The supplementary budget tabled in June indicated that SA’s existing dire fiscal position had taken a turn for the worse. The Fiscal Cliff Study Group (FCSG) has been warning since 2014 that SA’s public finances were developing in an unsustainable way. The growth in government revenue could not match the growth in spending, thus pushing government finances to the proverbial cliff.
Despite not having a clear academic definition, the term fiscal cliff was used in 2012 by Ben Bernanke (then governor of the US Federal Reserve) to symbolise the impact the coinciding end of various tax incentives would have on the US economy. It is thus a situation in which problems in public finances spill over to the real economy.
Having identified similar possible problems facing SA, the FCSG used the concept to define SA’s fiscal cliff as the point where government expenditure on social grants, compensation to civil servants and interest on government debt exceeds total government revenue. All three of these items grew sharply in the past decade, a period during which economic growth has mostly underperformed.
Our focus is on financial sustainability rather than the importance or value-for-money aspects of the items.
Due to low economic growth and a concomitant low growth in government revenue, the government reverted to old-fashioned Keynesian deficit spending to try lifting the economy out of its slump. This strategy is the opposite of austerity budgets, which would imply at least a balanced budget. SA has run large budget deficits averaging more than 5% of GDP annually over the past decade. No reserve capacity for future expansion (or shocks) was thus created.
These large deficits stem from aspects such as incorrect economic growth projections by the National Treasury. In the past decade SA’s annual economic growth potential declined from 2.5% to about 1.5%. The decline has been attributed to various factors, including uncertain government policy and structural challenges, while state capture and corruption amplified the problem. This decline in potential growth was not identified by the National Treasury timeously, resulting in overestimations of government revenue. Total government expenditure simultaneously continued to rise strongly, likely justified by the over-optimistic projections. Ultimately, this caused a sharp increase in government debt.
A worrying similarity between the three main expenditure components analysed by the FCSG (grants, remuneration and interest payments) is that these expenses do not generate future assets (and therefore income). The government focused extensively on supporting consumption expenditure in its attempt to stimulate the economy, while the rise in debt payments became merely an accounting exercise as debt levels rose. This is further evidence that the government did not adopt austerity budgets over the past decade.
Strong rises in these three expenditure items crowd out spending on other necessities, for example maintenance of and new infrastructure investment
The 2020 supplementary budget was tabled out of necessity in response to the economic impact of the Covid-19 crisis. Data from this budget shows that SA has now reached the fiscal cliff, as the sum of grants, remuneration and interest payments will amount to more than 100% of tax revenue during the 2020/2021 financial year.
This indicates a significant deterioration compared with the position in the February budget, when this ratio was 75.5% of tax revenue. Looking further back the position is even more worrying, as this ratio was about 55% in the 2007/2008 fiscal year. The ratio thus almost doubled over the past decade, while the government was unable to curb the trend. Strong rises in these three expenditure items crowd out spending on other necessities, for example maintenance of and investment in new infrastructure.
Due to the Covid-19 restriction the government’s revenue will decrease about R300bn this year. If this revenue can be replenished in the next fiscal year (or at least return to the pre-crisis level), it could create room for some years to step back from the fiscal cliff. Drastic action by the government will be required to recover permanently though.
The government has a small window of opportunity to retreat from the fiscal cliff by reining inin expenditure. Economic activity needs to recover to at least the potential growth level of 1.5% per annum quickly, to ensure sustained government revenue growth. If not, analysis indicates that another cliff will be reached by 2029 or even earlier. In that instance the difficulty will be more permanent, with inevitable cuts in expenditure on social grants and civil service remuneration the only remaining options.
Years of exuberance regarding budgeting has led to the situation where SA can realistically only afford an austerity budget, amid one of the largest economic crises the country has faced for at least the last century.
• Rossouw is interim head of the Wits Business School at the University of the Witwatersrand. Joubert is senior lecturer in the department of economics at the University of SA. They write in their personal capacities.
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