South Africa’s massive budget deficit problem

Finance Minister Enoch Godongwana said in the 2023 Medium-Term Budget Policy Statement (MTBPS) that South Africa’s large and ongoing budget deficit is a cause for concern. 

Godongwana delivered the 2023 MTBPS today, in which he expressed his concern for South Africa’s fiscal health.

In the MTBPS, Godongwana said the consolidated budget deficit has risen to 4.9% of GDP in 2023/24 compared with the estimate of 4% of GDP in the 2023 Budget. 

“In the context of persistently low economic growth, the government’s fiscal strategy remains focused on consolidating the public finances to narrow the budget deficit, stabilise public debt and ensure fiscal sustainability,” the Minister said.

“Fiscal policy will pursue a balanced approach that includes spending restraint, revenue measures and additional borrowing.”

The Minister said that, in recent years, revenue collection has benefited from a pattern of high prices for South Africa’s commodity exports. 

However, in the current year, commodity prices have fallen faster than expected, and value‐added tax (VAT) refund claims have risen, resulting in revenue collections projected to be R56.8 billion below 2023 Budget estimates. 

Godongwana said South Africa’s deep and longstanding fiscal challenges are rooted in a long‐term pattern of low economic growth. 

He said government spending has exceeded revenue since the 2008 global financial crisis, resulting in persistent large budget deficits. 

“Moderate budget deficits are not cause for concern. The difficulty arises when deficits are too large for too long, requiring ever‐higher levels of borrowing that are unmatched by improvements in public services,” he said. 

“This is the problem facing South Africa, and it is reflected in debt‐service costs that consume an ever‐larger share of public resources and shrinking fiscal space to respond to shocks.”

He said gross loan debt is projected to stabilise in 2025/26 at a higher level – 77.7% of GDP – than projected in the 2023 Budget. This is mainly due to an increase in the main budget deficit. 

As a percentage of GDP, gross loan debt increased by 47.2 percentage points between 2008/09 and 2022/23. 

Godongwana said debt has grown much faster than the economy, and newly issued debt has become more expensive to service. 

Rising debt‐service costs push up the cost of borrowing across the economy. 

Critically, the rising cost of servicing government debt reduces the amount of money available for meeting national development objectives. 

This “crowding out” effect means that debt‐service costs consume a greater share of the budget than social development, health, community development, economic development or peace and security. 

Government borrowing is not financing investments that support faster, job‐creating growth and changing this pattern is a key fiscal objective, he said.