Finance Minister has run out of good options to avoid fiscal cliff

Finance Minister Enoch Godongwana has only bad options available to him to arrest the country’s slide into a financial crisis – cutting spending and raising debt, adding to the country’s already hefty burden. 

Godongwana will deliver the country’s Medium-Term Budget Policy Statement (MTBPS) on 1 November, and investors will expect him to deal conclusively with the country’s fiscal challenges as they risk becoming unsustainable. 

While a commodity boom previously gave Godongwana some breathing space, recent metal price declines and rail constraints have curtailed the mining industry’s income and contribution to state coffers. 

The government is likely to collect R52 billion less tax than projected in February, according to the median estimate of economists surveyed by Bloomberg.

They also expect the consolidated budget shortfall to be 5.3% of gross domestic product in the current fiscal year, larger than the National Treasury’s projection of 4%.

To balance the books, Godongwana has signalled that he will trim spending and raise borrowing when he delivers the MTBPS.

However, a senior economist at PwC, Xhanti Payi, has warned that both of these are bad options and will have negative effects on the country’s economy. 

Payi told Newzroom Afrika that cutting spending will negatively affect the country’s economic growth as governments tend to be very poor in cutting spending in the right areas. 

“One of the key issues we are facing is growth. When you cut spending, you directly affect growth because people have certain expectations of government spending over a financial year,” Payi said. 

Because governments are not good at cutting spending in the right areas, the negative impact on growth tends to be exaggerated. 

Payi raised the example of historical budget cuts in South Africa, resulting in funding for infrastructure being cut, resulting in massive inefficiencies in the country’s economy and potential water shortages. 

Raising more debt to finance the government’s deficit will only increase the country’s debt burden and threaten a debt spiral. 

Many economists and investors are already concerned that South Africa’s debt burden is unsustainable, with the growth of it exceeding GDP growth. 

South Africa’s finances are in poor health, and nearly all of the Finance Minister’s fears at the beginning of the year have come true, Payi continued. 

“It really looks like the situation has deteriorated. We have an expected R52 billion deficit from a tax shortfall and increased expenditure.”

Godongwana said in the February Budget that he was concerned about the country’s economic growth, the finances of its state-owned enterprises, the overspending on government salaries and financial conditions globally. 

“All of those things have come to fruition. And so, there is not really any space to move,” Payi said. 

Payi urged the government to work with the private sector to build infrastructure and to ensure that its spending is efficient. 

“The larger the role played by communities, ordinary people, and businesses in the economy, with the government only playing a supporting role, the better we are going to be,” Payi said.