BEE Partner, South Africa Economy Watch

Suppose, for example, that the GDP growth rate exceeds the interest rate by five percentage points. Then the steady-state deficit-to-GDP ratio will be 5 per cent of the debt-to-GDP ratio. If the debt-to-GDP ratio is at, for example, 60 per cent, then the primary deficit-to-GDP ratio can be permanently maintained at 3 per cent. Incidentally, these figures are the same as those stipulated in the European Union Maastricht Treaty as ‘convergence criteria’ for debt and deficit. Note that if the GDP growth rate exceeds the interest rate by five percentage points, then no less than one-fifth of the public sector in our ’small government‘ example, and one-tenth of the ‘big government‘ example, can be permanently financed by allowing the government debt to grow continuously. Taxpayers would be relieved accordingly. Read the rest of this entry »