South Africa’s government has run out of money

South Africa’s government has mismanaged its finances to the point where there is no more room to protect the economy from external shocks. 

This also means it is unable to spend money to boost the local economy, drive employment, and invest in infrastructure. 

Efficient Group chief economist Dawie Roodt outlined South Africa’s precarious financial position in a recent interview on the NSN podcast. 

Roodt was critical of the government’s intervention to reduce the General Fuel Levy to shield motorists from the worst effects of an oil price shock. 

He said the government could not afford to forgo the revenue generated by the levy because of its poor financial health and its willingness to continue spending on wages. 

South Africa is a highly open and relatively small economy, making it vulnerable to external shocks beyond its control. 

Historically, the state has invested in fiscal buffers to ensure there are funds to shield the economy from these shocks. 

However, the mismanagement of the state’s finances over the past 15 years under the ANC has eroded these buffers, leaving the country exposed. 

“I am afraid that if you look at South Africa’s reserve margins at all levels, we do not have much and actually have close to nothing,” Roodt said. 

“On the fiscal side, the Finance Minister gave us some reprieve with tax reductions on petrol, but he will have to take that money back.” 

Roodt explained that with debt-to-GDP sitting at above 77%, the government needs all the revenue it can get. 

It cannot afford to provide relief for an extended period or support the local economy, as it simply does not have the fiscal room to do so. 

“There is no room for movement there, where we can use the state to buffer or to protect the South African economy from international developments,” Roodt said. 

The only exception to this is the Reserve Bank, which is exceptionally well-run by international standards. 

“I am afraid, though, that we have done so much damage to the South African economy that there just isn’t room really to support it from the state,” Roodt said. 

“This is because the ANC pretty much mismanaged the fiscal accounts to such an extent that we have come to the end of using the state.” 

SARS under pressure

The government has run up against a wall in the form of the bond market, with it realising that it cannot continue to borrow its way out of trouble. 

South Africa’s state has been reluctant to cut spending meaningfully, as this is not politically popular, with expenditure growth outstripping tax revenue over the past 15 years. 

This has resulted in the government posting successive budget deficits, with the shortfall being funded through debt. 

The state knows this is unsustainable and has slowly implemented fiscal consolidation to limit spending growth in line with inflation. 

While this is working, the National Treasury’s plan also relies on an extremely efficient SARS to squeeze more revenue from a stagnant economy. 

“What is happening is that the state continues spending like there is no tomorrow, and you cannot fund that through borrowing anymore,” Roodt said. 

“The only way they can fund that now is by putting more and more pressure on SARS, and SARS is now squeezing the economy for the last drop of blood.”

“The Finance Minister is now getting more revenue, not because the economy is getting bigger, but because SARS is getting more aggressive.” 

Roodt warned that people do not like SARS becoming more aggressive and will begin to look for ways to minimise their tax payments. 

Ultimately, the only sustainable way the government can fund its growing spending is through a faster-growing economy. 

A growing economy naturally generates more tax revenue for the state without it having to raise rates and take more money out of people’s pockets. 

However, in an economy growing at the rate of South Africa’s, the only way the state can generate more revenue is through tighter compliance and raising rates.