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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

SRC Inauguration speech: 22 January 2005
2005-01-22

Campus Head (Prof Peter Mbati). Dean of Students (Dr Natie Luyt). Deputy Director: Student Affairs and my boss (Mr. Teboho Manchu), Members of the University executive and Academic staff members, SRC members, Leaders of trade Unions and Student organizations, Distinguished guests, Ladies and gentlemen, most importantly first entering students and Parents receive my heartfelt revolutionary greetings.

Let me extend my word of appreciation to our distinguished guests for adding value and dignity to this event. Your presence here means a lot to us. Program Director what I bring here with me, assisted by facts, and is therefore just the work of my imagination. Like a love letter addressed to a sweetheart miles away, even though you do not know how she feels, what she wants to hear, and do not even know how her face looks like.

To me a speech is just an honest and intimate conversation. That is why I got into the habit of establishing a dialogue, or a debate, with my acquaintances looking at their faces and trying to persuade them of what I am telling them.

Mr. Speaker and Madam Deputy Speaker of the Student Parliament we are gathering at this ceremony, significantly few weeks after the release of grade 12 results, with the exception of those from Mpumalanga because of fraud. The Grade 12 results also show that only 18% of Black learners matriculated with exemptions, as compared to 53, 6% of white learners. This is an indication that our education system needs an overhaul.

We are also gathered here significantly a day after the management retreat held in Bloemfontein, Masselspoort. The retreat discussed, among other things, the transformation agenda, and some possible solutions to challenges we are facing now.

Most regrettably, we are gathered here when the whole world morns the victims of Tsunami tragedy. Let me therefore tore the line and convey our deepest condolences, from the last robot of my heart, to the affected families. Our hearts and thoughts will always be occupied by this horrified tragedy.

Creating a new Institution

I would submit, for purposes of debate and discussions that this Institution should strive to specialize and excel in regional rural development studies. Since our higher education, institutions in South Africa are generally weak in rural development studies. Instead, most of them tend to have an urban orientation to their programmes. Training everybody for the cities, big business and the private sector. This is a big weakness in a country with such large rural areas and population trapped in poverty, disease and ignorance.

Women’s studies

Program Director, it is only a moron who can argue against the fact that for us to reposition the institution around the regional development challenge, we need to start first with women empowerment. It is a fact that in most of our poor communities and families, it is women who withstand the worst of poverty. They are the ones who daily have to wipe tears from children who are hungry. It is women who look after the sick, the elderly, those dying from AIDS and the jobless. They are the one who have to fetch water, make fire and cook. There can therefore be no rural development studies without women studies, in particular on how to empower them and assist in the provision of basic services, so that they are relieved from some of the burdensome task of the society.

Registration Process

Mr. Speaker and Madam Deputy Speaker of the Student Parliament let me indicate that the registration is a process and not an event, so it cannot be concluded overnight. This huge process demands for people to stay calm, as there is no crisis. People should stop being excited. At the same time, no organization should use its cheap popularity and unilaterally disrupt the continuous and smooth running of the registration process at hand.

Let me strongly indicate, madam deputy speaker, that I am on record for stating that I have forgiven all those who have wronged us. I harbour no bitterness towards the protagonists of our painful and unfortunate events of the past week. And we will overcome this process not by our own devices but by the help of Almighty God and the grace of our Lord Jesus Christ.

Concerning registration of first years, we have programs, concerning that of senior students, we have programs, regarding graduations we have programs, and concerning HIV\AIDS we have programs. So, there is no need for people to press panicking buttons.

Mr. Speaker and Madam Deputy Speaker of the Student Parliament let me be opportunistic and welcome the entire student body on Campus for the academic year 2005. May our lovely first entering students have a happy and momentous year as part of Qwaqwa Campus of University of the Free State. May your studies be fruitful and enjoyable.

Student years are generally the happiest years of your life, so please make the most of them. While you are doing, all your preparations bear in mind that University is not an opportunity, it is just creating opportunities for a person.

On behalf of SRC members, our people, our students and management members I would like to welcome you all. Even though your parents are far away, here at Uniqwa you have more brothers, more sisters and more parents. Since we will love you with the same love as if we are from one family, and I have no doubts that management members will love and care for you as if you are their own children. Should you encounter any problem while studying at the Qwaqwa Campus of University of the Free State do not hesitate to contact us at the SRC offices because we need to ameliorate any factor influencing you negatively while on campus. I wish you well in the attainment of your academic pursuit.

Senior Students: We are not faced with just a new year but another academic year where we all have to work together to achieve our common goal of building our Institution through the development of human power. I urge you to invest your whole selves in this SRC.

For quite some time now, a debate has been ranging as to, whether has there been any progress in this incorporation process, or we are just moving with no direction. This debate is important, but I hasten to add not essential. The SRC is also involved in this debate, but with definite shift in emphasis. For us it is not important to participate in the debate than it is in finding solutions for the challenges of this new chapter in the history of humankind.

To my colleagues: Comrades, we are leading this Institution with a sense of pride and duty, and I know very well that we lead men and women, students who are determined to ensure that we all reach our destination safely and on time.

I said in one of our meetings that there are more enemies on our way, more than we can imagine. I think you witnessed that during the course of this week. The excitement and unnecessary confusions caused by some confused and loosed charlatans bear testimony to my statements. We should not reveal our game plans unless we are ready to slam.

Let me also borrow from the words of the late Albert Lethuli when he said and I quote: “There remains before us the building of the new land, from the ruins of the old narrow groups, a synthesis of the rich cultural strains which we have inherited. The task is immense”. Lastly, a navy divided within its ranks will be vanquished and destroyed by the enemy, but a navy united in purpose and action, loyalty and commitment will not drawn but sail on to victory.

In conclusion, let me call upon all political structures, church denominations, developmental structures, clubs, societies and forums to put aside all their differences, ideological insinuations and forge unity towards transforming Qwaqwa Campus of University of the Free State into an institution that is seen playing vigilant role in developing students academically, politically, socially, spiritually, religiously, culturally and otherwise.

Program Director, let me end my speech by indicating that every drop of my blood is telling me that Uniqwa is my home. I firstly became a student here, I became an activist here, I became a leader here, I became a president here, I will become a graduant here and hopefully I will become an employee here. So never, doubt my commitment towards the community of this campus.

Please be informed, in a central University of Technology’s way, that if there is no UNIQWA in HEAVEN, then I am not GOING.

Let us broaden the social base.

Tello Titus Wa-Motloung President General

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