Macro Analysis

Macro Focus: South Africa’s fiscal litmus test

The macro outlook for South Africa does not look rosy. The country’s primary deficit soared to 10% of GDP in 2020 and it is expected to remain at high levels in the coming years, as the pandemic-related fiscal measures induced a strong “ratchet effect” on public expenditure.  As mentioned in the Medium Term Budget Policy Statement issued by the Ministry of Finance in October 2020, “Options to stabilise the fiscus are becoming increasingly limited. Growth reforms are only expected to begin yielding results over the next several years, implying continued weakness in revenue collection over the period ahead. “ Public debt grew from 60% of GDP in 2019 to over 80% of GDP by the end of 2020.

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Macro Focus: An analysis of the European Commission’s Next Generation €750 billion recovery plan

the European Commission unveiled a €750 billion “Next Generation” recovery programme (€440 billion grants, €60 billion guarantees and €250 billion loans) over the 2021-2024 period. The Next Generation programme would preallocate funds to the Member States prioritising the green and digital transitions mainly through the Recovery and Resilience Facility (€560 billion). It includes additional cohesion funding for €45 billion. As we show in our analysis, Italy, Spain, Poland, Greece, Romania and Portugal would be the main beneficiaries of this proposal which is likely to meet resistance from the “Frugal four” (Netherlands, Austria, Sweden, Denmark).
For the first time in EU history, fiscal expenditure would be financed through debt issued by the European Commission and backed by all the Member states, along the line of a French-German proposal. However, while this proposal is a welcome step toward fiscal integration, it is still short of a Hamiltonian moment for Europe”. The countercyclical policies needed to close the output gap left by the coronavirus crisis will still have to be conducted at the Member State level.