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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

Department at the UFS receives special visitors
2008-02-26

 

From the left are: Prof. Hans Ausloos, Prof. Bénédicte Lemmelijn, and Prof. Fanie Snyman (Head of the Department of Old Testament at the UFS). Both Prof. Ausloos and Prof. Lemmelijn are professors in the Old Testament within the Bible Science Investigation Unit of the Katholieke Universiteit Leuven in Belgium.
Photo: Lacea Loader
 

Department at the UFS receives special visitors

The Department of Old Testament in the Faculty of Theology at the University of the Free State (UFS) has for the first time received a visit from two guest professors from the Katholieke Universiteit Leuven (KU) in Belgium who are presenting undergraduate lectures.

What makes the visit even further unique is that the guest professors are a married couple who specialise in the Old Testament.

“Proff. Hans Ausloos and Bénédicte Lemmelijn are visiting the faculty for about a month to present undergraduate programmes. They are part of a co-operative agreement between the UFS and the KU Leuven. This is also a good way of giving our students exposure to European experts,” says Prof. Snyman, Head of the Department of Old Testament at the UFS.

The couple and their three children, Matthias (10), Elke (8) and Ruben (6), are staying in Prof. Daan Pienaar’s house for the duration of their stay. Prof. Pienaar is a retired professor in Biblical Science at the UFS. The children are at school in Universitas Primary School for the duration of the family’s stay in Bloemfontein. “The headmaster was very kind and provided them with school uniforms out of the school’s second hand clothing shop, of which they will not part easily as they do not wear school uniform in Belgium,” says Prof. Lemmelijn.

Proff. Lemmelijn and Ausloos cannot stop talking about the charm of the university’s Main Campus. “In Leuven the university is part of the city and the university buildings are situated amongst the city buildings. We do our shopping while the students move from one class to the other! Here, the university is a town on its own and the students are given the opportunity to socialise in a protected environment,” says Prof. Lemmelijn.

The couple is also just as impressed with Bloemfontein. “The safety issue in South Africa is accentuated in such a way in Europe that we are astounded by the peaceful and friendly atmosphere of the city. We are also surprised with the shopping centres that are under one roof. In Belgium the shops are situated far apart,” says Prof. Lemmelijn.

The couple finds the living costs – especially food – to be quite expensive. “Some basic food is even more expensive than it is in Belgium,” says Prof. Ausloos.

Over and above their commitment to lecture, the couple is also busy with research on the Greek translation of the 12 Small Prophets in co-operation with Prof. Snyman.

“This is the first time that lecturers from the KU Leuven visit the Department of Old Testament for such a long time and are part of the normal curriculum. It is interesting to note that the teaching modules between the two departments resemble each other in such a way that lectures which are presented in Leuven are also repeated here,” says Prof. Snyman.

Both Proff. Ausloos and Lemmelijn are professors in the Old Testament within the Bible Science Investigation Unit of the KU Leuven. They publish articles internationally on the editorial and text criticism of the Old Testament and are involved with international investigative programmes such as the Hexapla Project and Septuaginta-Deutsch. Prof. Ausloos is director of the Leuvense Centre for Septuagint Studies and Textual Criticism and Prof. Lemmelijn is an associate in the centre. Together they have published several financed investigative projects on the characterising of the translation technique of the Greek Bible translation.

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  
25 February 2008
 

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