A Sakeliga analysis shows that Jacob Zuma and Cyril Ramaphosa have destroyed the good work done by Nelson Mandela and Thabo Mbeki to fix the financial mess left by the apartheid government.
Government finances have deteriorated sharply in 2023 as tax receipts have fallen further behind the pace of spending.
To fund the growing fiscal deficit, government borrowing has swelled to around R100 billion per quarter from R50 billion per quarter just a year ago.
The government has run up so much debt since 2008 that interest payments have spiralled up to nearly R100 billion per quarter.
Simply put, almost all government borrowing is currently used to cover interest obligations from previous borrowing.
Meanwhile, other government entities, such as state-owned enterprises and municipalities, have racked up hundreds of billions in new debts since 2008.
There are now rising expectations that the national government will guarantee or bail out these debts.
The liabilities of the national government have soared in the past 15 years while infrastructure investment has been neglected, and the economic value added has stagnated.
The result is that South African government bonds are less trustworthy than they once were. Lenders require higher interest rates as compensation for lending to the South African government.
Sakeliga said the deterioration in the government’s finances is a reminder of how its anti-growth policies and reckless spending habits destroy vast amounts of wealth each year.
But it also raises the threat of a negative policy feedback loop, in which extreme fiscal strain inspires desperate government officials to escalate the policies already doing so much harm.
This is because such policies are seen as a short-term path to otherwise dwindling lucre and securing vested political and financial interests.
The government’s spending problem
Sakeliga highlighted that South Africa’s fiscal deficit is not a tax problem but a spending problem.
South Africa is a high-tax country with a comparatively high tax compliance rate by global comparison.
Tax receipts are a higher percentage of GDP today than at any time in the previous 45 years.
Adjusting for inflation, tax receipts are higher in 2023 than before lockdowns and around 50% higher than in 2008.
One of the problems is prioritising BEE and local content in procurement, which has caused hundreds of billions, perhaps trillions, in wasteful spending.
The government’s inability to cut spending and address waste in procurement signals at least three significant risks that the business community should prepare for –
- Currency and banking system risks – Fiscal stress causes a less resilient and more volatile currency, which harms business and investment conditions.
- State failure risks – Fiscal distress almost always goes hand in hand with accelerating state failure.
- Policy risks – Diminishing tax receipts and public resources lead to governments seeking desperately to escalate policies that would extract resources from productive sectors of society.
Destructive policies from the government can include tax hikes, printing money, and regulatory devices to extract levies, fees, fines, patronage and control for government officials.
Fiscal deficit under different Presidents
Many people blame South Africa’s poor state on the ANC government, but that does not tell the full story.
The ANC government inherited state finances, which were in severe distress from former president FW de Klerk’s apartheid government.
Former Presidents Nelson Mandela and Thabo Mbeki did great work to grow the economy and shrink the fiscal deficit.
By the end of Mbeki’s second term, the government fixed the very high deficit left by the previous regime, and South Africa enjoyed a balanced budget.
However, under Jacob Zuma and Cyril Ramaphosa, there was runaway spending and widespread corruption, which caused a growing fiscal deficit.
This saw South Africa return to a fiscally stressed state which is now worse than in the early nineties.
The chart below, courtesy of Macrobond and Sakeliga, shows South Africa’s deficit over the last 40 years.