The National Treasury has proposed drastic steps to rein in spending as the government has run out of money and faces a debt trap.
The Sunday Times reported that the National Treasury prepared radical measures after a cabinet meeting in August at which ministers were warned of dwindling tax revenue.
The measures include a freeze on new public service jobs, stopping procurement contracts for all infrastructure projects, and keeping public servant salary increases in check.
“The spending cuts have been widely welcomed and indicated that the government had ‘run out of money’ and faced a ‘debt trap’ as growth had stalled,” The Sunday Times said.
The National Treasury’s performance is unsurprising, considering the latest data about the state’s financial health.
Last week, the National Treasury revealed that the budget moved to a deficit of R143.8 billion for July.
It is the largest deficit since 2004 and wider than the R115.5 billion forecast by economists. There was a surplus of R36.7 billion in June.
Bloomberg reported that national debt has risen to R4.7 trillion and could reach R6 trillion in 2025, compared with R500 billion in 2006.
The situation has reached such concerning levels that South African Reserve Bank Governor Lesetja Kganyago said it was essential that the country reduced fiscal risks.
In June, the central bank expressed concern about a growing reluctance from local investors to continue absorbing government issuance.
Based on data compiled by Bloomberg, demand at a recent government bond auction was the lowest in nearly two years. Bidding was weakest for the longest-dated 2048 notes.
South Africa’s current debt-to-gross domestic product (GDP) ratio is 73%. The situation is set to become much worse as the country’s fiscal deficit this year will be around 6% of GDP.
The state continues to spend far more than it gets in, which means it has a growing fiscal deficit and needs to borrow money to make ends meet.
Despite the government’s growing expenses and the Treasury’s warning, President Cyril Ramaphosa said lower spending is “not necessarily” the answer to the country’s fiscal challenges.
“The revenue projections that we had have been lower than what we had anticipated. That immediately tells you that we are going to have headwinds,” Ramaphosa said.
“What should we do? The discussion is ongoing. It is not necessarily cutting spending. It is seeing how best you focus on your key delivery areas.”
“After considering key investment areas, you look at how you recalibrate the other spending, you re-prioritise.”
Renowned economist Dawie Roodt previously warned that South Africa is running out of money, but the spending cuts were not palatable in an election year.
“The state’s expenses are going to be much larger than expected, and economic growth much smaller,” he said.
Roodt said South Africa’s fiscal deficit would be much larger this year than what Finance Minister Enoch Godongwana budgeted for.
“The minister said they want to stabilise South Africa’s debt level at 70% of GDP, but it has already increased to 72%,” he said.
“South Africa’s fiscal deficit for 2023 is set to be between 6% and 6.5% of gross domestic product (GDP), much higher than the minister’s expected 4%,” Roodt said.
“I expect South Africa’s debt to increase to 75% of GDP by the end of the year and reach 80% of GDP by the end of 2024.”
The only way to reduce the country’s debt is to increase income through economic growth or cut spending.
The economy is under pressure because of the government’s business-unfriendly policies, which leaves spending cuts as the only option.
However, announcing cuts to public sector employees, salary freezes, or reducing social grants will be unpopular.
It can be fatal ahead of an election year when the ruling ANC is fighting to maintain its majority in Parliament.
Therefore, Ramaphosa’s comments on spending make sense in terms of party politics, but not as the country’s leader.
Without spending cuts or rapid economic growth, South Africa’s debt will continue to grow, and it will continue to spend more on servicing interest on this debt.
It can lead to a debt spiral, ultimately resulting in high inflation levels, further stifling economic growth.
The outcome of this situation can be devastating for a country, which is why many experts are urging the country to cut spending as a matter of urgency.