Interview: Pravin Gordhan
What impact do you think the rollout of social security reform will have on fiscal policy?
PRAVIN GORDHAN: The government has a very clear fiscal policy framework which is based on counter-cyclicality, debt sustainability and intergenerational equity. Over the past 19 years, the government has demonstrated a firm commitment to sound fiscal policy and will continue to do so. That is why the National Treasury has prepared a long-term fiscal report, which projects expenditure over the next 15-25 years based on demographic trends and economic scenarios that model the main components of social spending, including social grants and health and education expenditure.
The report contrasts a “no policy change” trajectory with the likely impact of new policies on expenditure, and draws on proposals outlined in the National Development Plan. Long-term projections are inherently uncertain and depend heavily on underlying assumptions. Noting this caveat, the study concludes that the current fiscal policy and spending mix is sustainable, but would remain vulnerable unless government creates fiscal space beyond the medium term.
It also shows that structural increases in spending require concomitant revenue increases if they are to be financed sustainably. So should the rate of economic growth improve, then major new policy initiatives such as national health insurance or expanded vocational education will become affordable with relatively limited adjustments to tax policy.
To what extent is South Africa vulnerable to potential international or domestic shocks?
GORDHAN: South Africa has several characteristics that make it less vulnerable to external shocks than many other emerging markets. First, our flexible exchange rate acts as a buffer. Second, most of South Africa’s debt is denominated in domestic currency. Our banking sector has very limited foreign currency exposure, while private companies tend to borrow very little in foreign currency. The South African government also has a very low ratio of foreign debt. Third, South Africa has roughly $50bn in foreign reserves, which is equivalent to covering South Africa’s import bill for five months.
While our foreign reserves are lower than several developing countries such as Turkey, Hungary, and China, we also have a lower risk profile.
South Africa is undertaking steps to narrow the fiscal deficit. We entered the recession with a low debt-to-GDP ratio, but much of this fiscal space has been eroded. Nevertheless, debt is projected to stabilise at around 40% of GDP in 2015, which is fairly low by international standards and roughly in line with other emerging market economies. Demand for South African bonds remains strong, and we do have space to accumulate more debt in the short term. However, reducing our vulnerability will require that South Africa stabilises and reduces its debt-to-GDP ratio.
Already, the government has slowed expenditure growth to meet this target, and could potentially reduce expenditure growth further. At the same time, a tax committee will consider whether levels of taxation are appropriate to cover projected expenditure.
How will the introduction of carbon taxes and rising energy tariffs impact industrial output?
GORDHAN: South Africa has made a commitment to reduce greenhouse gas emissions as part of the contribution we will make to mitigate, and adapt to, the impact of global climate change.
As part of this, the economic modelling and analysis we have undertaken indicate that a modest carbon tax – increased over time to allow for a relatively smooth transition and with effective revenue recycling – will help reduce greenhouse gas emissions and will be neutral with regard to economic growth and job creation.
Indeed, over the medium to long term such a tax might actually have a positive effect on economic growth and job creation as we continue to improve our competitive position and are therefore able to limit potential carbon imports tariffs being imposed on our exports.
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