Put a stop to planned budget cuts before they harm SA
Dozens of policy analysts and organisations say cuts will worsen unemployment, hunger and social instability in SA
We are among more than civil society organisations and 100 policy analysts who recently voiced our opposition to the National Treasury’s attempts to force government entities and departments to significantly cut spending.
We believe the National Treasury’s instruction to government entities to immediately institute severe budget cuts is misguided, dangerous to our economy and wellbeing, and not supported by robust evidence.
The finance minister and National Treasury officials have cited expected revenue shortfalls and budget overruns as grounds for this drastic action. This is being wrongly characterised as an imminent “fiscal crisis”. The National Treasury has also failed to acknowledge its own role in precipitating the budget mismatch. A sense of panic is being created to force through these rushed, chaotic and indiscriminate cuts in the medium-term budget policy statement in November 2023.
If implemented these cuts will slow economic growth, undermine service delivery and curtail social protection, thus worsening unemployment, hunger and social instability, leading to a retrogression in the realisation of the socioeconomic rights contained in our constitution. Those who are most vulnerable — particularly women and children — will be worst affected. This strategy is self-defeating as economic contraction resulting from such cuts would make debt repayment more difficult. Rather, the fiscus must be leveraged to set SA on a new economic path.
We believe this cannot be done alongside such drastic budget cuts, and that the president and finance minister should put a halt to all budget cuts. We also urge government to undertake a thorough, transparent and evidence-based budget review process over the next 12 months.
Alongside this, the existing budget mismatches can be readily resolved through other measures. The revenue shortfall is not abnormally large. The shortfall is widely projected to be R53bn. This is of a similar magnitude to shortfalls in previous years, for example of R61bn, R58bn and R70bn respectively in 2017/18, 2018/19 and 2019/20, and significantly below the revenue windfalls of R241bn and R123bn in the last two years.
In addition to a revenue shortfall there is also an expenditure overrun. The expenditure overrun is predominantly due to the National Treasury failing to budget adequately for foreseeable expenditure, and departments should not be punished for this. The largest share of this is R37.5bn from the predictable public sector wage bill increase. The overspend is also comparable to other years, though the revenue shortfall and expenditure overspend compound one another.
SA’s debt is not unusually high, though it is comparatively expensive. SA’s debt-to-GDP ratio is 71.4% in 2022/23, compared with the emerging market and middle-income country average of 69%. However, on average upper-middle income countries in 2022 paid 2% of GDP in interest payments, compared with SA’s 5%.
Rushed across-the-board expenditure cuts will not lead to greater efficiency, or the improvement of poor-performing programmes. Rather, cuts will result in staff shortages across the public service, programmes seen as “easy to close” irrespective of need or performance will face the chop, and programmes supporting patronage networks and corruption are likely to be jealously guarded.
Expenditure cuts are widely known to have negative social and economic outcomes. Recent research shows that fiscal contraction larger than 1.5% of GDP generates a negative effect of more than 3% on GDP even after 15 years. The drop in GDP reaches 5.5% for fiscal contractions larger than 3%.
Recent research by the IMF also highlights that, “[o]n average, fiscal consolidations do not reduce debt-to-GDP ratios”. Cutting spending will hamstring desperately needed economic growth, making it harder to service debt in the future.
SA faces multiple well-known social and economic crises, including low growth, poverty, inequality, hunger, unemployment and crime. The immediate budget mismatches constituting the National Treasury’s “fiscal crisis” should not obscure these dire pre-existing crises. Ill-conceived cuts would worsen these crises.
The only solution to secure the sustainability of public finances and address our social and economic crises is state-supported, inclusive and sustainable economic expansion. With this in mind a sequenced approach to the budget mismatches can be adopted.
Immediately, the budget mismatch should be closed by drawing on reserves and increasing shorter-term, less expensive borrowing. This includes drawing on the R459bn owed to the SA government in the SA Reserve Bank’s gold and foreign exchange contingency reserve account. Even if the entire mismatch were closed through borrowing it would only increase debt levels by one to two percentage points and keep them well below recent estimates.
In the next budget cycle we can raise additional revenue. In doing so, take account of the fact that the budget allocates R305bn in income support to the highest earning 30%. Eliminating or reducing tax breaks for those earning above R750,000 per year could raise up to R83bn. The budget also recently reduced the corporate income tax rate from 28% to 27%, which has cost R11bn-R13bn a year. Other ineffective corporate tax subsidies also remain in place, for example, the Employment Tax Incentive.
It is critical that we do not raise VAT as this would make the tax mix more regressive and has previously failed to raise the sums needed. A VAT increase would disproportionately burden the poor and low-income earners.
In the medium term, government should explore implementing a wealth tax. Such taxes have been used in other countries in times of economic crisis and if the Treasury really believes this is a crisis then this is an opportune time.
Our fiscal and monetary authorities also need to reduce the cost of borrowing by moving to shorter-term loans that are cheaper, and renegotiating the terms of particular debt. We should also explore other avenues to reduce the cost of borrowing further, for example, via interest rate management and prescribed assets.
On the expenditure side, it is critical to institute a transparent, consultative, and evidence-based expenditure review process. This may result in expenditure cuts in particular areas and spending increases in others. It should include proposals to “restructure the state”, as suggested by the National Treasury.
With appropriate political will, the current budget mismatches are relatively straightforward to resolve. At the same time, we recognise that further pressures are on the horizon. The current impasse therefore provides an opportunity for fundamental reform of SA’s fiscal framework. This needs to prioritise the role and potential of the budget in advancing developmental priorities. The budget’s emphasis needs to be on service delivery, economic growth, employment creation, social protection and structural transformation.
The rushing through of ill-considered budget cuts will undermine wellbeing, as well as SA’s ability to thrive in the future, and must be halted.
• The authors are among dozens of policy analysts and organisations that signed an open letter expressing similar views.
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