Public spending has failed to deliver the desired impact on long-term economic growth and poverty alleviation, the World Bank noted in the first part of its sobering new report, Driving Inclusive Growth in SA.
The lender warned the government’s ability to deliver basic social and infrastructure services has sharply deteriorated over the past decade.
At the same time, it highlighted the public debt-to-GDP ratio has tripled, leaving the state with dangerously limited fiscal space to fund urgent priorities.
“In SA, public spending has not delivered the desired impact on long — term economic growth and poverty alleviation, part one of the Bank’s report reads.
“Analysis by the Reserve Bank of SA found that, over the past decade and controlling for other variables, increases in public expenditures have no longer been associated with growth in output.
“The fiscal multiplier even turned negative in the late 2010s and poverty (at the upper middle-income international poverty line of $6.85 per person per day), at 61.6%, is well above what would be expected at SA’s level of development.”
Stats SA released disappointing data on Tuesday revealing full-year economic growth for 2024 came in at just 0.6% — lower than the 0.7% expansion recorded in 2023.
An economist described this as “an all-time low for nominal GDP growth” (excluding the pandemic years).
With the 2025 budget speech to be delivered by finance minister Enoch Godongwana on Wednesday, the World Bank’s report delivers a stark warning: policymakers “cannot afford to remain inactive”.
To address this, it has outlined a clear framework for improving the efficiency of public spending.
The World Bank identifies three key factors driving SA’s public spending inefficiencies.
First, shrinking fiscal space has severely constrained spending on capital and social programmes that promote inclusive growth, the lender said.
Public debt has surged from 24% of GDP in 2008 to nearly 75% by the end of 2023, significantly increasing the risk of debt distress and pushing up interest rates.
This rising debt not only crowds out private sector investment but also dampens consumer spending, as households anticipate future tax hikes to finance government debt.
This issue will take centre stage when Godongwana delivers a revised national budget on Wednesday, after the rejection of the initial proposal, which was based on the now-shelved plan to raise VAT by two percentage points.
Second, public spending is misaligned with the country’s most pressing needs, prioritising consumption over investment, the World Bank found.
Insufficient investment in infrastructure over the past two decades — about 3% — 5% of GDP per year less than high-growth economies in East Asia and six times less than China — has created a crisis that stifles economic expansion.
“In addition, just 11% of the budget was allocated to economic expenditures during fiscal year 2023/24, well below the more than 20% allocated in Malaysia, Singapore, and Thailand,” the report reads.
This chronic underinvestment has widened inequality leaving the economy less competitive and limiting opportunities for job creation and sustainable growth.
Finally, the declining capacity of the public sector to deliver services efficiently has drastically reduced the impact of government spending.
According to the report, even when funds are allocated to priority sectors, weak governance, institutional inefficiencies and skills shortages have undermined outcomes.
The report further highlights how corruption and poor oversight have led to the capture of public funds by private interests, as reflected in SA’s deteriorating worldwide governance indicators.
“This decline [in indicators] is especially prominent in government effectiveness, quality of regulations and control of corruption,” the World Bank says.
Additionally, widespread dysfunction among municipalities has further weakened service delivery.
Meanwhile, state-owned enterprises (SOEs) such as Eskom, Transnet and Prasa have not only failed to maintain critical infrastructure but have also required costly bailouts amounting to 6—7 percentage points of GDP between 2009 and 2023.
“Those failures have generated direct losses to the economy, estimated at 2% — 3% of GDP growth in 2023 alone.”
In its report, the World Bank proposes a structured framework built around three strategic priorities, eight actions and six reforms to maximise the impact of public spending on inclusive growth.
The priority focuses on creating fiscal space to allow for present and future public spending. This requires co-ordinating and consolidating social programmes to eliminate inefficiencies and adopting a results-based approach where funding is tied to measurable outcomes.
“The two main levers are the wage bill, which at 12% of GDP is five percentage points above the average in Organisation for Economic Co-operation and Development (OECD) countries, and the expected increase in debt-service payments,” the report states.
To rein-in wage increases, it says, the National Treasury “has gained power and discretion to bargain with labour unions using the legal room created by a recent judicial decision that went against labour unions”.
“To slow the rise in debt service costs, plans call for reducing borrowing by controlling the fiscal deficit, seeking more financing on concessional terms, and improving debt management,” the report states.
“These reforms are assessed as the most politically and technically feasible, impactful and timely as they do not require large changes in the legal framework,” the lender notes.
1. Coordinating and consolidating active labor market programmes. For example, there are more than 100 active labour market programmes at the national level offered by some 20 government departments.
2. Linking the Covid-19 social relief of distress grant with active labour market programmes to enhance employability and support job creation and labour productivity in the longer term.
3. Making the head of public administration responsible for ensuring transparent and robust processes for hiring and managing all top managers.
4. Introducing a unified national ID standard to prepare for a digital ID that will improve access to social and financial services and data.
5. Incentivising the uptake of the e-procurement system (eTenders) for procuring entities across levels of government by introducing financial and nonfinancial rewards.
6. Scaling up the contract-based approach piloted in the electricity sector to other sectors (water, waste, education, health) and other levels of government to incentivise them to improve their overall financial performance.
— The World Bank's six reforms
Additionally, the government is urged to partner with the private sector, particularly in infrastructure development, to leverage external resources and reduce fiscal pressures while improving service delivery.
The second priority is allocating public resources to loosen constraints to inclusive growth.
“Two of the major challenges facing SA — inadequate infrastructure and high unemployment — require the more efficient allocation of public resources,” the report states.
This includes enhancing public investment management systems to ensure that projects are selected, implemented and monitored based on their economic and social returns.
The World Bank says SA “could follow the direction taken by countries like the Republic of Korea, New Zealand and the UK, which have established a central project information management (PIM) unit with oversight of strategic public sector projects.”
The World Bank also calls for smarter spending on job creation programmes with a stronger emphasis on skills development and employability, particularly for young people and historically disadvantaged groups.
“SA could reform the Employment Services system by providing counselling services to jobseekers and by linking the databases of the department of social development and the employment services system,” it suggests.
“SA’s active labour market programmes could follow the direction of programmes in several middle- and high-income countries.
“For example, Bosnia and Herzegovina and the UK provide integrated wrap-around services to work-seekers and vulnerable households that face multiple barriers to employment, after an initial comprehensive assessment of their needs.”
The final priority is upgrading the public sector’s delivery capacity.
This entails professionalising the civil service by reinforcing merit-based recruitment and career progression, strengthening monitoring and evaluation mechanisms and accelerating digitalisation to improve service efficiency.
The World Bank recommends SA enhance anti-corruption efforts and strengthen public integrity management by reducing fragmentation and closing gaps in the financial disclosure framework across institutions and levels of government.
“Corruption has had a corrosive effect on SA’s public institutions, in particular on accountability institutions and the management and oversight of SOEs... On the 2023 corruption perceptions index, SA dropped below the global average, scoring 41 out of 100 (where 0 is highly corrupt and 100 is very clean), reflective of perceived stagnation in the fight against corruption,” the World Bank notes.
It also suggests using “performance-based funding” for higher education.
“Higher education institutions must ensure that students complete their training and graduate with the skills to be successful in a dynamic economy.
“Having performance-based funding systems in place is particularly important as more private providers enter the education and training market.”
As most European countries and several US states have successfully implemented this approach, the World Bank suggests SA could learn from their experience.
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