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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

Wildlife researcher in ground-breaking global research on giraffes
2017-10-20

Description: Giraffe read more Tags: giraffe, conservation, Dr Francois Deacon, Last of the Long Necks, Catching Giants 

Dr Deacon from the Department of Animal, Wildlife and Grassland
Sciences at the University of the Free State (UFS),
lead a multispecialist research group to catch
and collar giraffe to collect data that will
contribute to the conservation of these animals.
Photo: Prof Nico Smith


Capturing 51 giraffes without any injuries or mortalities to collect data that will contribute to the conservation of these animals is not for everyone. Capturing a giraffe with minimum risk to the animal and the people involved, requires extraordinary skill, planning, and teamwork. “This exercise is a dangerous task, since a well-placed kick from these large and extremely powerful animals can cause serious injuries. Early in October was the first time that giraffes were captured on such a large scale,” said wildlife researcher Dr Francois Deacon.
 
Dr Deacon from the Department of Animal, Wildlife and Grassland Sciences at the University of the Free State (UFS), led a multispecialist research group of over 30 people from 10 different countries to collect information about these little-known animals.

UFS first to collar giraffe
Taking a global approach, the team responsible for this intricate process consisted of wildlife biologists, conservationists, interdisciplinary scientists and five specialist veterinarians who are experienced in catching and working with wild animals. Specialised drugs sponsored by Dr Kobus Raath from Wildlife Pharmaceuticals, tested for the first time and administered with a dart gun were used to tranquillise the giraffe, which then allowed for the GPS collars to be fitted.  These collars, sponsored by Africa Wildlife Tracking, enable the researchers to record the location of individual giraffe for up to two years, give 24/7 readings, irrespective of weather conditions. In this cost-effective manner, data can be gathered on climatic factors, giraffe communication, social behaviour, home ranges, seasonal movements, human and giraffe interaction zones, as well as migration routes and the duration of the migration process. The collars will effectively be used to locate individuals to collect faecal samples for hormonal cycles, stress hormones, nutrient deficiencies based on diet and also internal parasites. 

“This knowledge we gain is the key to all keys in saving this iconic animal from becoming extinct,” said Dr Deacon.

Six years ago, during a pilot study, Dr Deacon was the first researcher to fit giraffes with a GPS collar. Collaring is less invasive and allows researchers to collect detailed samples. Not only was extensive knowledge and experience gained during the process, but he also initiated interest from the filmmaker and conservationist, Ashley Scott Davison, executive producer of Iniosante Inc. 

Getting to tell the story

Davison, who was doing research for a film on giraffe learnt about the silent extinction of the species. In a great number of countries giraffe numbers have been declining by as much as 40% over only a few years since 2000. Today West Africa has between 400 to 600 giraffe left while four out of five giraffes were lost in East Africa since 2000. This is a considerable decline in numbers and poses a real threat to the survival of the species in the longer term. At the end of 2016, the giraffe was classified as vulnerable on the International Union for Conservation of Nature Red Data list.

According to Davison, children in school learn about the destruction caused by ivory poaching and habitat loss. But in Africa today, there are six times as many elephants as there are giraffes. 

In the process to find out more about this majestic species Davison learnt of Dr Deacon’s work. After being introduced to and spending time with Dr Deacon, Davison not only describes the UFS as the leader in the conservation of giraffes but he returned to the university, three times to help build a dedicated research team to address unanswered research questions within various disciplines.

Flowing from the affiliation with the UFS is Iniosante’s award-winning production of a documentary, “Last of the Longnecks”. The film has received several awards, including official selection at the 2017 Global Peace Film Festival, the Wildlife Conservation Film Festival and the Environmental Film Festival in the US capital. 

The film team accompanied the multispecialist research team last week to gather footage for a follow-up documentary, “Catching Giants”. This film is expected to air in middle 2018.

 Video clip of the event: https://www.dropbox.com/s/d3kv9we690bwwto/giraffe_UFS_revision-01a.mp4?dl=0

Video clip of the event: RooistoelTV

Former articles on this topic:

18 Nov 2016: http://www.ufs.ac.za/templates/news-archive-item?news=7964 
23 August 2016: http://www.ufs.ac.za/templates/news-archive-item?news=7856 
9 March 2016:Giraffe research broadcast on National Geographic channel
18 Sept 2015 Researchers reach out across continents in giraffe research
29 May 2015: Researchers international leaders in satellite tracking in the wildlife environment

 

 

 

 

 

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