EDITORIAL: The fiscal warning noises grow louder and scarier

The Treasury publishes updates on revenue and spending at the end of each month and next week’s release, for the month of June, will be closely watched. June is one of the two big corporate tax collection months (December is the other). Budget watchers will be looking to the figures for an early steer on how far 2023’s tax collections will fall short of February’s budget estimates.

A shortfall in revenue is all but certain given how much weaker the economy looks now. But spending is already certain to come in higher than budget estimates because of the unbudgeted public sector pay increase. It could come in much higher over the medium term if unbudgeted state-owned enterprise bailouts and social grants are added to the mix — as everyone has assumed all along they would be.

Added to that are higher interest rates on government debt because SA’s riskiness in the eyes of investors has risen. The bottom line is that the government is unlikely to achieve its goal of stabilising public debt anytime soon. Its interest bill keeps rising and public finances will become ever more unsustainable. 

The IMF pointed that out in its recent annual report on SA, arguing that the government needed to cut spending by an additional three percentage points of GDP, mainly through wage cuts, in order to stabilise the debt.

Wits University adjunct professor and former Treasury budget office chief Michael Sachs and his colleagues find in a recent study that the government’s debt will rise to higher levels than the budget anticipates and keep rising. But they argue the government has already cut spending quite significantly in recent years, and public sector pay has fallen in real terms. Yet SA is no closer to achieving fiscal consolidation.

It is simply not feasible to slash spending to the extent the IMF advises. Nor is it feasible to hike taxes in an environment of very weak growth. What’s more, the budget doesn’t even factor in the government’s hugely expensive national health insurance and other policy ambitions. 

One bleak result is that SA has become stuck in a permanent state of what they call “austerity without consolidation”. Another is that the budget has lost its credibility. The Treasury deals with the policy incoherence in the government by simply denying that funding is available in future budgets for expenditure items that the market knows are on the cards. The weakening of credibility erodes institutions. And with concern about SA’s solvency rising, “the fiscal position itself has become a critical constraint on faster growth”.

The Sachs study is a bleak reminder that without higher rates of economic growth, SA cannot hope to balance its budget arithmetic, and its public finances are likely to get into more and more trouble, making growth even harder to achieve. As importantly, however, it is a reminder that as long as the government cannot or will not make clear and considered policy choices that are tailored to what SA can afford, our fiscal woes will worsen.

Whether the government will listen to these warnings is a question. SA will pay a steep price for if it does not.