National Treasury is reportedly proposing a host of extreme measures to get national departments and other spheres of government to cut spending as the country’s coffers have run dry.
Treasury data this week showed that the budget moved to a deficit of R143.8 billion for July, the largest since at least 2004 and wider than the R115.5 billion forecast by economists.
Economists are also sounding the alarm on the full-year outlook, with South Africa’s fiscal deficit for this year expected to exceed the budget set by Finance Minister Enoch Godongwana by some margin.
South Africa’s fiscal deficit for 2023 is set to be between 6% and 6.5% of gross domestic product (GDP) -much higher than the minister’s expected 4%.
In the budget, Finance Minister Enoch Godongwana said the government wants to stabilise South Africa’s debt level at 70% of GDP, but it has already increased to 72%.
As a result, South Africa’s debt situation has also worsened significantly, moving from a relatively modest R500 billion in 2006 to over R4.7 trillion in 2022. This is expected to hit R6 trillion by 2025, putting the country in a significant debt trap.
Similar warnings have emanated from the South African Reserve Bank, which raised red flags over the country’s growing deficits this week.
According to the Sunday Times, Godongwana is acutely aware of the fiscal problems the country faces, and in a draft document looking for solutions, is proposing huge cuts to spending, a moratorium on advertising new hires and forcing departments to find other means to fund wage increases.
The austerity measures would mark the first time since 2013 that the National Treasury took an official stance, and this is particularly notable as this would come ahead of a national election.
The document reportedly points to much lower-than-expected tax revenues as well, which exacerbates the funding crunch.
It was also reportedly recommended that the provinces introduce similar measures.
South Africa’s provincial governments and municipalities are in deep financial crises – with major metros having already run out of money and many others nearing collapse.
The City of Tshwane has run head-on into a battle with its municipal workers of wages, with the threat of being placed into administration now looming over its head.
Other metros, like the City of Joburg and the City of Ekurhuleni, are struggling to replace parts and do repairs to city infrastructure, with the latter announcing this week that it would have to stop the repair of traffic lights and instead replace them with stop signs as repair funds have run out.
Municipalities’ financial stresses are well known, with one of the most obvious markers being how indebted they are to power utility Eskom, where money owed has rocketed to R64 billion.
According to the Sunday Times, the measures could be implemented as soon as mid-September, lasting as long as needed to bring the budget under control.
Every South African ‘owes’ R70,000 – thanks to the government
The average South African “owes” roughly R70,000 each as the country’s national debt snowballs at an alarming rate.
This estimate comes from Efficient Group economist Dawie Roodt, who noted South Africa’s debt-to-GDP is reaching disastrous levels.
The debt-to-GDP ratio is the ratio between a country’s government debt and its gross domestic product (GDP). A low debt-to-GDP ratio indicates that an economy produces sufficient goods and services to pay back debts without incurring further debt.
This is not the case for South Africa.
Roodt stated that South Africa’s fiscal deficit for this year would exceed the budget set by Finance Minister Enoch Godongwana by some margin.
“South Africa’s fiscal deficit for 2023 is set to be between 6% and 6.5% of gross domestic product (GDP), much higher than the minister’s expected 4%,” Roodt said.
Roodt added that Godongwana said the government wants to stabilise South Africa’s debt level at 70% of GDP, but it has already increased to 72%.
Farzana Bayat, portfolio manager at Foord Asset Management, noted that, in 2006, the country’s total debt was a modest R500 billion. By 2011, this had doubled to R1 trillion before quadrupling to R4.7 trillion by 2022.
The IMF loan is not South Africa's biggest debt problem
Roodt added that, in nominal terms, the country owes around R5 trillion, and this will reach R6 trillion by 2025.
“On a per capita basis, this means every South African owes about R60,000 to R70,000 each, which the Minister of Finance incurred on their behalf,” Roodt said.
Roodt gave a few reasons for the growing fiscal deficit:
The salary bill for civil servants is larger than budgeted because they received above-inflation increases. This is set to continue with an election year in 2024.
The government gave more money to failing SOEs than expected. This will continue, especially with the state taking over a large part of Eskom’s debt.
South Africa’s tax collections are under pressure because the economy is not growing.
Income from mining is declining because of a downturn in the commodity cycle and problems with South Africa’s rail and port services.
Finance Minister Enoch Godongwana noted that the intensity of Eskom blackouts and perennial inefficiencies at Transnet’s operations have undermined any efforts to grow the economy this year, putting public finances under immense pressure, reported Daily Maverick.
Godongwana told the publication that the February budget projections are now widely seen as having been too optimistic.
The government had set a goal to achieve a primary budget surplus, where revenue exceeds non-interest expenses, this year. However, the current budget situation in South Africa shows a deficit of R47 billion.
The revenue collection is estimated to be at R406 billion, while the government’s spending is much higher at R453 billion.
The harm caused to the economy and public finances is so severe that Godongwana is expected to announce wide-scale cuts to the budgets of provinces for 2023 and 2024 when he presents the Medium-Term Budget Policy Statement on 25 October, said Daily Maverick.
While Godongwana didn’t confirm to the publication that budget cuts were on the table, the National Treasury has already asked provinces to cut spending by as much as R25 billion.
The Treasury’s technical budgeting guidelines document stated: “The 2023 economic outlook has worsened, fiscal revenues are weaker than expected and the financing of the government borrowing requirement is under renewed pressure.”
What needs to happen to fix the debt crisis
Bayat and Roodt highlighted several things the government needs to do to reduce the debt burden and improve the state’s financial position.
Grow the economy. However, South Africa’s current macroeconomic policies will not lead to economic growth.
Spend less money. However, spending less money on people is not politically palatable and, therefore, unlikely – especially with elections around the corner in 2024.
Increase taxes. However, the country already has an alarmingly narrow tax base, with 1.12% of taxpayers paying 30% of total personal income taxes and 4.4% of corporate taxpayers paying 95% of total corporate income taxes. If this increases, the tax base will collapse as many will simply leave.
Privatise state-owned enterprises. The government can sell state-owned companies before they are worthless. However, this is also unlikely, as many public servants, unions, and politicians have a vested interest in SOEs.
WE need to keep the ANC and all its KADERS responsible for the DEBT of South Africa
