SA’s finances are in bad shape. It’s running out of time to fix them

The risks continue to mount.
There is no consensus among economists or other public finance experts on a specific threshold that is tolerable, but it is certain that as debt relative to the size of the economy increases, so does the risk. Picture: Shutterstock

South Africa’s public finances are in a perilous state. There are four main reasons for this. First, economic growth is low or non-existent. Second, tax revenue collection is repeatedly below forecasts. Third, debt levels have risen rapidly and are now at their highest levels in the post-apartheid era. Fourth, the poor performance of state-owned enterprises is necessitating large-scale government support.

Recent developments since the tabling of the 2019/20 Budget in February 2019 have only made the situation worse. A downgrade of government debt to ‘junk’ by a third ratings agency will lead to an outflow of investment and exacerbate matters further. South Africa is, in fact, fortunate that this has not already happened.

The state of South Africa’s public finances is the outcome of different dynamics in three, overlapping periods. The first was the period after the 2008 global financial crisis. The second was the period under the continued presidency of Jacob Zuma. And the third has been the period since Zuma was succeeded by Cyril Ramaphosa. Careful consideration of these periods contradict widely-circulated claims in the political space.

Some have claimed that South Africa’s woes began with Zuma but this is not true. The first shock to the economy under public finances was the global financial crisis. Others have claimed that Zuma is not responsible for poor economic and public finance performance, but this is also not true. South African economic performance should have been able to recover to a much greater degree than it did under the era of his leadership. Government revenue collection seems to have been negatively affected by institutional destabilisation of the South African Revenue Service.

Finally, the deterioration of economic indicators (growth and employment), along with further underperformance of revenue collection and public finances more broadly, is being laid at the door of Ramaphosa’s presidency. That is simply implausible.

The deterioration can often be linked to factors that preceded Ramaphosa’s replacement of Zuma in early 2018. Admittedly, Ramaphosa has not helped his case by making promises about job creation, for instance, that may be outside the ability of the state to deliver.

Understanding why such claims are likely to be wrong is important not just because of attributing blame, but in order to understand what the fundamental drivers are behind the country’s current state and future trajectory.

Recycled disagreements

Unfortunately, beyond blame, much of the policy discussion is characterised by recycled disagreements. These date to the era in which the African National Congress (ANC) government adopted the Growth, Employment and Redistribution (Gear) strategy – which was opposed and resented by left-wing parts of the ANC alliance. That strategy was largely concerned with reducing the debt levels the new democratic government inherited from its apartheid predecessors.

For example, left-wing commentators have argued for expansionary fiscal policy. This basically means increasing government spending to a significant degree. They have also claimed that National Treasury implemented ‘austerity’ after 2008. This is incoherent. First, South Africa actually adopted a ‘countercyclical’ approach after 2008: government spending increased faster than revenue. That is how the country’s debt initially escalated.

Second, increasing government expenditure in the manner proposed is, at best, a very high risk strategy. With the country’s public finances already under strain, an increase in expenditure that does not deliver significant increases in economic growth and tax collection will lead to a dramatic deterioration in public finances. That could cause harm for generations to come. These risks, which seem more likely than the benefits, are never mentioned by populists who simply regurgitate arguments from earlier eras.

The reality is that even though Treasury attempted to maintain government spending to support the economy during the aftermath of the global financial crisis, and then attempted to stabilise debt levels using a policy of ‘fiscal consolidation’, it has been unable to do either. The economy has not recovered, arguably due in significant part to the ravages of state capture and other state failures in the Zuma era. Debt targets have been regularly missed. At one point national government debt was expected to stabilised below 45% of GDP, now it has gone above 60% and may reach 70% of GDP within a few years.

There is no consensus among economists or other public finance experts on a specific threshold that is tolerable. What is clear though is that the higher the amount of debt relative to the size of the economy, the greater the risk. This is especially true where economic growth is lacklustre, as it has been in South Africa for some years.

Recent developments have only made the situation more dire. In the 2019 Budget, Treasury indicated that it would have to breach its expenditure ceiling for the first time in order to give support to national power utility Eskom amounting to R23 billion per year for an intended 10 years. That was despite planned cuts to public service employment and additional tax measures.

Since then, Eskom was given a lower-than expected tariff increase by the National Energy Regulator (Nersa). National government has also tabled an additional proposal to give Eskom a further R59 billion over two years.

It seems unlikely that government will be able to cut such vast sums in other parts of the state, not least at such short notice, with the result that debt targets will be exceeded again. And despite the money being poured into Eskom, there is no clear indication of the overall plan to stabilise the utility’s finances.

Meanwhile various other risks, like South African Airways, the Road Accident Fund and medical negligence lawsuits, continue to linger in the background. Economic growth and job creation are virtually non-existent, and both are below population growth. This means a higher unemployment rate and less national wealth per person.

In the face of the crisis with Eskom, public finances and economic growth, the only way to proceed is to secure a societal agreement on the way forward that recognises the need for sacrifices in the face of the crisis. Ramaphosa is uniquely equipped to secure a ‘social compact’ of this kind. But he is moving too slowly. This may be due in part to incessant factional battles in the ANC and an unprecedented assault on Ramaphosa and close allies like Public Enterprises Minister Pravin Gordhan that is being conducted through the Office of the Public Protector.

