Although relationships are not always direct and consistent, fiscal policy as a whole will affect the level and composition of aggregate demand, the national savings rate, the growth of monetary aggregates and inflation, and the balance of payments and the exchange rate. Through all these inter-relationships, fiscal policy in the final situation is indeed the most important determinant of economic growth, employment and the standard of living of the total community. However, of this amount, R66 billion was required for maintaining the existing production capacity of the economy, that is for depreciation, to leave only R27 billion for the financing of an expansion of production capacity. The deficit on the budget of the consolidated general government, however, in its own right required R28 billion, and net investment by the private sector in fixed capital and in inventories a further R27 billion. Without analysing the complex financial flows involved in the balancing act, it can be understood why the demand for credit from the banking sector was relatively large, and why the M3 money supply eventually rose by R37 billion, partly to finance also the rising consumer demand for goods and services.
Fiscal policy is part of the problem, and part of the solution.
For the time being, this makes economic development in South Africa very dependent on sustainable capital inflows from the rest of the world, not only to supplement the insufficient level of domestic saving, but also to provide the foreign exchange reserves needed for the payments for imports. Fiscal policy planning must obviously also take this structural deficiency of the South African economy into account. Not only must undue pressures on domestic resources be avoided by keeping public sector expenditure under control, and by non-inflationary financing of government deficits, but an investor friendly environment must also be supported to keep South Africa attractive for the foreign investor. This by definition rules out the option to raise taxes indiscreetly. Throughout the economic upswing of the past few years, no progress was made towards solving this daunting problem.