The alarm bells are ringing ahead of October’s medium-term budget, which is expected to show SA’s public finances are in significantly worse shape than finance minister Enoch Godongwana projected in his February budget.
IMF first deputy MD Gita Gopinath warned last week that the cost of servicing government debt could rise from 19% of state revenue in 2023 to 27% by 2028 — more than twice the health budget — if the government does not take firm action on fiscal consolidation. The ballooning debt costs reflect a government debt burden that is expected to climb to more than R5-trillion in a context in which SA finds itself borrowing at ever higher rates.
With revenue tanking and pressure on spending climbing, the Treasury has instructed departments and provinces to implement severe cost cuts in the current year. It has frozen new hiring and new infrastructure spending, as well as imposing cuts on travel and events budgets. It has reminded President Cyril Ramaphosa and his cabinet that the R350 a month social relief of distress grant is not funded beyond the end of the current fiscal year — and spelt out very clearly the trade-offs required to extend it.
The president has been equivocating about spending cuts in his typical style, reportedly saying recently they won’t necessarily be required even though the government in effect has no money. Perhaps the money could be found some other way, he indicated. And it has to be said that the venue chosen for his meeting with cabinet and the Treasury this past weekend was not a good look under the circumstances. Did they really have to gather at a Cape wine estate?
SA had been saved from the consequences of its own profligacy over the past couple of years by the commodities boom and a better-than-expected economy, as well as by the 2020 public sector wage freeze. February’s budget was still fairly optimistic about growth and fiscal prospects. But it has proved far too optimistic, in a year in which load-shedding has reached unprecedented levels, rail and port facilities have failed, and commodity prices have turned negative. Add to that a wage settlement that came in R37bn higher than budget, and pressure to spend billions bailing out failed state enterprises, from the Post Office to Transnet to SAA (never mind Eskom), and it’s hard to see how the Treasury is supposed to craft a credible medium-term budget.
In that context it is good to hear it is forcing the president and his cabinet to confront the trade-offs involved. There is no magic money tree. If they want to keep the R350 grant going over the medium term, at a cost of more than R40bn a year (and up to R130bn a year if it’s expanded to be more like a basic income grant), something else has to give.
But of course there’s an election coming up, and politicians are not good at confronting trade-offs at the best of times, least of all ahead of an election campaign. But if they don’t they will rapidly get SA to the point where it’s handing over more than a quarter of tax revenue the government collects, and (as the IMF says) more than double its health budget in interest payments, to financiers and fund managers. They will rapidly push SA into a fiscal crisis.
The Treasury has reportedly told the cabinet that extending the R350 grant would require the government to raise the VAT rate by two percentage points — something that seems unlikely in an election year. Alternately, the Treasury has proposed a whole series of deep spending cuts, which includes eliminating entire programmes, such as the mines inspectorate. This looks like a case of tweaking a few hundred million here and another few there, in a process that could cumulatively have severe consequences for essential services and hit households as well as entire industrial sectors.
Cutting here and there and everywhere, for a government that has been trying to trim spending for some years now, seems likely to make the state even more dysfunctional. The root of the problem is Ramaphosa and his colleagues aren’t willing to face the big trade-offs that are required to get SA’s public finances back on track. That means taking on the trade unions and doing a proper review of a public sector pay structure that pays underperforming workers too much and highly skilled, productive ones not enough.
It means taking bold decisions to shed state-owned enterprises that shouldn’t exist at all — such as SAA — or those that need radical restructuring and private entry, such as Transnet or the Post Office. It means tackling dysfunctional government departments and rent-seeking procurement processes head on.
Unless the ANC government is willing to make the tough decisions now, it risks tipping SA into a fiscal crisis that could make the party even less electable in future.
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