South Africa on a tightrope

The deteriorating state of South Africa’s finances highlights the delicate balancing act required to keep the country from falling into a fiscal crisis.

This is feedback from Citadel chief economist and advisory partner Maarten Ackerman following Finance Minister Enoch GodongwanaMedium-Term Budget Policy Statement (MTBPS) on Wednesday, 1 November.

Ackerman said the Minister painted a more realistic picture of the country’s precarious economic situation in his statement than he did in February’s Budget. This was both good and bad news for the country.

In the MTBPS, Godongwana revealed that the country faces a tax revenue shortfall of R56.8 billion.

He said government spending has exceeded revenue since the 2008 global financial crisis, which puts it on the road to a fiscal crisis.

These rising annual budget deficits have reached an extent where the government will borrow an average of R553 billion annually over the medium term.

In other words, the state will borrow R1.5 billion per day to fill the gap between revenue and expenses.

As a result, gross debt will rise from R4.8 trillion in the current financial year to R5.2 trillion in the next financial year. By 2025/26, it will exceed R6 trillion.

“We expect gross government debt to stabilise at 77% of GDP by 2025/26. This is higher than the level we forecasted in February,” the Minister said.

Ackerman said he was concerned about the announcement that the government’s debt as a percentage of the size of the economy is expected to increase to 77%.

He explained that South Africa could still avoid a debt spiral, considering a ratio of 90% is considered the tipping point. 

However, a study by the World Bank found that countries whose debt exceeds 77% as a percentage of the size of the economy for prolonged periods experience significant slowdowns in economic growth.

This is something South Africa cannot afford, given the country’s already weak growth environment.

“The budget has two sides – revenue and expenses – and we know that in the current situation, we are faced with a concerning budget deficit because the government is spending too much,” he said. 

“Given local structural issues and external factors like the commodities cycle and South Africa not getting the tax revenue we hoped for, the right message would have been austerity and cutting back.”

While some austerity measures like cutting the size of the state have been mentioned, “the current government has not demonstrated that they can cut back on expenses – especially not ahead of the upcoming elections”, Ackerman said.

The government needs to focus more sharply on growing the economy faster, as this would allow them to collect more taxes and provide the necessary revenues to fix the budget shortfall.

Some of Ackerman’s most significant causes for concern were the Finance Minister’s silence on how the government would fund Transnet, the Social Relief of Distress grant, and the proposed National Health Insurance.

“What is also concerning is that the government is not cutting wages and instead is focusing on trimming non-wage spending, which is always tricky,” he said.

Ackerman was concerned about a lack of transparency about the true cost of the increasing government wage bill. 

“No increase was included in this budget, and that is an oversight and a concerning one at that.”


Top JSE indices