South Africa sinks deeper into a State debt quicksand

If you were sitting on the edge of your seat in the expectation that South Africa’s November 2023 Medium Term Budget Policy Statement (MTBPS) would usher in an age of sensible austerity, then it is quite likely, dear reader, that you are ‘sailing’ close to insanity. Per that quote that so oft-misattributed to Albert Einstein: insanity is doing the same thing over and over again, and expecting a different outcome.

An LOL response to ‘sweeping cuts’ promise

Thus, if you listened to Finance Minister Enoch Godongwana expecting him to announce sweeping cuts to the public sector wage bill and other social expenditures, you will be sorely disappointed. Instead, he confirmed South Africa’s gradual path to R6 trillion in gross debt by 2025-2026, from R4.8 trillion in the current budget year. What this means, dear reader, is that South Africa’s debt servicing costs will soak up 20.7% of our total revenue in 2023-2024, rising to 22.1% by 2026-2027. “It is clear we are in something of a pickle here,” conceded Sanlam Investments chief economist, Arthur Kamp, in his brief video response to the mini-budget. 

“South Africa’s budget requires a lot of expenditure restraint because our interest bill is rising,” he said, lamenting the fact that debt servicing was crowding out other types of expenditure. According to Kamp, the country is paying a high real interest rate on a very high debt level, and as those interest payments ratchet upwards, they eat into the minister’s ability to maintain spending elsewhere. Case in point, although government committed to finding R34 billion for yet another 12-month continuation of the Social Relief of Distress grant, there was scant mention of the billions needed to ‘fix’ Eskom or Transnet or fund the National Health Insurance (NHI) pipedream. 

It was difficult to take any positives from the minister’s address; but in fairness to him, he had precious little to work with. Unlike the last couple of years, when corporate income tax revenues surged on the back of higher commodity prices, this year’s main budget revenue estimated was R54.7 billion too optimistic. “The deficit [stemmed from] lower revenue performance, higher wage bill costs and higher projected debt-service costs,” Godongwana said. And the fix, sadly, was for South Africa to borrow ZAR1.5 billion per day over the next year-or-three, with large chunks of this money anyway being diverted towards public sector salaries and wages rather than infrastructure. 

Lacklustre growth limits revenue prospects

The MTBPS was cautious with its medium-term revenue projections, adjusting its base case for economic growth to just 0.8% ‘real’ for 2023 and a disappointing 1.4% for 2024, 2025 and 2026. Sans GDP growth, the focus turns to the expense side of things. And unfortunately, government has a long-established track record of reneging on its promises to rein in expenses. Case in point, eight months after committing “to review and reconfigure the structure and size of the state” to cut costs, the MTBPS merely re-promised the same. No surprise then, that Kamp’s post-MTBPS commentary suggested the national debt ratio was unlikely to stabilise in the next few years. 

Professional services firm, PwC, seemed unimpressed by the 2023-2024 austerity measures, which delivered a paltry R3.7 billion reduction in non-interest expenditure through what is best-described as the ‘robbing Peter to pay Paul’ principle. Putting this saving (sic) under the microscope revealed upward adjustments for higher-than-expected public sector wages (plus R23.6 billion) and larger allocations to provincial departments (plus R17.6 billion). These amounts were offset by around R27.1 billion in spending cuts across national, provincial and local government budgets alongside declared underspending of budgets of some R3.3 billion. 

Commenting on the reductions in expenditure, Lullu Krugel, PwC South Africa Chief Economist, conceded that government spending only made a small direct contribution to the country’s overall economic growth. However, public sector expenditure remained at the core of economic development and socio-economic upliftment, with public services providing the basic ‘hard and soft’ infrastructure needed by the private sector to grow their business and employment. PwC also flagged the big shortfall in the 20223-2024 fiscus, and the mitigating measures proposed to close the gap, as contributing to concerns over the short-term health of the South African economy. 

Repeating the fiscal austerity narrative

This writer loved the one-liner used by PPS Investments to introduce their mini-budget commentary. It was, they wrote, a return to the “anaemic-growth-and-much-needed-fiscal-austerity narrative” that citizens know so well. “In addition to global growth decelerating and financial conditions tightening, the South African economy is being held back by inadequate electricity and logistics infrastructure,” they said. The double whammy of a downward adjustment to the 2023-2024 GDP growth forecast and decline in global commodity prices resulted in the main budget deficit widening to 4.9% from the February forecast of 4.0%. 

What happens from here is anybody’s guess; but it seems clear that three years hence taxpayers may be squaring up to a gross public debt-to-GDP ratio that is far worse than the 77% forecast for 2025-2026. “The MTBPS has given South Africans more certainty about the country’s fiscal trajectory,” said Christie Viljoen, PwC South Africa Senior Economist. “But this certainty is not an overwhelmingly positive factor as it stems from the finance minister announcing reduced spending, higher borrowing needs and an increase in tax rates during 2024-2025”. According to Viljoen, the only way to sustainably improve the fiscal trajectory is to accelerate the country’s economic and employment growth. 

This ‘faster growth, now’ plea has been echoed by economists for as long as this writer has covered the domestic economic, insurance and investment landscape; it is a plea that has largely fallen on deaf ears. Instead of creating a business-friendly environment, government is steadfastly pushing ahead with countless ill-thought social policies while stumping up for an ever-expanding public sector wage bill and social grant system. As proof that the dwindling group of local taxpayers can expect more of the same, the minister opened his address with the tried-and-tested “‘More rapid and inclusive growth is the only solution to unemployment, poverty and inequality”. What is the point of that comment in light of government’s own forecasts for three-year growth? 

Forget inclusive; rapid growth will do

Perhaps it is time for the state to drop words like ‘inequality’, ‘inclusive’ and ‘poverty’ from its platitudes. The bottom line is that rapid, strong GDP growth will improve the lot of every South African. It is after all government’s obsession with redress that underpins the twin terrors of an ever-higher public sector headcount, and continued productivity declines. As an aside, this writer reckons government could achieve impressive pseudo-austerity by simply ensuring that every rand spent on goods, services and wages receives at least a rand of value in return! 

To conclude with a line from PPS Investments. “South Africa has major challenges to overcome, many of which stem from the fact that our debt position is unsustainable; given our structurally low growth economy, our debt trajectory will not improve until we can sustainably engineer a budget surplus,” they wrote. In the absence of growth, this is extremely difficult to achieve.

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