The president is also heavily reliant on advisers, his Cabinet and senior government officials – few of whom have shown that they can deliver on such a weighty responsibility. But as others have noted: if the country fails to agree in time, decisions will be forced upon it. And under such dire circumstances there will be less opportunity to protect vulnerable citizens with the least to sacrifice.The Conversation

Seán Mfundza Muller, Senior Lecturer in Economics and Research Associate at the Public and Environmental Economics Research Centre (PEERC), University of Johannesburg

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Sort by:
  • Oldest first
  • Newest first
  • Top voted

You must be signed in to comment.


Great article.

Seems we’ve been sleep-walking into all of this. Not one structural adjustment in 25 years, now we need about 10 at once.

Meantime we fantasize about leading the 4th IR, the NHI and smart cities.

Hard to see how the country gets through another 12 months

Yip, keep blaming them there “apartheid predecessors”…

Sad that the one thing the government did Not inherit in any way, means or form; ‘competence’. Then again, who needs competence when you have an abundance of nepotism and corruption.

It seems like the tipping point has been reached.

There is a silent taxpayer revolt going on where the 5% who pay tax have realized the game is up and no matter how much they contribute, SA is beyond saving. The state is sinking their money into assets destined for bankruptcy.

Capital flight & emigration is picking up steam and tax avoidance and evasion heavily on the rise. In this kind of musical chairs race for the bottom, no one wants to be the last person holding the bag of public debt .

This country need Financial Fitness !!!!

Unsure why there is uncertainty about who is to blame, it lays squarely at the feet of the ANC

Who within the ANC is semantics, they have caused as much harm to their people as apartheid did, directly and indirectly

When my predecessor arrived from Amsterdam in 1806 he had already studied medicine at the university and practiced as a doctor. By contrast the locals were running around in loin cloths living in mud huts. They had neither invented nor applied the wheel in any useful form. They had no system of writing nor calendar to keep track of the days. Development simply did not happen naturally
and these differences persist till today. Though there are some brilliant individuals, the collective way of thinking is completely different to that of the Europeans. It is naive to think otherwise.

….bit harsh your statement. Traveled the world extensively and in Africa. Hospitality out of 10? 9 on most service levels not pertaining to Government and even then not bad and on par with other international nations

The fact that Africa in general has no known written history or known alphabet is conjecture

It does as a continent of people suffer fiefdom but history shows many nations globally still do

And even though Timbuktu has historical writings in Arabic, its still a history of the times when written

I don’t think black South Africans are particulary impressed with their lives under the ANC but again the ANC is behaving as a fiefdom and it will take time to change that cultural thinking

I am quite outspoken about the economic instability that results from collectivist/socialist systems. These systems negate and even remove price, the economic agent that signals the value of stuff, from the economy. Price acts as the messenger that tells the supplier/producer/entrepreneur how badly consumers want stuff or services. Price also tells market participants something about the relative supply of resources and services.

The tripartite alliance give all the wrong messages when they set the minimum wage. When labour unions are protected by law to determine high wages by extortion, they signal to the market that there is zero unemployment, a shortage of workers. We know the opposite is true.

When BEE and EE laws prescribe that workers and community members must become owners of businesses, this theft of equity tells the entrepreneurs that the country does not need entrepreneurs or new businesses. The high personal income tax tells highly-skilled individuals that there is an oversupply of their skills and that they are not needed here. Free education, housing, municipal and medical services signals to the economic agents that this stuff is worthless and that there is zero demand for it. If there is zero demand for these services, the economy will stop supplying it. The high, redistributive municipal rates and taxes signal to the economy that there is no space to build new houses and that no new development is needed. It signals that housing is a bad investment, in a country where there is a critical shortage.

Socialism is a naive, myopic attempt to change the laws that drive the economy. During this process, they give the exact opposite signals of what they actually need. The current state of our economy is the direct result of the confusing economic messages that emanate from Luthuli House. This is how Luthuli House will turn the most industrialized country in Africa into an underdeveloped wasteland.

Well spoken Sensei,

Price is where demand meets supply. imo, the rand is the great equilibrium that shows the value of the nation. Strengthening rand means global demand for what SA inc offers while weakening reflects we have less and less to offer.

Rand weakness and the recent acceleration shows that our ‘global value add’ is spiraling down the drain. We can fix local wage rates etc and fool the local population for a while but the global tribe has spoken. The GDP pie can cut up into thinner slices (rands) but its shrinker faster than ever before and inflation is coming to decimate the lower income groups.

From YouTube…Milton Friedman uses a pencil to illustrate how the free market price system promotes cooperation and harmony among those with no common interest.

PS. I read Moneyweb for Sensei’s sensibility.

Thanks for the link. Every ANC member will learn more in this 10-minute clip than in his entire school career……ok, maybe their school career was also only 10 minutes! ☺

Missing in above. This state was handed over as a running entity. B.E.E was the main tool for the state it is in now, today. A truly African country. Mission accomplice. No one to blame. Going North, old wisdom, watch Europe news.

The ANC and its corruption and vindictive behavior have taken SA way beyond the brink.

“For example, left-wing commentators have argued for expansionary fiscal policy.”

They got what they wanted, runaway spending on Gupta and other projects. Phase2 of this runaway spending will be NHI and further bailouts for Eskom.

And SAA. And SABC. And and and…….

It’s mindboggling that the finance minister didn’t announce a 10% wage/ salary cut across the board for each employee, from SOEs to MPs to department officials and politicians. If he does it now, it’s already too late.

and the can’t wait for an IMF bailout..more money to take..

The ANC have the view that taxpayers are there to bail them out of their self-created messes. When most of your supporters are on social grants (i.e. living off the tax-payer) or in the informal-sector then the taxpayer can be milked for political gain.

End of comments.





Follow us:

Search Articles:Advanced Search
Click a Company: