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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

Open letter from Prof Jonathan Jansen to all UFS students
2014-02-22

Dear Students of the University of the Free State

In the past four years there has emerged a new consensus on the three campuses of the University of the Free State (UFS) about the things that divide us – such as racism, sexism and homophobia. Students and campus leaders have worked hard to develop this new consensus in residences and in the open spaces on campus. There can be no doubt that new bonds of friendship have developed across the markers of race, ethnicity, class, religion and sexual orientation. I bear witness to these new solidarities every day on the campus.

You chose a white student to head up the transformation portfolio on the SRC. You chose a black captain to head up the university’s first team in rugby. You chose a white “prime” as head of residence to lead a predominantly black men’s residence. You chose a South African woman of Indian descent as Rag Queen and last week, a black student from Cape Town as the men’s Rag winner—choices not possible and never made before in our campus history. Many of you have intimate friends who come from different social or cultural or religious backgrounds. You learn together, share rooms together, pray together and party together. In other words, in the day to day workings of this university campus, you have demonstrated to campus, city and country that we can overcome the lingering effects of racism and other maladies in this new generation. You have helped create a university community inclusive of people of diverse religions, abilities, class and sexual orientation.

I have said this repeatedly that from time to time this new consensus will be tested – when a minority of students, and they are a small and dwindling minority, still act as if these are the days of apartheid. And when that consensus is tested as it was this week, and as it will be tested in the future, only then we will be able to assess the strength and durability of our progress in creating a new South African campus culture of human togetherness based on respect, dignity and embrace.

The real test of our leadership, including student leadership, is how we respond when our transformation drive is threatened.

Let me say this: I have absolute faith in you, as students of this great university, to stand together in your condemnation of these vile acts of violence and to move together in your determination to maintain the momentum for the Human Project of the University of the Free State. We have come too far to allow a few criminals to derail what you have built together in recent years.

There will, no doubt, be unscrupulous people on all sides of the political spectrum wanting to milk this tragedy for their own narrow purposes. There will be false information, rumours and exaggerations by those who wish to inflame a bad situation to gain mileage for their agendas. That is inevitable in a country that is still so divided.

I ask you, through all of this, to keep perspective. Two or ten or even twenty students behaving badly do not represent 30,000 students; a minority of violent and hateful persons do not represent the ideals, ambitions and commitments of the majority. At the same time, let us be realistic – anyone who thinks you can drive transformation without resistance clearly does not understand the difficult process of change.

The events of the week remind us, however, that we still have a long road to walk in deepening social and academic transformation at our university. Yes, we have invested hundreds of hours in training and mentorship; we have created new structures – such as the Institute for Reconciliation and Social Justice – to capture the energy and imagination of students driving transformation; we have created many opportunities for students to study and travel on this and other continents to enable cross-cultural learning; we have established formal and informal opportunities to dialogue about difficult issues on and off campus between students and their leaders; and we crafted new curricula to enable teaching and learning on the big questions of our times.

But this is clearly not enough, and so I have decided on the following immediate next steps:
  1. We will meet for several hours next week to think about how we can deepen the transformation of our university after this terrible incident.

  2. We will arrange a University Assembly on the events of the past week so that we speak with one voice on human wrongs and to re-commit to human rights and we will continue with open forum discussions during the months to come.

  3. We will review the entire spectrum of programmes, from orientation to residence life to the undergraduate curriculum, to determine how effective our interventions really are in reaching all students with respect to basic issues of human rights.

  4. We will review our media and communications strategy to determine how far and deep our messages on human rights travel across all sectors of the university community. In this regard it is important that the campus be blanketed on a regular basis with our condemnation of human wrongs and our commitment to human rights.

  5. We will commission the Institute for Reconciliation and Social Justice to review the events of the past week and make recommendations on how we can improve the campus environment so that all students are protected from harm inside residences, classrooms and in open spaces of the campus.

  6. We will take the questions raised during this week into the academic community and to the general staff of the university so that all personnel also engage with our own roles and responsibilities with respect to campus transformations.

  7. We undertake to make annual report-backs on transformation to all stakeholders in public forums so that students and staff and external communities can track the progress of the university on matters of human rights on campus.

I wish to thank my staff for acting firmly as soon as this tragic event came to our attention. We worked through the night to find and identify the perpetrators. We traced the two students and immediately handed them to the police. They were expelled. And throughout this process we offered counselling and support to the victim of this violent act.

The two former students were expelled and will now face justice in the criminal courts. It is hoped that in the course of time they will come to their senses and seek restoration and reconciliation with the student they so callously harmed. They are not part of the university community anymore.

That is the kind of university we are.

Jonathan D Jansen
Vice-Chancellor and Rector
University of the Free State
20 February 2014

 
Note: The use of the word ‘campus’ refers to all three campuses of the UFS, namely the Bloemfontein Campus, South Campus and Qwaqwa Campus.

 

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