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04 March 2020 | Story Jean-Pierre Geldenhuys | Photo Supplied
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 hosts tenth SASRIM conference filled with highlights

Description: SASRIM conference book Tags: SASRIM conference book

A new OSM book entitled Musics of the Free State:
Reflections on a Musical Past, Present and Future
will be launched on 25 August 2016 as part of the
South African Society for Research in Music’s
conference, hosted by the UFS.

Photo: Supplied

Bridging the gap between music thinking and music making. This is one of many aims of the South African Society for Research in Music (SASRIM), whose 2016 annual conference will be hosted by the Odeion School of Music (OSM) at the University of the Free State (UFS). It marks the tenth anniversary of SASRIM and the congress, from 25 to 27 August 2016, features many highlights. This includes the Arnold van Wyk Centenary Gala Concert and the launch of the OSM book Musics of the Free State: Reflections on a Musical Past, Present and Future. Keynote speakers will be Stephanus Muller from Stellenbosch University and Guthrie Ramsey from the University of Pennsylvania.

Society encourages multiple facets of music research
Research forms a crucial part of music and therefore SASRIM looks at perspectives on thinking and performing the boundary between music thinking and music making. The society also encourages the submission of a wide variety of proposals, including those exploring alternative formats, multiple facets of music research and practice on the African continent, and disciplinary intersections. Contributions that reflect on the first decade of the society’s existence or any aspect related to Van Wyk are especially welcome.

New OSM book receives sterling international review

Musics of the Free State is a nuanced and
richly endowed study of musical practices in
South Africa, which deserves the international
dissemination it will now receive”.

“It will deeply repay close reading far beyond Bloemfontein.” That was some of the praise that Musics of the Free State received from Prof Harry White from the University of Dublin in the International Review of the Aesthetics and Sociology of Music 47 (1). According to him the book, edited by Prof Martina Viljoen from the OSM, “is a nuanced and richly endowed study of musical practices in South Africa, which deserves the international dissemination it will now receive”.
The book will be launched on 25 August 2016 in the Odeion foyer after the Arnold van Wyk Centenary Gala Concert.

Gala concert commemorate celebrated SA composer
The gala concert on 25 August 2016 at 18:00 will be recited by OSM staff members and the OSM Camerata in the Odeion Auditorium. The programme for a special concert, presented in collaboration with Fine Music, has been curated to celebrate the centenary of the birth of South African composer, Arnold van Wyk. Tickets are available at Computicket or at the door.

The concert, which will also serve as the annual OSM Dean’s concert, will be broadcasted live by Fine Music Radio.

See the following links:

More information about SASRIM 2016.
To listen to the broadcast of the Arnold van Wyk Centenary Gala Concert (then click the button to listen live).
A complete review by Prof White on Musics of the Free State will be available soon.
Copies of Musics of the Free State can be purchased from the OSM at

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