Economy, deficits and inflation...what's the connection?

In 2010, the South African government reported a budget deficit the equivalent of roughly 5% of the national Gross Domestic Product (GDP), which had only three years ago, in 2007, been a 1% surplus. (Source: TradingEconomics)

 

While a 1% surplus might not seem like a major advantage, a surplus of any kind means that inflation due to the creation of money through the reserve bank would decrease, resulting in an overall lower inflation rate. Budgets that see deficits indicate a tendency to borrow money from outside sources, such as central banks or allied nations and as such, mean that the country is in debt. With South Africa being a relatively young country in its democracy does, in some ways, justify money lending, however there surely must be a limit.

 

The political turmoil and increased tension that we have seen over the past few years indicate a mass dissatisfaction with the way the government has been allocating funds. However, in recent announcements made by finance experts close to the ministry, it has been indicated that the government plans on working towards long term goals, instead of focusing on the short term. The idea is to basically create a medium-term plan, which includes borrowing around $7 billion over the next few years in order to meet development needs. This amount will aid in the bid to lower the budget deficit, albeit gradually, as plans have been made to maintain the inflation rate at between 4 and 6% at all costs.

 

While this inflation rate is notably higher than those of South Africa’s trading partners such as China and the USA (at 3.4 and 2.3% respectively), the country has currently only the 20^th highest inflation in the world, and is even lower down on the list in terms of debt.

 

In short, while the fact that government spending does influence (and harshly so) the inflation rate is very frustrating, and to a high degree is unnecessary especially in the economically unstable times we find ourselves in right now, it is important to remember that as a nation South Africa is still a part of the ‘third world’. While all of the money spending may be seen as exorbitant, and at times mismanaged through corruption, the spending must take place if South Africa ever wants to have a stable enough economy to flourish.