Government pushing South Africa towards a fiscal cliff

The government’s budget deficit continues to widen, and it will likely issue more debt to plug this revenue gap, threatening to push the country to the edge of a fiscal cliff where difficult decisions must be made. 

Investec Treasury economist at Investec Tertia Jacobs told Newzroom Afrika that the government has failed to address the structural issues that put it in this position nearly every year. 

The National Treasury faces the same dilemma it has seen every year besides the past two, as the country benefitted from a massive revenue windfall from high commodity prices. 

In the February Budget, Treasury determines government expenditures based on revenue estimates for the financial year. However, revenue has fallen short of these estimates so far, resulting in a wider budget deficit than expected. 

The Treasury said earlier this month that total revenue growth was 8.7% year-on-year in August, while total expenditure grew at a stronger pace of 9.2%.

The cumulative main budget deficit in the first five months of the 2023/24 fiscal year amounts to R238.4 billion, or R254.4 billion, including Eskom debt relief. 

This is much higher than the deficit of R160.7 billion in the same period in 2022/23.

To finance this growing budget deficit, the government has had to increase the amount of debt it issues.

From the beginning of August, the National Treasury has increased the issuance of government debt by R2 billion to over R14 billion per week. 

This is deeply concerning as the government already has a hefty debt burden and rapidly growing debt servicing costs. 

The Budget in February predicted that South Africa’s debt-to-GDP ratio would reach 72.6% in the current financial, but “that ratio could easily slide to 77% plus”, Jacobs said. 

Government debt is growing much faster than GDP growth, making it likely that, at some point, the country will simply be unable to service its debt. 

“If we issue more debt to continue current spending due to a lack of revenue, the only thing that will happen is that the debt-to-GDP ratio will rise, making less money available to spend elsewhere,” Jacobs said. 

“So, before we know it, we are going to stand again on the edge of a fiscal cliff where very difficult decisions will have to be made.”

Jacobs urged the government to look at ways to cut spending rather than finding more ways to access funds without addressing the country’s structural problems. 

“These additional funds are not really going to deal with the structural problems the government is facing that are pushing us towards this fiscal cliff,” Jacobs said. 

Currently, the government is merely addressing the symptoms and not the root cause of the problem – a lack of economic growth.