Before the fiscal cliff?


By dr. Sandra Adendorff

Several experts agree: the state is in trouble and finds itself on the edge of a fiscal abyss. Mindful of this dilemma, the question on everyone’s lips is: “How does such a collapse happen?” The reality of the matter is that the spotlight of South African political uncertainty and structural problems is putting increasing pressure on everyone and everything.

The role of the state is, among other things, to provide services and infrastructure to citizens. On local soil, many households struggle every day due to inaccessible and dilapidated infrastructure. Think, for example, of the supply of running water. On 28 July 2010, the United Nations (UN) recognized access to water and sanitation as a basic human right (Resolution 64/292). This resolution states that the human right in terms of access to water is indispensable to lead a life in human dignity. Put another way: access to water is a prerequisite for the realization of other human rights. Today, more than 13 years later, South Africa’s dilapidated water infrastructure is the source of great frustration and unhappiness for thousands for whom water supply is only (still) a dream.

The blame for this frustration, and many others, can be placed at the door of a populist government, which is trying to win the 2024 elections with empty promises. It is within this context that an already tight economy further puts the fiscus under immense pressure. Given the medium-term budget that will be announced soon, everyone from economists to policy makers and Jan Alleman are anxiously awaiting the plans that will be outlined for the next three years. Although South Africa needs fiscal consolidation, i.e. a reduction in government expenditure and an increase in government income, it is however doubtful whether this will materialise.

At a glance, public finances ultimately represent the difference between government expenditure and income, which in most cases generates a deficit. A part of this deficit is generated by tax revenues, while the remainder is part of the national debt that will have to be paid off by the future generations of our country.

Government expenditure

In principle, managing the state budget is simple: reduce expenditure and increase revenue. Take, for example, the number of provinces and ineffective state entities currently maintained. Is it really necessary?

Provinces and municipalities can be consolidated, which will cut costs enormously. Government departments, in turn, can cut unnecessary expenses such as extravagant official cars, parties and trips and cut waste accordingly.

Unfortunately, since 2015, government spending has shifted from investment and building out infrastructure to consumption, which stifles economic development. Items such as the astronomical salary bill of the state and the interest charged on public debt are among the biggest bottlenecks that seemingly cannot be fixed. The implication of this is that South Africa has reached a tipping point and that salaries, allowances and interest on existing debt exceed and engulf the income of the state.

At this stage, it seems highly unlikely that the state has the ability to limit spending and the pressure to, for example, increase social allowance is significant. As economic conditions further weaken, this pressure is increasingly placed on social spending with the result that poverty and the associated need for additional social spending increase. This is evidenced by the state’s efforts to continue funding not only the income allowance of R350, but also a series of other social allowances such as the Sassa old-age pension and the NSFAS allowance for students. These allowances have increased astronomically over time.

Unemployment is historically high and social unrest is a reality. Together with this, the South African education system appears to be in crisis and South Africa is placed as one of the worst performing countries among low and middle income countries. Add to this environmental factors such as the rising incidence of disaster situations due to flood damage and fires, and it becomes clear that the fiscus is reeling under increasing pressure.

Government revenues under pressure

Taxation is the main source of income for the state according to the South African Reserve Bank and Statistics South Africa (SSA). Data shows that personal income tax (PIT) at 35.5% is still the most important source of revenue, followed by value added tax (VAT) at 25% and corporate tax (CIT) at 20.7%. Unfortunately, these sources are dwindling due to the ongoing low levels of economic activity.

In addition to this, there is an exodus of taxpayers which further reduces this tax base. Tax avoidance practices therefore take place more readily because households cannot resist the pressure. During the 2021 tax year, the tax base was already limited to 6.4 million payers which is not sufficient for the increasing needs. Only 21.4% of large firms showed a profit in that year and the mining sector in particular was put under pressure due to lower international mineral prices and increased production costs. The implication of this is that the tax collector has to make do with significantly less tax revenue.

It is worrying that VAT is now seen as an attractive source of government revenue. The national treasury has already mentioned that it would like to increase VAT by up to two percentage points. In response, Solidarity expressed its shock and described it as “insane” because households are already suffering due to rising living costs. The irony is that poor households that are already on the short end will then be under even more pressure.

Another alternative to fill government coffers is to take out loans. However, South Africa’s inclusion on the international gray list since February this year makes this process problematic. The country’s gray list status means that we have to pay more for loans while the interest rates on such loans increase sharply. Unfortunately, foreigners are no longer interested in buying our government bonds. Despite the attractive rates, the foreign sector is selling our bonds rather than buying them. The trend that is detected is that local investors are not particularly keen either. In addition to this, the Reserve Bank and other financial institutions are restricted by legislation not to take on too much government debt, which becomes a significant problem. The capital outflow and reduction of depth in financial markets and liquidity are worrying.

The bond issue by the Brics New Development Bank of R1.5 billion, which also seemed like a positive alternative, must eventually also be financed.

Fiscal government debt

Increasing public debt is a source of concern. South Africa’s public debt increased from 30.3% of gross domestic product (GDP) on 31 March 1982 to 70.9% of GDP on 31 March 2023.

Sakeliga recently reported that this debt will increase by around R100 billion per quarter in 2023. The immediate implication of the rising debt burden is the accompanying increase in the interest on government debt. Due to the high level of government debt and interest rates, more than 10 cents from every rand is currently used to pay off this interest. This cost is nothing but a waste as it takes money from the treasury to finance important projects that ultimately hamper economic growth.

What can we do?

It remains every South African’s own responsibility to participate in the upcoming election and public debate in order to pursue better economic policy. The private sector should become increasingly involved in this and enable the country to develop the economy for future generations.

If we can privatize and sell or even scrap unwieldy state enterprises, this can ensure a welcome source of income. The Post Office is an example where the private sector provides a much better service than could ever be performed by the Post Office as a state entity.

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  • Sandra Adendorff is a lecturer in economics attached to Akademia.