NEVA MAKGETLA: The looming budget crisis is not due to greater spending on the poor

It’s generally considered insane to do the same thing over and over again and expect different results. So why does the Treasury seem to repeat the same mistakes every time it faces a fiscal crunch? It starts the budget process by targeting swingeing cuts in public services or remuneration. Faced with public resistance, it retreats in a sulk, whinges about the rising deficit, and then does the same thing the following year.   

SA’s fiscal dilemma is fundamentally shaped by its unusually deep economic inequalities. On the one hand, the majority cannot afford to pay for basic services thanks to the combination of high joblessness, low pay and the long history of underinvestment in education, health, policing and infrastructure in working-class communities. On the other hand, powerful elites expect government support for formal business; to maintain services and schools in the leafy suburbs; and for the foreign service and the military.

It follows that cuts to specific programmes inevitably run into fierce opposition. The Treasury has the perfect bureaucratic response, designed to minimise its own responsibility for failure rather than fixing the problem. Proposing broad cuts means it avoids fighting over specific programmes. Then, when its proposals disappear in a political firestorm, it can blame weak-willed politicians for the failure to control the deficit.   

There is reason to be concerned about SA’s national debt, which has risen from a low of less than 25% in 2007/08 to more than 70% in 2022/23. The problem is the growth in debt, not its level relative to the GDP, which is still only slightly above the norm for upper-middle-income countries excluding China.

The rising debt did not, however, result from newly profligate spending on the poor. Rather, it reflects stagnant revenues after the commodity price boom ended in the early 2010s, combined with huge bailouts for Eskom from 2019 and more recently higher interest payments.

Per person, government spending excluding interest and payments to Eskom climbed just 1.3% a year from 2007 to 2022 in real terms (deflated with the Consumer Price Index). From 2019 to 2022 it actually fell 0.5% a year. In contrast, government spending on debt service and Eskom rose 5.7% a year from 2007 to 2022. Much of the increase occurred in 2019, when the Treasury hugely increased payments to Eskom. Meanwhile, in 2022 revenues per person were the same as in 2007 in real terms, though they grew a modest 0.3% a year from 2020 to 2022.

This is the classic picture of a mining-based economy hit by falling international prices. SA’s economic growth, and consequently public revenues, still largely mirror global metals and coal prices. When those prices fall, government income levels out. But it’s hard to figure out how long the decline will last and what programmes to scale back.

The choices are aggravated by the tensions inherent in SA’s unusually unequal democracy. In 2020, individuals earning more than R500,000 a year accounted for less than a fifth of taxpayers. But they captured half of all taxable income and paid almost three-quarters of personal income tax. Just more than 300 companies contributed 60% of company income tax.

Necessarily, these groups retain enormous power over government decisions, with continuing engagement at all levels backed by threats of pulling out of SA altogether. Still, in the end no politician can simply ignore the interests of the majority of voters. Moreover, spending on government services for working-class households — especially education, emerging businesses and social security — is a prerequisite for SA’s long-run prosperity.

These circumstances mean the budget process has to be far more explicit about the balance between the needs of voters, and investment in human and social capital, against the demands of those with economic power. We cannot afford to continue with strategies that signal fiscal virtue but make no real effort to restructure spending to meet long-run national needs.

• Makgetla is a senior researcher with Trade & Industrial Policy Strategies.