South Africa heading towards a serious crisis

South Africa is heading for a fiscal crisis as the country’s debt-servicing costs continue to balloon, crowding out spending in other areas that could boost economic growth and improve the lives of South Africans. 

Without significant cuts to expenditure or much faster economic growth, this trend could lead the country to fall off a fiscal cliff. 

This is feedback from the Organisation for Economic Co-operation and Development (OECD), in its latest report on South Africa’s economy. 

The organisation outlined South Africa’s poor economic outcomes over the past decade, attributing them to the collapse of state-owned enterprises (SOEs), corruption, and policy uncertainty as the primary causes. 

It also outlined some of the reforms the country could implement to address these issues and boost economic growth. 

One of the key areas of focus for the OECD in the report was the country’s deteriorating fiscal health, with its economic growth crisis manifesting itself as a potential financial crisis. 

As the South African economy stagnated after 2010, government spending continued to rise, leading to a significant increase in the country’s debt-to-GDP ratio. 

While one deficit is not an issue in itself, the OECD said that persistent primary and full budget deficits have increased South Africa’s debt load to the point where it puts the country’s financial sustainability at risk. 

Public debt has risen from 31.5% of GDP in 2010 to a projected 77% of GDP in 2025, with the government last running a full budget surplus in 2008. 

Mounting debt and higher interest rates have led to growing debt-servicing costs, expected to reach 5.2% of GDP in 2025, up from less than 3% of GDP a decade ago. 

In rand terms, this translates to R426.3 billion over the next financial year. The government will spend over R1 billion a day to service its debt. 

Elevated debt-servicing costs are limiting the government’s ability to fund much-needed social spending and public investment, hampering economic growth. 

The graph below, courtesy of the OECD, shows the steady increase in the government’s debt-servicing costs since 2011.

South Africa is in trouble

The rise in debt-servicing costs has already begun to crowd out spending in other areas, with the National Treasury implementing fiscal consolidation to run primary budget surpluses. 

This involved limiting spending growth across the board to ensure government spending is less than the tax revenue it collects. 

Over time, this limits the increases to government debt and should eventually result in the debt burden stabilising and being reduced. 

However, this comes at a cost to economic growth and potentially service delivery as various departments face spending cuts. 

The OECD stated that recent primary surpluses, albeit small, have limited increases in debt, but warned that it will take some time before debt-servicing costs decrease. 

This is because the primary budget surplus excludes expenditure on debt-servicing costs. When these costs are included, the government runs a full budget deficit. 

On the fiscal side, high public spending pressures necessitate a continued consolidation strategy that limits government expenditure growth, the OECD said.  

This strategy should include stricter spending controls, reinforced spending rules, improved governance and administrative efficiency.

The OECD also called for substantial reform of South Africa’s SOEs to reduce fiscal transfers, as their business models have to be revamped to reduce their reliance on state support. 

Supporting government revenues will play a key role in reducing debt, with economic growth serving as the primary lever to achieve this, as it will result in increased revenue without necessitating tax increases. 

Another way is to broaden the narrow tax base, with the OECD recommending that the government reduce personal income tax expenditures, enhance corporate income tax compliance, and strengthen municipal property tax collections.

The OECD warned that if the government does not address its financial challenges, some more painful decisions may have to be made. 

This includes raising the net effective carbon tax and raising the VAT rate while also reducing the number of zero-rated VAT items with targeted support for the vulnerable.