Latest News Archive

Please select Category, Year, and then Month to display items
Previous Archive
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

UFS appoints Jansen as rector
2009-03-15

The Council of the University of the Free State (UFS) is pleased to announce that it has agreed to offer the post of Rector and Vice-Chancellor of the UFS to internationally renowned academic Prof. Jonathan Jansen, making him the first black Rector and Vice-Chancellor of the institution in its 105-year history.

This decision was taken by an overwhelming majority, signalling the commitment of the UFS to continue as a world-class university that will at the same time pursue the objective of transformation in the interests of the entire university community.

Announcing the decision today (Friday, 13 March 2009), the Chairperson of the UFS Council Judge Faan Hancke said the UFS was privileged to have had candidates of the highest calibre apply for the position. An international executive search agency specialising in academic appointments had assisted the UFS Council in its search for top quality candidates.

“This has been a truly vibrant, transparent and participatory selection process, which has resulted in our institution being able to make this historic appointment,” said Judge Hancke.

“I appeal to the entire UFS community, staff, students and alumni to support the new Rector and Vice-Chancellor in his endeavour to lead this institution to greater heights. This is an important moment in the life our institution. We should celebrate this achievement as a united university community,” Judge Hancke said.

“As a council we are now unanimously behind Prof. Jansen and want to assure him of our full support,” Judge Hancke said.

In response to his appointment, Prof. Jansen said it was a great privilege and that he would really do his utmost best to be of service to the UFS.

In his statement of intent which was submitted earlier as part of his application for the post, Prof. Jansen indicated that if appointed he “would be deeply honoured to lead one of South Africa’s great universities”.

“The University of the Free State has gained a national reputation for three things: [1] its turnaround strategy in terms of financial stability in a context where external funding has been uncertain; [2] its research strategy which has seen a steady and impressive growth in research outputs; and [3] its managerial decisiveness in the wake of the Reitz incident,” Prof. Jansen said.

Regarding the challenges facing the UFS, Prof. Jansen said in his statement of intent: “The UFS has to find a way of integrating classroom life while at the same time ensuring the promotion of Afrikaans, an important cultural trust of the institution, as well as Sesotho and other indigenous languages. It has to bring academic staff, administrative staff, workers, students, as well as the parent community behind a compelling vision of transformation that works in the interest of all members of the university community. And it has to rebuild trust and confidence among students and staff in the mission of the university.”

Prof. Jansen is a recent Fulbright Scholar to Stanford University (2007-2008), former Dean of Education at the University of Pretoria (2001-2007), and Honorary Doctor of Education from the University of Edinburgh. He is a former high school Biology teacher and achieved his undergraduate education at the University of the Western Cape (BSc), his teaching credentials at UNISA (HED, BEd) and his postgraduate education in the USA (MS, Cornell; PhD, Stanford).

He is also Honorary Professor of Education at the University of the Witwatersrand and Visiting Fellow at the National Research Foundation.

His most recent books are Knowledge in the Blood (2009, Stanford University Press) and his co-authored Diversity High: Class, Color, Character and Culture in a South African High School (2008, University Press of America). In these and related works, he examines how education leaders balance the dual imperatives of reparation and reconciliation in their leadership practice.

Media Release
Issued by: Lacea Loader
Assistant Director: Media Liaison
Tel: 051 401 2584
Cell: 083 645 2454
E-mail: loaderl.stg@ufs.ac.za  
13 March 2009
 

We use cookies to make interactions with our websites and services easy and meaningful. To better understand how they are used, read more about the UFS cookie policy. By continuing to use this site you are giving us your consent to do this.

Accept