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04 March 2020 | Story Jean-Pierre Geldenhuys | Photo Supplied
geldenhuysJP
Jean-Pierre Geldenhuys.

As has been the case for the past five years, the latest (2020) budget paints another sobering picture of South Africa’s public finances and short-term economic outlook. Of particular concern is that this budget does not project that the government debt ratio will stabilise in the medium term (by 2022/23), which means that the current fiscal policy trajectory is unsustainable (which National Treasury acknowledges in the Budget Review). This makes a rating downgrade by Moody’s in March all but inevitable. 

In the budget that was tabled on Wednesday, the budget deficit is projected to be 6,3% in 2019/2020, while increasing to 6,8% the following year, before gradually declining to a still unsustainable 5,7% of the GDP by 2022/23. These large budget deficits contributed to large projected increases in the government debt-to-GDP ratio: this ratio is projected to increase from about 62% in 2019/20 to about 72% by 2022/23. To understand the extent of the deterioration of South Africa’s public finances over the past 12 months, it should be noted that this ratio was projected in the 2019 budget to increase to about 60% by 2022/23.

Burger and Calitz (2020) show that the government debt-to-GDP ratio can be stabilised (and fiscal sustainability can be restored) if: the gap between real interest rates and real GDP growth is reduced, and/or if the primary balance (government revenues minus non-interest government spending) is adequate to avoid an increase in the debt ratio. They then show that the debt ratio has increased over the past decade because the (implied) real interest rate on government debt has increased and the real growth rate has decreased and government ran large primary deficits, at a time when large primary surpluses were required to avoid increases in the debt ratio. 

Between 1998 and 2007, the debt ratio was reduced from just under 50% to just under 30%. This period (especially from 2002 onwards) was characterised by (relatively) high economic growth. Fast economic growth is crucial to stabilising the debt ratio and restoring fiscal sustainability. National Treasury (NT) has proposed structural reforms (aimed at reducing regulatory burdens and backlogs and increasing competitiveness in the economy) to stimulate private sector investment and growth. Given the constraints that continued load shedding will put on South African growth in the near future, as well as projected slower growth in the economies of our main trading partners, and the uncertainties associated with disruptions wrought by the coronavirus outbreak, it remains to be seen if private sector investment will increase and stimulate growth (available evidence in any event suggests that private sector investment tends to follow, not lead, economic growth). 

With growth likely to remain slow, lower real interest rates and lower budget deficits are required to reduce the debt ratio and restore fiscal sustainability. These interest rates will more than likely increase if Moody’s decides to (finally) downgrade its rating of South African government debt.

With low economic growth and high real interest rates, stabilisation of the public debt ratio means that the budget deficit must be reduced. To reduce the budget deficit, government can: (i) increase taxes, (ii) decrease spending and (iii) increase taxes and reduce spending. Given that fiscal policy is unsustainable in South Africa, it is surprising that NT decided against increasing taxes (other than customary annual increases in the fuel levy and excise taxes) in this budget – many analysts were expecting some combination of higher personal income tax, VAT, and company taxes. As reasons for not raising taxes, it cites low expected economic growth, and that most of the efforts to reduce the budget deficit in the past five years have been centred on using tax increases. Even more puzzling, the budget granted real tax relief to taxpayers, as income tax scales were adjusted by more than expected inflation. 

All efforts to rein in the budget deficit therefore rely on government spending reductions. To this end, NT is proposing to reduce government spending by about R260 billion over the next three years. This reduction in spending is comprised of a R160 billion reduction in the wage bill, and a further R100 billion reduction in programme baseline reductions. At the same time, as a proposal for wage cuts, government is allocating even more money to prop up the balance sheets of many SoCs, with R60 billion allocated to Eskom and SAA (while the Minister referred to the Sword of Damocles when referring to SAA in his speech, a more apt analogy for government’s response to the financial crises facing many of its SoCs might rather be the paradox of Buridan’s ass). While government has announced plans for the restructuring of Eskom and has placed SAA in business rescue, so far there is no feasible consensus plan to address Eskom’s mounting debts and dire financial situation, which poses a systemic risk to the South African economy. 

Regarding the proposed reductions to the wage bill, NT believes that its target can be achieved through downward adjustments to cost-of-living adjustments, pay progression and other benefits. Furthermore, the Budget Review also states that pay scales at public entities and state-owned companies (SOCs) will be aligned with those in the public service to curtail wage bill growth and ‘excessive’ salaries at these entities. We are also told that government will discuss the options for achieving its desired wage bill reduction with unions. Given the precariousness of the public finances, and the understandable objections of workers and unions, one must ask why these discussions were not already in full swing by the time that the budget was tabled? 

Regarding the proposed cuts to government programmes, NT notes that it tried to limit these to underperforming or underspending programmes, and that the largest cuts will be in the human settlement and transport sectors. But, as NT acknowledges, any cuts to government programmes will negatively affect the economy and social services; the budget speech also states that the number of government employees has declined since 2011/12, which also affects the provision of public and social services adversely (the Minister explicitly mentioned increased classroom sizes, full hospitals, and too few police officers during his speech). 

