Former head of the budget office at the National Treasury, Professor Michael Sachs, warned that South Africa’s economic crisis is manifesting itself as a fiscal crisis, with the government’s debt becoming unsustainable.
Sachs is an adjunct professor and head of the Public Economy Project at the University of Witwatersrand’s Southern Centre for Inequality Studies.
Earlier this month, he made a presentation on the medium-term budget during public hearings held by Parliament’s two finance committees.
He told Parliament that Finance Minister Enoch Godongwana had effectively created an entirely new budget in the Medium-Term Budget Policy Statement.
“South Africa’s economic growth crisis is manifesting as a fiscal crisis and austerity measures, which have been ineffective in stabilising debt over the last ten years,” he said.
Spending cuts contribute towards lower aggregate demand, lower growth and a weakened state. It is also unlikely that debt can be stabilised while GDP per capita continues to fall.
This crisis is deepening due to South Africa’s poor economic performance, high interest rates, and global uncertainty.
Sachs’ comments follow concerns over the credibility of the Treasury’s fiscal consolidation plans expressed by the Financial and Fiscal Commission earlier this week.
Asset manager Stanlib also said there are risks to the budget because the Treasury has not made additional provisions for the country’s ailing state-owned entities.
Most of South Africa’s SOEs are “in serious financial difficulty and will need government assistance sooner or later”, Stanlib said.
“By not making provisions for SOEs now, the Minister is simply delaying the inevitable and pushing the problem down the road.”
Transnet is the most concerning for Stanlib, as the utility has already requested additional funds from the government as part of its turnaround plan.
This raises further concerns about the government’s growing debt burden, expected to reach R6 trillion by the 2025/2026 financial year.
Avoiding a debt spiral will be painful
Citadel chief economist Maarten Ackerman said South Africa has not yet entered a debt spiral, but avoiding it will require making tough choices.
Ackerman said a country typically enters a debt spiral when its debt-to-GDP ratio reaches 90%. South Africa’s currently sits at 77%.
He was still deeply concerned about the announcement that the government’s debt as a percentage of the size of the economy is expected to increase to 77%.
A study by the World Bank shows that countries whose debt exceeds 77% as a percentage of GDP for prolonged periods experience significant slowdowns in economic growth.
Ackerman said this is something the country cannot afford, given its already stagnant economy.
“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,” Ackerman 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.”
“Some of this has been mentioned, but unfortunately, the current government has not demonstrated that they can cut back on expenses – especially not ahead of the upcoming elections.”
Ackerman said the government needed to focus more sharply on growing the economy faster, which would have allowed them to collect more taxes and could have provided the revenue needed to fix the budget shortfall.