Too many red lights flashing on economic dashboard
Without a concerted effort to lift business and household confidence, the only way is down
The medium-term budget policy statement (MTBPS) provided a sobering but realistic assessment of government finances, especially the rapid and unmitigated deterioration in key fiscal parameters during recent years. More importantly, it revealed further deterioration is likely, amid a looming fiscal debt trap and more credit rating downgrades, unless significant changes occur.
Three years ago the MTBPS projected that by 2019/2020, government revenue would reach R1.67-trillion, the budget deficit would improve to a mere 2.5% of GDP, gross debt would total R2.87-trillion, or 52.3% of GDP, and SA’s real annual GDP growth would exceed 2%.
Fast-forward three years and the reality is alarmingly different. According to finance minister Tito Mboweni, government revenue is now projected at only R1.53-trillion in 2019/2020. This is R52.5bn less than that budgeted as recently as February 2019 and a huge R133bn below what was envisaged three years ago. Similarly, the budget deficit has risen to 5.9% of GDP as growth in government expenditure has outpaced growth in tax revenue; gross debt has jumped to a record R3.167-trillion, which equates to 60.8% of GDP; and SA’s GDP is expected to grow at only about 0.5%.
Without higher economic growth, tax collection will continue to dwindle, scuppering government attempts to meet its social-economic objectives.
In simple terms, the government has borrowed a staggering R297bn more than it forecast just three years ago. And that is without solving any of the looming debt issues in the major state-owned enterprises (SOEs). This sustained deterioration in SA’s fiscal position, which has been especially pronounced this year, largely reflects the combined effect of three major constraints that are still not attracting the appropriate level of urgency and political will to resolve.
First, tax revenue has fallen well behind budget for the fifth consecutive year, hurt by weaker-than-expected economic growth, a systematic decline in tax morality as a result of higher levels of corruption, and a deterioration in the institutional capacity of the SA Revenue Service (Sars).
The minister acknowledged an estimated tax revenue shortfall of R52.5bn in 2019/2020, which is fairly widespread. This includes a R25bn under-collection of personal income tax, a R12bn shortfall in VAT receipts and a R10bn underperformance of corporate taxes. The minister revised down government revenue by a further R84bn in 2020/2021 and a staggering R114.7bn in 2021/2022.
It is abundantly clear that without a sustained increase in economic growth, accompanied by an increase in employment and an improvement in revenue collection and tax morality, the SA government is going to continue to struggle to meet its revenue targets. Without higher economic growth, tax collection will continue to dwindle, scuppering government attempts to meet its social-economic objectives.
The second constraint is that the government’s provision of significant additional finance to many of the SOEs remains unresolved. For example, in the February 2019 national budget, Mboweni indicated the government would transfer an additional R23bn to Eskom each year for the next 10 years to support its balance sheet. Shortly after that budget was released, the authorities said Eskom would require much more financial support.
Consequently, the government allocated an additional R26bn to Eskom in 2019 and a further R33bn in 2020. This has been expanded to include a further R10bn in 2021. These bailouts, together with the underperformance of other SOEs, have contributed substantially to the acceleration in government debt. Clearly there is a real risk that the SOEs will require additional funding in the years ahead unless more meaningful measures are adopted to restructure the key public corporations.
The third constraint is the inefficiency of government spending. A few years ago the Treasury introduced an expenditure ceiling to control government spending and restore fiscal discipline over the medium term. The results of this initiative have been somewhat encouraging.
However, the split between consumption and capital expenditure remains hugely problematic. Over the past 10 years, the government has tended to increase consumption expenditure at the expense of capital projects. This clearly undermines economic growth over the longer term and is leading to the deterioration of many vital areas of service delivery, including water, health care and education.
The efficiency of spending has deteriorated significantly, with the auditor-general reporting a substantial increase in wasteful and unauthorised expenditure in recent years. This, coupled with high levels of corruption, massively undermines the effectiveness of government services, negatively affecting confidence. Encouragingly, in the MTBPS the minister announced a range of initiatives to start to more effectively control spending on salaries. While this is a step in the right direction, it is not nearly enough to restore fiscal discipline.
In recent years the government has raised expectations regarding the implementation of a number of ambitious projects, such as National Health Insurance (NHI). Achieving these ambitious goals is going to become increasingly problematic unless there is a substantial increase in tax revenue and an improvement in the efficiency of government expenditure.
Back in 2016, then finance minister Pravin Gordhan made the point that “the quality of government spending needs to be improved. Too much public spending is regarded as wasteful, too much is ineffectively targeted and too little represents value for money.” Gordhan stressed that “fiscal resources do not match long-term policy aspirations”. Since then, the government’s policy aspirations have increased, while the fiscal resources have deteriorated significantly, limiting the government’s ability to close the gap between policy intention and enactment.
As a result of these three constraints, government debt has risen from a low of 26% of GDP in 2009 (at the time Moody’s assigned SA an A credit rating) to about 60.8% of GDP in 2019/2020, and is expected to rise to more than 70% of GDP within the next three years. This means that in value terms, over the past three fiscal years government debt will have risen by a huge R934bn, equivalent to R25.9bn a month, or an average of R1.1bn each working day.
This increase in debt is especially damning when you consider the deterioration in SA’s socioeconomic conditions, especially sustained low economic growth, record high unemployment, a record low savings rate, systematic downward revisions to the credit rating, regular electricity outages, a fragile water supply, the deterioration in public sector health and poor education outcomes.
Ultimately, there is no substitute for higher economic growth in resolving SA’s unfolding fiscal crisis. This can only be achieved through a concerted and co-ordinated effort to lift business and household confidence to improve private sector fixed investment, skills development and productivity.
• Lings is Stanlib chief economist.