/ 29 October 2023

The Fiscal Cliff | Is South Africa nearing a debt crisis?


South Africa’s economy has performed dismally since its miracle transition to democracy. From 1994 to 2022, GDP per capita, an imperfect measure of average living standards, increased by 22%. By comparison, over the same period, GDP per capita growth in local currencies was 783% in China, 337% in Vietnam, 315% in Ethiopia, 285% in India and 216% in Poland, according to the World Bank. In South Africa GDP per capita in 2022 was lower than it was in 2007.

It is expected to decline for another three years. By the end of 2025, the country will have had 18 years of declining average living standards. South Africa is now an unviable country that has record levels of unemployment, poverty and inequality. 

It has the world’s highest unemployment rate. During the second quarter of 2023, there were 11.9 million unemployed people. The unemployment rate was 42.4%. About half the country lives in poverty and one in five have inadequate access to food. 

South Africa is the most unequal country in the world. The top 10% earned 67% of incomes and owned 86% of wealth, according to the World Inequality Lab. 

We cannot continue like this. But the two most important institutions in the economy do not care about unemployment, poverty and inequality. The treasury cares only about debt. The South African Reserve Bank cares only about inflation. 

When he presents his medium term budget policy statement (MTBPS) next week, Finance Minister Enoch Godongwana will continue the treasury’s debt fear-mongering with new estimates of revenue shortfalls and spending overruns. 

In September, President Cyril Ramaphosa convened a summit at the Spier wine estate in Stellenbosch to discuss the country’s finances a week after he said a basic income grant would replace the R350 a month social relief of distress grant.

The treasury went to the summit with a political agenda to scare the president into not implementing a basic income grant, which it opposes. In a presentation, the treasury proposed the most severe austerity measures since 1994. In a policy brief, the Institute for Economic Justice (IEJ) said the treasury was exaggerating the so-called fiscal crisis for political purposes.

The IEJ has forecast a revenue shortfall of R52.4  billion and a spending overrun of R67.9  billion to R123  billion. This will result in a budget deficit of 6.3% of GDP. The 2023 budget forecasted a deficit of 3.9% of GDP. The IEJ says the revenue shortfall is within historic norms and that the spending overrun is comparable to other years. 

It is also important to note that every budget misses its revenue and spending targets and 2% either way is regarded as normal internationally.

The real issue is that the February 2023 budget was the least credible assessment of the country’s finances since 1994. Revenue forecasts are based on estimates for GDP growth. But, for a decade before the pandemic, the treasury always underestimated the negative effect of its austerity policies on the economy and overestimated the effect of structural reforms on GDP growth. 

The 2019 MTBPS said: “Over the past nine budget cycles, the government has overestimated GDP growth.”

This resulted in revenue shortfalls, especially after the trend GDP growth rate collapsed from 2014 as austerity policies began to bite. From 2014-15 to 2019-20 there were revenue shortfalls of R248.4  billion — R9.9  billion in 2014-15, R14.4  billion in 2015-16, R37.1  billion in 2016-17, R55.8  billion in 2017-18, R62.2  billion in 2018-19 and R69  billion in 2019-20. 

Revenue shortfalls are the norm at the treasury because its forecasts do not consider the harm government’s own policies — austerity and interest rate hikes — and electricity blackouts have on GDP growth.

The 2023 budget also had unrealistic spending targets. It budgeted for a decline in non-interest spending in 2023-24 and primary surpluses — the budget deficit excluding interest payments — of R65  billion in 2023-24, R93  billion in 2024-25 and R138.3  billion in 2025-26. These targets were based on five dubious assumptions. 

First, it budgeted for a 1.6% increase in the public sector wage bill when it knew that this would not happen.Now the treasury says there is a fiscal crisis because it has to pay an extra R37.5  billion that it had not budgeted for. The treasury created its own so-called crisis.

Second, it assumed that the R36  billion a year social relief of distress grant that is paid to about eight million people would come to an end in March 2024 when the treasury knows that it cannot be stopped two months before an election. 

Third, it assumed that the R10  billion a year Presidential Employment Stimulus, which created more than a million work opportunities, would come to an end in March 2024 when the treasury knows that it would be electoral suicide to stop this successful programme.

Fourth, as Wits University’s Southern Centre for Inequality Studies has pointed out, the treasury has adopted a problematic accounting practice that classifies cash payments to Eskom as debt redemption and not an expenditure item. “In our view this departs from good government accounting practices and results in a better-looking but wrong deficit number.” 

Finally, the budget is based on an incorrect assumption that Eskom, Transnet and local governments can self-finance their huge infrastructure needs. An honest assessment would make provisions for such funding.

The treasury does not understand Keynesian economics 101. A national budget does not operate like a household budget. The public sector, broadly defined to include state-owned enterprises and other agencies, probably accounts for 40% of GDP. 

If the government cuts spending it reduces GDP growth, which results in a higher debt ratio. South Africa cannot cut public spending and expect to grow the economy. Austerity is a self-defeating policy that will worsen the economic crisis and result in a rising debt ratio. South Africa has a GDP growth problem, not a debt problem.

The idea that South Africa is broke and can run out of the currency that it issues is absurd. For most of the 20th century, central banks were agents of economic development. After a pause during the neoliberal era from the 1980s, the artificial separation between fiscal and monetary policy started to melt after the global financial crisis of 2008. 

The separation disappeared after the pandemic-induced recession of 2020 when global stimulus packages were $17  trillion. The International Monetary Fund says central banks financed 75% of global stimulus packages. 

There is no reason the Reserve Bank cannot fund government spending (monetary financing), lend to the public sector on favourable terms (at the repo rate) or intervene in the bond market (quantitative easing) for an extended period and determine the cost of government borrowing (yield targeting). 

SA Inc has a vast public sector balance sheet with assets of R4  trillion. These include assets worth R2.6  trillion at the Public Investment Corporation — the asset manager of the Government Employees Pension Fund (GEPF) and the Unemployment Insurance Fund (UIF). SA Inc also has foreign exchange reserves of about R1.2  trillion and cash of about R200  billion.

In the wake of the pandemic-induced recession of 2020, SA Inc created almost R60  billion out of thin air when it ran down the UIF surplus to pay 13.8  million people who were temporarily unemployed. The UIF still has a projected surplus for March 2024 of almost R110  billion. A private sector pension fund must be fully funded because it can go bust. But there is no scenario where the government can close shop and have to pay the pensions of 1.2  million public servants on the same day. 

In 2021, the GEPF had funding of 110% — R400  billion above the 90% target that its trustees have set. If it reduced its funding to 50% it would still be able to pay pensions as if it was fully funded. SA Inc’s foreign exchange reserves are R750  billion above the international rule of thumb that a country must have reserves that can cover three months of imports. Finally, South Africa’s debt ratio of 71% in March 2023 is not high when benchmarked against its emerging market peers. 

The only way for South Africa to get out of its permanent crisis is for the government to discard its failed neoliberal economic policies.

Duma Gqubule is a financial journalist, analyst, researcher and adviser on issues of economic development and transformation.

This article forms part of the third instalment of The Fiscal Cliff, a monthly series by the Mail & Guardian on the state of South Africa’s public purse. The series looks into the effect of fiscal consolidation on public services — which have steadily deteriorated over the years — and considers this policy’s impact on the country’s growth prospects. You can read the other article in part one of the series here