South Africa’s money running dry

South Africa’s new Government of National Unity (GNU) will need to address the country’s fiscal crisis as the country’s fiscal position is unsustainable, and failure to address this could cause enormous harm.

This is according to the Centre for Development and Enterprise (CDE), which recently released the third report in its AGENDA 2024 series. This series of reports sets out catalytic actions to reverse South Africa’s decline.

The CDE said it welcomed President Cyril Ramaphosa’s renewed commitment to economic growth and fiscal reform and urged him to stay on this path.

In his recent Opening of Parliament Address, the President promised to “manage public finances with a view to stabilising debt” and to “place inclusive economic growth at the top of the national agenda”.

South Africa’s debt-to-GDP ratio declined from 50% in 1994 to 24% in 2008 but has now risen to 74%.

This is well above the emerging market average of 58.9%. Of all the taxes collected in South Africa, 20% go to servicing the government’s massive R5.2 trillion debt pile.

In other words, one in every five rands of South Africa’s revenue goes to debt-service costs, which now absorb a larger share of the budget than basic education, social protection or health.

“Years of large structural gaps between government’s revenues and its spending have wiped out the fiscal progress achieved in the first 15 years of democracy, and the country is now in a much worse position than at the start of the democratic era,” said Ann Bernstein, CDE executive director.

“South Africa’s position is much closer to that of a business that is insolvent than one that is merely experiencing cashflow problems.”

CDE acknowledged that there are no magic bullets for resolving the fiscal crisis. However, it said the GNU must make meaningful progress along two dimensions that would help improve spending quality and pursue faster economic growth.

CDE believes that the government’s current fiscal strategy should be strengthened through seven key actions to make spending more efficient. 

It said the GNU should –

• Refrain from making new unaffordable spending commitments, including unbudgeted increases to public sector remuneration.
• Improve the quality and productivity of spending by focusing on core business, eliminating low impact and low productivity activities, and enhancing accountability for service delivery. Institute productivity commissions to identify practical ways to increase service delivery within current budget limits. These processes should be led by Operation Vulindlela.
• Improve decision-making at the centre of government.
• Swiftly identify and dismiss officials involved in theft and corruption, including the dismissal of officials credibly accused of wrongdoing.
• Pursue much greater value for the hundreds of billions of rands spent on government procurement.
• Maximise revenue collection by investing in the enforcement of tax obligations against those who are evading their obligations.
• Appoint a high level expert task team to relook at the structure and financing of local government. Every year some 10 per cent of the national budget is transferred to municipalities and metros, and there is almost universal consensus that this money is not being spent effectively. The President should urgently appoint a task team to recommend actions to be discussed in parliament within six to eight months.

“CDE recommends that the GNU sticks with the current fiscal strategy and strengthens it further with the series of key interventions outlined here,” it said. 

“It is important that this approach is understood as a permanent commitment to fiscal sustainability, not a short-term fix.”

The second part of CDE’s report echoes and expounds upon the President’s pronouncement that economic growth is paramount, particularly regarding stabilising South Africa’s fiscal position.

“Ultimately, the most desirable way to improve the sustainability of public finances is through economic growth,” Bernstein said. 

“The effect of growth on fiscal sustainability is instantaneous because a growing economy can sustain existing levels of debt more comfortably.”

She said achieving faster growth is not as difficult as some may believe. 

“It requires a government that is committed to addressing the enormous governance deficiencies that exist – from cleaning up procurement to sending corrupt officials to jail to demanding higher standards from public servants,” she said. 

“The confidence that would flow from actually doing this would electrify investment and growth.”

The CDE’s concerns about South Africa’s tenuous fiscal position have been echoed by Old Mutual investment strategist Izak Odendaal.

Odendaal said cleaning up the mess will take time, and fiscal consolidation is the trickiest problem for the new government to tackle, especially since new coalition partners have big ideas for their first term in power.

“South Africa cannot afford not to stabilise a debt-to-GDP ratio that has almost doubled in the past decade and tackle a debt burden that has reached R5.2 trillion,” he said.

“It is relatively easy for the various coalition partners to agree on feel-good economic reforms that lead to private investment and photo opportunities for hard hat-wearing politicians.”

“It is much more difficult to commit to being disciplined with state money when each party has its own spending priorities.”