More than 100 academics, economists, professionals and civil society organisations have signed an open letter to President Cyril Ramaphosa and finance minister Enoch Godongwana calling for a halt to all planned budget cuts.
The calls come as SA faces a deteriorating fiscal position characterised by low growth, much reduced tax revenue, expenditure overruns and ballooning debt. The Treasury issued guidelines to government departments on how they can cut spending and will announce how it plans to deal with the mounting fiscal pressures when it tables the medium-term budget policy statement in parliament on November 1.
But the signatories to the letter who include NGOs such as the Institute for Economic Justice, the Budget Justice Coalition and the Black Sash reject the notion of an imminent fiscal crisis, and oppose the Treasury’s attempts to force government entities and departments to cut spending significantly.
Instead of indiscriminate cuts, they urge the government to undertake an expenditure review over the next 12 months. SA’s fiscal framework, they say, needs to be fundamentally reformed so that the budget advances economic growth and development.
“National Treasury’s instruction to government entities to immediately institute severe budget cuts is misguided, dangerous to our economy and wellbeing, and not supported by robust evidence,” the letter says. “A sense of panic is being created in order to force through these rushed, chaotic and indiscriminate cuts.”
The letter says if implemented, the cuts will slow economic growth, undermine service delivery, and curtail social protection thus worsening unemployment, hunger and social instability.
“This strategy is self-defeating as economic contraction resulting from such cuts would make debt repayment more difficult.”
Some economists have predicted a revenue shortfall as high as R53bn, but the letter says this is not abnormally large and is of similar magnitude of shortfalls in prior years. The expenditure overrun is mainly due to the Treasury failing to budget adequately for foreseeable expenditure such as the R37.5bn cost of the public sector wage agreement.
The letter also says SA’s debt, while expensive, is not unusually high.
“SA’s debt-to-GDP ratio is 71.4% in 2022/23, compared with the emerging market and middle-income country average of 69%. However, on average upper-middle income countries in 2022 paid 2% of GDP in interest payments, compared with SA’s 5%.”
“Ill-conceived” expenditure cuts will result in staff shortages across the public service, the closure of much needed programmes and worsen poverty, inequality, hunger, unemployment, and crime.
“Cutting spending will hamstring desperately needed economic growth, making it harder to service debt in the future,” the letter says.
“Recent research shows that fiscal contraction larger than 1.5% of GDP generates a negative effect of more than 3% on GDP even after 15 years. The drop in GDP reaches 5.5% for fiscal contractions larger than 3%,” the letter says and refers to IMF research that on average, fiscal consolidations do not reduce debt-to-GDP ratios.
State supported economic expansion was needed to secure the sustainability of public finances and address SA’s social and economic crises, the signatories argue.
The letter urges the government to close the mismatch between revenue and expenditure by drawing on reserves and increasing shorter term, less expensive debt. This would include drawing on the R459bn owed to the government in the Reserve Bank’s gold and foreign exchange contingency reserve account.
“Even if the entire mismatch were closed through borrowing it would only increase debt levels by one-two percentage points and keep them well below recent estimates,” the signatories say.
They also propose that tax breaks for those earning above R750,000 should be eliminated or reduced as well as a range of other tax measures including possibly implementing a wealth tax. The cost of borrowing could be reduced by moving to cheaper, shorter term loans.
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