South Africa has run out of money

Efficient Group chief economist Dawie Roodt said South Africa has run out of money as the state’s fiscal debt rapidly rises while the economy stagnates.

Last year, Roodt warned that South Africa’s money was “finished and klaar,” meaning the country had run out of money.

When asked if he still agrees with this statement, Roodt said he does, and South Africa is in a worse fiscal position than it was a year ago.

“There’s no doubt that the money is finished and klaar, and it is certainly worse today than it was a year ago,” he said. 

Roodt explained that this can be seen by looking at South Africa’s fiscal debt, which keeps going up daily. 

South Africa’s debt to GDP stands at around 72% and has skyrocketed over the past decade, partly due to inflation, wage increases for civil servants, and increased spending on social grants.

Those hikes account for about a third of state expenditure after rising by an annual average of two percentage points above the inflation rate for the past decade.

Another concern is the country’s debt repayments, which take up a bigger slice of South Africa’s budget each year.

“Debt is one of the concerns that we have as a government,” President Cyril Ramaphosa said during his election campaign earlier this year. 

“We don’t want our debt to balloon to unmanageable levels to a point where we will not be able to deliver services.”

The government has had to perform a delicate act with severe budget cuts affecting front-line services such as policing, health and education.

“We’re in a worse position because the debt situation worsened and continues to worsen every day,” Roodt said. 

He explained that this is true for South Africa’s national accounts and reflects the fiscal position of state-owned enterprises and the country’s local authorities. 

South Africa’s municipalities are in severe debt to Eskom, which also gets higher by the day.

Earlier this year, the National Treasury approved 70 out of 72 municipal applications for debt relief on their arrears debt to Eskom. 

In the Medium Term Budget Policy Statement in November last year, Finance Minister Enoch Godongwana introduced support to relieve municipalities of the debt they owe to Eskom. 

The minister said it would be counterproductive to try and address the problems at Eskom without dealing with chronic municipal non-payment and historical debt owed to the utility. 

Eskom revealed in its annual results in October 2023 that municipal debt owed to it, including interest, increased by R13.7 billion to R58.5 billion. 

This problem is compounded by the payment rates from municipalities continuing to decrease to 76%.

Therefore, the municipal debt relief was introduced, whereby, on application, the debt owed to Eskom up to 31 March 2023 will be written off over three years in equal annual tranches. 

This is provided the municipality complies with set conditions, such as enforcing strict credit controls, paying their monthly electricity accounts and enhancing revenue collection. 

The 72 applications that had been submitted for debt relief at the time totalled R56.7 billion, or 96.9% of the total municipal debt owed to Eskom at the end of March 2023.

As of January 2024, 70 applications totalling R55.2 billion had been approved.

While this seems a dire situation, Roodt said there is some hope for recovery for South Africa’s finances, as a new government could fix the country’s fiscal crisis.

However, he warned that this will not be the case if the ANC partners with a left-leaning party like the MK or EFF.

To fix the crisis, South Africa needs to spend less money and implement policies and measures to help the economy grow. “And the ANC is not going to do that,” he said. 

“The only hope for us is to get a coalition with the ANC and the DA, as then the DA can slowly put measures in place to improve economic performance. But it’s not gonna be easy politically,” he said.

“I’m afraid that with a very dominant ANC coalition, and especially if the ANC goes into the coalition with the guys on the left, EFF or MK, it’s going to get significantly worse.”

Finance Minister Enoch Godongwana disagrees

Finance Minister Enoc Godongwana disagreed with Roodt, arguing that the government can never run out of money because it can always tax its citizens.

“No government runs out of money when they can tax people any day,” he said. “If we were running out of money, we would have increased taxes,” he said.

“The reason we didn’t do so is because we are confident that we’re not running out of money.”

He said the National Treasury has made an assumption that, over the next years, the economy will grow by 1.6% on average.

“Unless there are too many excessive expenditure increases, which will require a tax increase, you will see in our assumptions over the next three years that we’re not planning major tax increases.”

Godongwana’s argument that the state can merely raise taxes should it face a shortfall is flawed.

Roodt highlighted that there is no room to increase taxes as rich people and companies will leave the country if it happens.

He referred to the Laffer curve, which dictates that higher taxes can result in lower tax collections.

If the tax rate is incrementally increased from 0% to 100%, tax revenue will increase to an optimal point.

The government’s goal would be to reach the optimal tax rate to generate the highest tax revenue.

When the tax rate is raised beyond this point, individuals have greater incentives to do tax planning and arrange their finances to pay as little tax as possible.

Higher taxes also mean productivity will deteriorate. Individuals will prefer to stay in lower tax brackets, as the reward for hard work will be too low to pursue.

Another problem is that rich people are mobile and will leave South Africa when the tax burden becomes too high.

High taxes can also put a strain on the economy and limit growth, which in turn results in lower tax collections.