growth starts to decline.

Lower economic growth that is caused by high public debt can also be explained through the overlapping generations model (Blanchard, 1985; Diamond, 1965; Modigliani, 1961), where the increase in the public debt will be partly used up national savings that were meant for future generations. A reduction in the level of national savings will force the interest rate to increase, thus demotivate incoming investors. Lower investments will result in lower capital accumulation, leading to lower economic growth.

JUSTIFICATION OF PUBLIC DEBT

I.                   UNFORESEEN EMERGENCIES

South African government, like any other government, often resorts to public borrowing in order to meet unforeseen emergencies such as war, flood, draught and in the latest unfolding, the COVID-19 epidemic, where the government secured R500 million worth of funding from the World Bank, International Monetary Fund and the Development Bank. Such huge expenditure of national emergency or disaster cannot be met solely by taxation, particularly in developing countries such as South Africa.

       I.            FOR ECONOMIC DEVELOPMENT

As already mentioned, public borrowing is perceived to be a vital source of development finance. The state is required to build up industries, economic and social infrastructures. The inadequacy of tax revenue has led the government to adopt the borrowing policy to finance these activities. In the long run, these economic activities, are revenue-yielding. Since they are revenue-yielding or permanent income generators, government borrowing is justified.

    II.             TO CURB INFLATION

By resorting to public borrowing, the government can draw off excessive purchasing power of the public. In an already inflationary situation, since people’s disposable income tends to rise, their purchasing potential also rises. Under the circumstance, the purchasing power of the people can be curbed by resorting to borrowing by the government. However, some economists argue that, as an anti-inflationary method, taxation works better.

 III.             TO CONTROL DEPRESSION

During depression, economic activity remains at a low level. To stimulate the economy, what is required is the increase in public spending. Public works programmes are one such example of government investment spending. Under depression, financing of economic activity through taxation is not advisable. By increasing the volume of government spending an economy can be stimulated and, government spending has a multiplier effect on income and employment. Thus, additional government spending financed through public borrowing may revive the economy from a state of depression.

CONCLUSION

Public borrowing is unavoidable in certain circumstances and not essentially bad for a state as there is no mutual consensus on the relationship between public debt and economic growth. The relationship can be positive, negative, or even non-linear. Public debt can only destabilise an economy if it rises to an abnormal extent, of which that is not that case in the Republic of South Africa. The 90% threshold as argued in the Reinhart-Rogoff hypothesis, is not applied across all countries. The findings may help governments and policymakers to design their own fiscal policy by investigating how existing debts affect the growth level.

REFERENCES

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Diamond, P. A. (1965). National debt in a neoclassical growth model. The American Economic Review, 55(5), 1126–1150

Focus Economics. (2019) Public Debt (% of GDP). Retrieved from  https://www.focus-economics.com/economic-indicator/public-debt

Hadhek, Z. and Mrad, F. (2014). Debt and Economic Growth, International Journal of Economics and Financial Issues, Vol. 4 (2), pp. 440-448.

Humberto, N.R.R., Tadas, V. and Ausrine, L. (2012). The Effect of Public Debt and Other Determinants on the Economic Growth of Selected European Countries, Economics and Management, Vol. 17, pp. 914-921.

Karadam, D. Y. (2018). An investigation of nonlinear effects of debt on growth. Journal Of Economic Asymmetries, 18, 1–13.

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Mohanty, A.R and Mishra, B.R. (2016). Impact of Public Debt on Economic Growth: Evidence from Indian States, Vilakshan, XIMB Journal of Management, Vol.13, pp.1- 21.

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