Government must cut spending – Nedbank

To prevent South Africa from falling over a fiscal cliff due to its widening budget deficit, the government needs to contain its expenditure as tax revenues continue to decline. 

This is according to Nedbank’s economic research, joining a chorus of warnings about the country’s dire financial situation. 

The bank’s research shows that corporate tax collations dropped significantly in the first four months of the 2023/24 financial year. 

Nedbank senior economist Isaach Matshego said total national revenue declined 3.2% compared to the same period last year, with lower taxes on income and profits driving the decline. 

“The first four months of 2023/24 recorded lower revenue and expenditure increases well ahead of budget,” Matshego said.

“The rapid increase in expenditure against the backdrop of underlying poor economic conditions threatens to undermine the fiscal position in 2023/24 and beyond.”

“The myriad economic challenges are clearly hurting tax collections, pointing to the urgent need to contain fiscal spending to restrict the widening of the budget deficit and consequent increase in public debt and debt service costs.”

The estimated consolidated budget deficit is R283.7 billion over the first four months of 2023/24. This indicates that the budget deficit will exceed the 4% of GDP projected in the February budget. 

South Africa’s debt-to-GDP has increased from 23.6% in 2008 to 71.1% at the end of 2022. The ratio is expected to increase further to 73.6% by the end of the 2026 financial year. 

Matshego warned that the budget deficit will continue to widen unless expenditure is restricted, resulting in the country’s debt burden growing. 

This, in turn, will significantly increase the interest payments required to service the country’s debt, which is projected to be over R1 billion a day in 2023. 

Spending cuts

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 recommendation is unsurprising, considering the latest data about the state’s financial health, revealing 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.

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.