CLAIRE BISSEKER: SA’s fiscal outlook is far worse than most realise

SA can always rely on Michael Sachs to put his unerring finger on the most painful spot with regard to the country’s public finances.

The Wits adjunct professor and former head of the National Treasury’s budget office does it again with his colleagues at the Wits Public Economy Project (PEP) in a new fiscal paper, “Austerity without Consolidation”. It should be essential reading for every politician and business person.

The key takeaway is that SA’s fiscal outlook is much worse than most realise. Despite all the fiscal consolidation we’ve endured the country is no closer to consolidating its fiscal position.

This isn’t because the Treasury hasn’t stomped down hard enough on spending. The PEP estimates that in real terms government employees have on average experienced a 9% fall in their basic pay since the pandemic. This has helped reduce overall expenditure growth to historically low levels.

Despite this, the goal of deficit stabilisation is more distant than ever because economic growth is much slower and interest rates on government debt much higher than the Treasury foresaw.

When the PEP factors in these deteriorating macroeconomic conditions, and makes more realistic expenditure assumptions than the Treasury’s it arrives at some disturbing conclusions.

First, SA’s debt ratio will not stabilise at 73% by 2025 (up from 71% now) as the Treasury has forecast. By the PEP’s reckoning it will be close to 80% by 2025. That is in no way sustainable.

Second, to stabilise the debt ratio now would necessitate even larger spending cuts than we’ve endured already. These have eroded the social services on which the poor depend.

Third, further spending cuts could worsen social unrest. For this reason, the PEP thinks continued austerity is socially and politically implausible.

This is the crux of SA’s fiscal dilemma: the combination of slower economic growth and higher interest rates means that even deeper cuts in spending and/or tax hikes are now required to counterbalance rising debt service costs.

But raising taxes into a stalled economy will depress growth even further. It’s something the Treasury has so far resisted. In fact, it provided generous tax relief to cushion households during the pandemic and subsequent cost-of-living crisis. Sachs suggests this needs to end, at least for the more affluent.

But it needs to go hand-in-hand with a realignment of the government’s policy agenda with the limited resources available. The paper doesn’t come right out and say that the government has to choose free higher education or a basic income grant (BIG) or National Health Insurance (NHI). But it is clear that SA cannot afford to do the Rolls-Royce version of everything and that the failure to choose is giving the budget (and the nation) a huge tension headache.

The dissonance between the state’s expansive policy programme and the budget’s goal of debt stabilisation means the budget suffers from “a credibility gap”. Quite simply, nobody believes the budget (and by extension, the Treasury) when it fails to factor in inflation-related increases for public servants, or more bailouts for state-owned enterprises (SOE), or for the continuation of the social relief of distress grant.

The problem is that if the Treasury were to accurately cost the government’s policy programme it would show the debt ratio exploding not stabilising. I think that’s exactly what the Treasury should do since the shock of finding out just how much NHI, and a BIG, and continued SOE bailouts are going to cost might jolt some politicians awake.

The Treasury must be tempted to do precisely this. But to do so publicly would be to admit that the goal of debt stabilisation is a fantasy (in the absence of draconian tax hikes). And this it dare not admit. SA’s stated commitment to debt stabilisation is an important anchor in keeping ratings agencies and investors onside, even if they increasingly disbelieve the line they are being fed.

Sachs cannot look away as this fiscal farce unfolds; neither should we. 

• Bisseker is a Financial Mail assistant editor.