Finance

Government must raise taxes or cut spending

South Africa is on an unsustainable fiscal path, with the costs of servicing its debt rising and economic growth stagnating, forcing the government to raise taxes or cut its spending. 

Deputy chair of the Finance and Fiscal Commission, Professor Michael Sachs, told 702 that despite the National Treasury’s good work, the outlook for the country’s finances is worsening. 

The Treasury has succeeded in slowing down government spending growth and reducing the public wage bill. 

However, the high levels of inflation seen since the end of 2021 have flattered South Africa’s finances by inflating nominal GDP, making the country’s debt-to-GDP ratio look better than it is. 

In real terms, South Africa’s GDP is stagnant, and the outlook for real economic growth is close to zero. 

The South African Reserve Bank has responded to rising inflation by raising interest rates, significantly increasing the cost of borrowing and servicing the country’s debt. 

This combination of stagnant economic growth and rising interest rates has undone the Treasury’s good work in limiting government spending. 

The National Treasury is back at square one, and its consolidation work has been “like it is walking down on an escalator that is going up”.

Sachs warned that even more consolidation is required for the Treasury to meet its targets outlined in the February budget.

Ultimately the Presidency will have to consider the tradeoffs and discipline government departments. 

However, “the Presidency is incapable of keeping government departments in check and is doing nothing to coordinate efforts between Treasury and the departments”.

The Treasury and government departments are moving in opposite directions, with the Finance Minister trying to cut spending while departments are increasing their staff numbers. 

Budget cuts from the Treasury are not aligned with the policy aims of the government departments. In effect, the departments are writing cheques that the Treasury cannot cash.

These irreconcilable contradictions and policy disarray at the heart of the government will ensure that the country’s finances continue to deteriorate. 

The crisis is a continuation of bad policy decisions that increase the government’s debt burden without growing the economy. 

This will force the government to either cut government spending, as the Treasury is trying to do, or it will have to raise taxes, which is the more politically palatable option. 

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