Apart from the proposed spending cuts, the proposed allocation of spending is unsurprising and reflects long-standing government priorities: spending on basic education, post-school education and training, health and social protection takes up 13,6%, 6,7%, 11,8% and 11,3%, respectively. Increases in social grants range between 4 and 4,7%, which means small real increases in most social grants (only if inflation remains subdued). Worryingly, debt service costs are expected to take up more than 11% of total government spending (and is projected to exceed health spending by 2022/23). These costs are projected to grow by more than 12% by 2022/23 (almost double the growth in the fastest growing non-interest expenditure category). These figures vividly illustrate how a high and increasing debt-to-GDP ratio limits the scope for increased spending on important public and social services. 

Unless fiscal sustainability and the  balance sheets of SoCs are restored, the scope for the government to increase spending to combat poverty, rising inequality, and unemployment will be severely limited – as would the scope for countercyclical fiscal policy, should the local economy again slide into recession. The stakes are high, and the cost of indecisiveness is increasing.

This article was written by Jean-Pierre Geldenhuys, lecturer in the Department of Economics and Finance in the Faculty of Economic and Management Sciences 

News Archive

Significant support for Student Safety March in Bloemfontein
2017-07-28

 Description: Student Safety March Prof Petersen Tags: Student Safety March Prof Petersen 

SK Luwaca, UFS SRC President; Thapelo Ngozo,
CUT SRC President, and Prof Francis Petersen,
UFS Rector and Vice-Chancellor, during the handover of the
memorandum at the Bram Fischer Building.
Photo: Johan Roux

The University of the Free State (UFS) and the Central University of Technology (CUT) united in a Student Safety Awareness March, which took place on Thursday 27 July 2017 from the UFS Bloemfontein Campus to the Bram Fischer Building.

The peaceful march had a turnout of approximately 1 500 students and staff from both institutions, led by the Student Representative Councils (SRC) from UFS and CUT. The purpose of the march was to hand over a memorandum to the Provincial Commissioner, Lieutenant General Lebeoana Tsumane, who acknowledged it on behalf of Mr Sam Mashinini, MEC for Police, Roads, and Transport in the Free State. The memorandum includes students’ demands regarding safety around student residential areas and general student safety in the city.

Prof Francis Petersen, UFS Rector and Vice-Chancellor, who – together with other members of the senior leadership group – was part of the march, says he is very impressed with the outcome of the march and the participation rate of both staff and students, as well as the joint efforts between the UFS and CUT to arrange the march.

Prof Petersen says, “There are public spaces where our students feel unsafe, and we would like the city and the province to seriously look into that and work with us to try and see if we could make those spaces safe.

A week filled with safety activities
The march was part of the Safety Week taking place from 24 to 28 July 2017, during which the UFS SRC, together with other stakeholders, took part in several activities on and off the Bloemfontein Campus. These included door-to-door visits to student homes and residences on and around campus, awareness campaigns at all the gates of the campus, and a Safety Dialogue held on 26 July 2017 at the Equitas Auditorium on campus.

The aim of the Safety Week was to focus on informing, educating, and encouraging students as well as the Mangaung community at large, to work together in creating a safe environment for students. The week started with the roll-out of an awareness campaign titled Reach Out, which was set to bring students and the community of Mangaung together to help decrease the number of violent crimes faced by students off campus. The communication plan included safety messages, using outdoor billboards, posters on lampposts around the residential student areas, local community radio stations, campus media, and the university’s social media platforms.

 Description: Student Safety March  Tags: Student Safety March  

UFS and CUT students and staff, occupying the streets of
Bloemfontein during the Safety March.
Photo: Johan Roux

Accreditation of off-campus accommodation service providers
Over and above the Safety Week and safety awareness march, the university has initiated a number of other projects as part of its student safety strategy. This includes a process to accredit off-campus accommodation service providers in Bloemfontein who provide accommodation to students. The decision to accredit these service providers comes from a concern by the university management about the safety of students and the conditions under which some of our students live in off-campus accommodation. The accreditation process entails a list of primary requirements, drafted with the cognisance of the Mangaung Metropolitan Municipality and the SRC, in terms of off-campus accommodation to which private providers must adhere in order to be accredited by the university. The requirements are in line with the Policy on the Minimum Norms and Standards for Student Housing at Public Universities (Government Gazette 39238, dated 29 September 2015).

Transport to and from campus
Another project to be initiated on 31 July 2017 is a transport pilot project with Interstate Bus Lines to assist students with transport and access to the Bloemfontein Campus. The route includes various stops in the areas surrounding the campus, as well as a hop-on/hop-off route within the campus.


Released by:

Lacea Loader (Director: Communication and Brand Management)
Telephone: +27 51 401 2584 | +27 83 645 2454
Email: news@ufs.ac.za | loaderl@ufs.ac.za
Fax: +27 51 444 6393


 

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