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-apart- heid era. Fourth, the poor perfor- mance 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 out- flow of investment and exacerbate matters further. South Africa is, in fact, fortunate that this has not already happened.
the state of South Africa’s pub- lic finances is the outcome of differ- ent 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 consid- eration of these periods contradict widely-circulated claims in the polit- ical 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 financ- es 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 great- er degree than it did under the era of his leadership. Government rev- enue 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 col- lection 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 preced- ed ramaphosa’s replacement of Zuma in early 2018. Admittedly, ramaphosa has not helped his case by making promises about job cre- ation, for instance, that may be out- side the ability of the state to deliver.
Understanding why such claims are likely to be wrong is import- ant 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 charac- terised 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 commen- tators 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 ‘countercy- clical’ approach after 2008: govern- ment spending increased faster than revenue. that is how the country’s debt initially escalated.
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
in expenditure that does not deliv- er significant increases in econom- ic 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 gov- ernment 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 consolida- tion’, 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 gov- ernment debt was expected to stabi- lised 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 lack- lustre, as it has been in South Africa for some years.
recent developments have only made the situation more dire. In the 2019 budget, treasury indicat- ed 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 govern- ment 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 lin- ger 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 econom- ic 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 com- pact’ 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 responsi- bility. 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