FISCAL SUSTAINABILITY AND THE SOUTH AFRICAN TRANSFORMATION CHALLENGE.

A sustainable fiscal policy means that the public debt/GDP ratio remains stable over the medium to long term. If the real interest rate exceeds the real economic growth rate, the neoclassical prescription for fiscal sustainability requires government to run a sufficiently sized primary surplus in the medium to long term and not to dissave on average. The IMF, international investors and sovereign credit rating agencies use this neoclassical prescription as a measure of country risk. To create an environment friendly to foreign investors, the new South African government has, since it came to power in 1994, reduced the conventional budget deficit to below three percent of GDP to stabilise the debt/GDP ratio.