SA faces an inevitable fiscal crisis because it will not be politically possible or desirable to impose the kind of budget adjustments envisaged by the Treasury, says former budget office head and Wits adjunct professor Michael Sachs.
If the authorities fail to arrest rising debt, the country will be unable to finance its budget deficit, resulting in a default on debt and interest payments.
The warning comes ahead of the tabling of the medium-term budget policy statement by finance minister Tito Mboweni on Wednesday, at which he is expected to set out a path for debt consolidation.
SA’s debt burden is escalating fast as interest rate growth outstrips economic growth. The Treasury has said if nothing is done, debt could reach 140% of GDP by 2028/2029.
In June, Mboweni pledged a debt consolidation path in which radical expenditure cuts would see debt peak at 87% of GDP in three years, declining thereafter. The Treasury has subsequently been warned from a number of quarters, including the presidential economic advisory committee, that cuts of this magnitude would impose severe austerity on the country.
Sachs presented his latest paper, "Fiscal dimensions of SA’s crisis", at a webinar hosted by the Wits School of Governance on Tuesday. His core argument is that the dynamics of debt are driven by interest rates, growth and the primary budget surplus, that is the budget excluding debt costs. While the first two are driven mainly by global factors, the primary surplus is politically determined.
The size of the primary surplus a country can run depends on its political will and ability to impose large tax increases on the affluent and/or make expenditure cuts, which are a large part of the consumption basket of the poor, said Sachs.
In June, Mboweni proposed cuts of R400bn over the next three years. Sachs said if, for instance, the government was able to freeze public servant salaries, it would still need cuts of R100bn a year to reach the target. In comparative terms,
not even slashing the entire infrastructure budget of national and provincial government of R50bn would bring it close to doing this.
"Where the interest rate exceeds the economic growth rate, the primary surplus needed to stabilise debt is unattainable for political reasons and, therefore, SA faces an almost certain debt crisis. This crisis will define policy making for the next five to 10 years, and it is a crisis that will lead to large shifts in the structure of SA’s budget," he said.
Sachs said the only way to reduce the debt burden was through economic growth, with the best option being to restore private sector investment.
Ahead of Mboweni’s speech on Wednesday, economists at several online events emphasised the importance of reducing the growth of the public sector wage bill as an essential structural change to expenditure.
Mamokete Lijane, macro strategist at Absa Capital, said while GDP growth was the most important tool for tackling the fiscal crisis, SA now had no choice but to cut expenditure.
The priority was to curb
the wage bill, which, if done, could also win SA some much-needed credibility. An aggressive approach to the wage bill could provide some space to make less aggressive cuts to the rest of expenditure.
"Containing the wage bill in the next two to three years, as outlined in the June adjustment budget, is an absolute imperative. If you don’t do that you are not going to get fiscal credibility because you will be embedding the problem you have," she said.
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