ISAAC MATSHEGO: Fiscal mirror reveals a fragile reflection

Wednesday’s medium-term budget policy statement (MTBPS) will likely reflect a fragile fiscal situation. SA has been in fiscal drift since 2009, with a few expenditure functions crowding out other spending needs, accounting for most of the increase in the budget deficit. At the same time, weak economic growth has stifled revenue growth. As a result, the public debt stock surged to 68% of GDP in 2022 from 23.6% in 2008.  

Key among the culprits that significantly raised expenditure are the public sector wage bill and interest payments on public debt. The steep rise in the wage bill has weakened the government’s financial position since the onset of the global financial crisis and continues to edge it towards the abyss. Over the decade to 2019, it rose to 35.6% of total expenditure from 31.5% in 2009, increasing at an average rate of 10.4% per annum.

Even the 2020 wage freeze, triggered by the pandemic-induced hit to tax revenue, has not helped to rightsize the wage bill. It was not meant to, as a pay freeze would always be a stopgap. The 7.5% wage increase for 2023/24 and the assumed 5.5% for 2024/25 will lift total expenditure by about 6% a year over the next three years. Therefore, in the absence of measures to reverse the wage bill’s sharp increase and lift the economy to the structurally higher growth rate envisaged in the National Development Plan (NDP), the bloated civil service will remain a burden on the fiscus.  

A permanent solution to constrain the rapid rise of the public sector wage bill without measurable productivity gains includes promoting public-private partnerships in critical functions. The success of the National School of Government (NSG) in partnering with the private sector to advance skills development in the public sector is a model that needs to be expanded to other functions. 

Interest service costs will remain among the fastest-growing expenditure items as the wider budget deficit and financial support for the country’s beleaguered state-owned enterprises (SOEs) push the debt stock higher. Between 2009 and 2019, government, in effect, more than doubled its debt stock to pay salaries and interest on existing debt, with the bailouts for SOEs adding to the rapid rise of the debt stock.

State-owned bailouts: Debt’s domino effect

Speculation is now that the government will offer Transnet a similar debt reduction plan to that provided to Eskom earlier this year. Adding the borrowings for Transnet’s debt relief to Eskom’s R254.4bn package raises the debt-to-GDP ratio significantly over the next three years. Adding between 50% and 80% of Transnet’s R130bn debt pile to the fiscus raises the public debt ratio to between 75% in 2023/24 and 78.2% by 2025/26. Other mooted expenditures, such as the introduction of the Basic Income Grant (BIG) and the rollout of the National Health Insurance (NHI) scheme, will, if implemented, push borrowing and interest payments even higher. 

If no further bailouts are provided, interest payments will absorb 17.5c of every R1 raised in taxes in 2023/24. With additional bailouts, interest payments rise to 19c in 2023/24 and 22c by 2025/26. This would be a major drag on the government’s ability to spend on essential services and infrastructure. Fitch Ratings calculates the median debt-service coverage ratio (DSCR) for “BB”-rated sovereigns at 8.6%. SA’s figure is therefore well above that of its peer economies.  

The rapid increase in debt not only threatens sovereign debt’s sustainability; the deteriorating fiscal position has dampened SA’s attractiveness to international bond investors. National Treasury data indicates that foreign portfolio investors hold only 25% of all outstanding government bonds, with their share slumping from more than 40% in early 2018.

With a limited number of foreign bond investors, local institutions will have to absorb the bulk of the higher bond issuances, which could have implications for bank intermediation and the availability of capital for private sector investment over the medium term. Alternatively, the Treasury will have to raise foreign currency loans, which could be more costly as the country’s risk premium increases. 

This week, the Treasury must demonstrate that it is committed to ensuring that the higher public sector wage bill and debt service costs do not significantly widen the budget deficit and push the public debt stock even higher. The finance minister has been quoted as saying expenditure cuts will exclude social programmes and infrastructure investment. However, it is tough to see government achieve notable reductions in non-wage expenditure without cuts in some important functions. All this comes ahead of a crucial election.  

The rising fiscal pressures will boil over into a crisis unless measures to contain the deterioration are implemented. An unsustainable public debt stock, with debt service costs absorbing an ever-rising share of fiscal revenue and a narrow investor base that limits the capacity of the sovereign to issue loans in local currency, is a recipe for disaster. Government must grab the opportunity to jump out of the gradually boiling pot of fiscal disaster before it is too late. SA is fast running out of time. 

• Matshego is senior economist at Nedbank.