State spending a threat to economy

One of the most striking things about the rebasing and recalculation of South Africa's GDP data is evidence of how powerful the public sector has become in driving the economy.

General government services is now the second biggest sector after the finance, real estate and business sector, trumping both retail trade and manufacturing.

Analysts warn this makes the economy vulnerable to the slowdown in government spending that is taking place now and is ultimately unsustainable.

"It shows that the government's share in the economy is rising at the expense of the private sector," said Econometrix chief economist Azar Jammine.

"The government has been spending so much on compensation of employees that it has crowded out private sector investment, mostly in the mining and manufacturing sectors."

Because the government was paying public sector employees so well, unions in the private sector had responded by becoming militant in their demands for wage increases, he added.

MacQuarie First South economist Elna Moolman said that if the government's expanded role in the economy was accompanied by better service delivery and efficiency, it would be less of a worry. "The problem is that service delivery has deteriorated in the past five to 10 years and the combination has become a drag on the economy. We are at a point where the government has to either cut back spending or increase taxes, which is also not good for growth."

Iraj Abedian, CEO of Pan African Advisory Services, said the assumption that the government could steer growth and investment was a "flawed ideological stance".

"Broadly the infrastructure requirement of growing the economy has been left entirely in the hands of the state, which is incapable of delivering on those," he said.