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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

Student receives international award in microbiology
2008-01-24

A postgraduate student at the University of the Free State (UFS) received an exceptional honour last month when he received the first prize for his presentation in the Biochemistry and Industrial Mycology session of the Asian Mycology Congress (AMC) held in Malaysia.

Desmond Ncango (24), a Ph.D. student from the Department of Microbial, Biochemical and Food Biotechnology received the first prize for his presentation on the inhibitory effects of non-steroidal anti inflammatory drugs (NSAIDs) such as aspirin on fungi.

This suggests that commonly used aspirin may be used as a cheap antifungal to combat yeast infections. Desmond also exposed novel lubricants that are used by yeasts for water-propelled movement. This may find application in nanotechnology in the lubrication of nanorobots, which are manmade miniature machines, invisible to the naked eye, which may in future be used to combat diseases such as cancer.

The conference, which was attended by more than 300 representatives from 27 countries, is a platform for mycologists (who are experts in fungi) around the world to come together and share their knowledge and research. “Many interested researchers listened to my presentation and were impressed by the novelty and scientific depth of my work,” said Desmond.

“The presentation was selected as the best because of its novelty, academic depth as well as applicability. The meticulous preparation and presentation style also contributed to the success,” said Prof. Lodewyk Kock, head of the Lipid Biotechnology Group at the department and main promoter of Desmond’s Ph.D. studies.

“I cannot really explain the feeling when my presentation was selected as the best as it was presented in a very difficult category and many senior researchers and professors also participated. I plan to use all the knowledge and skills I have learnt from Prof. Kock, who is my role model, especially to the benefit of disadvantage communities in South Africa. I want to follow an academic career at a tertiary institution when I have completed my Ph.D. studies,” said Desmond.

Desmond went to school in Botshabelo, Bloemfontein and completed his Grade 12 in 2000 with a distinction in Mathematics. He enrolled for a B.Sc. degree at the UFS, majoring in Microbiology and Physiology. After obtaining this qualification, he joined the postgraduate research group of Prof. Kock. He completed his M.Sc. degree with distinction last year and was privileged to have this research published in and on the cover of the Canadian Journal of Microbiology, a journal accredited by the Institute for Scientific Information (ISI).

He was one of six postgraduate students from the Lipid Biotechnology Group who attended the AMC conference in Malaysia. The students’ attendance was funded by the South African Fryer Oil Initiative (SAFOI), which is housed in the UFS Department of Microbial, Biochemical and Food Biotechnology. This initiative, steered by Prof. Kock, currently monitors edible oils in the food industry in South Africa and makes a quality seal available to the manufacturers and distributors of these edible oils.

“SAFOI’s income is used to fund my own research on various kinds of oils (including yeast oils) to enable postgraduate students to attend international congresses and to partially fund international scientific symposia and congresses,” said Prof. Kock.

 

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 
24 January 2008

 

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