Make or break for South Africa

South Africa faces a make-or-break moment in the coming years, with the National Treasury’s policy of fiscal consolidation set to stabilise the government’s debt load for the first time in 15 years. 

However, the major question is whether South Africa will be able to use this foundation to grow the economy at a much faster rate needed to substantially reduce the debt burden and increase employment. 

To this end, the government will have to spend more money, but this will have to be financed through increased tax collection and not borrowing. 

This presents a whole new problem to the National Treasury, which has been laser-focused on limiting expenditure increases to stabilise the debt burden. 

It now has to find a way to increase government investment in infrastructure, crowd-in private sector investment, and spend more efficiently to grow the economy. 

Stanlib chief economist Kevin Lings explained this tricky balancing act in his Weekly Focus podcast, where he discussed his expectations for the Medium-Term Budget Policy Statement (MTBPS) on 12 November. 

Lings said data from SARS and the National Treasury is encouraging with regard to government revenue and expenditure. 

“Most areas of tax revenue are either ahead of budget or in line with budget. At this stage, there is an expectation that the Finance Minister will be able to present a tax revenue overrun,” Lings said. 

He explained that the minister will be cautious in how much of an overrun the National Treasury expects, as they would not want to have to revise this figure downwards later. 

“We are in a decent position to post a R20 billion to R30 billion tax revenue overrun. This is very encouraging considering South Africa’s economic growth,” Lings said. 

“At the same time, government expenditure is set to end up largely in line with the budget. This means the net effect is that the government’s fiscal balance will improve, with a smaller deficit, and the primary surplus should be larger.” 

As a result, the government is likely to be able to remain on track to stabilise its debt burden in the near future, lending a broadly positive outlook to state finances. 

The economic growth question

There is a general consensus that to reduce the debt load sustainably over the long run, South Africa’s economy needs to grow at a much quicker rate.

This would naturally increase tax revenue through more economic activity, reducing the need for any tax increases and further borrowing. 

Furthermore, faster growth would also greatly improve the government’s debt-to-GDP ratio by increasing the size of the economy. 

This has the potential to create a positive flywheel by freeing up the state to spend more money on growing the economy through fixed investment. 

“And so, there is this constant desire for the economy to do a lot better, and in order for the economy to grow faster, the government would have to spend significantly more,” Lings said. 

“But, the government is under significant constraints from its own fiscal parameters, and the state does not want to embark on a massive fiscal expansion programme at this stage.” 

As a result, the National Treasury’s current plan is to focus on fiscal consolidation to improve the government’s financial health before finding ways to boost growth through increased spending. 

“From what the Finance Minister has put forward, it is about getting to a point of fiscal consolidation and showing fiscal discipline, and then growing the economy off that base,” Lings said. 

“In terms of the state objective, the minister is going to be able to show that South Africa is on track to achieve that outcome, even if the growth rate remains disappointing.”

Lings expects the economic growth rate to be addressed on a medium-term basis, with a focus on how South Africa’s economy will grow over a three- to five-year period. 

To this end, private investment is crucial, with companies sitting on over R1.8 trillion in cash in the bank, waiting to be pumped into the local economy. 

To get this cash off the sidelines, business confidence has to pick up, and deregulation has to occur in key sectors to enable more investment. 

This has worked extremely well in the electricity sector, with private companies investing heavily in generation capacity to reduce the pressure on Eskom. 

The reform process is taking longer than expected with regard to the logistics sector and at a local government level, but this should unlock billions more in private investment in infrastructure.