SA's public finances are in a dire state. There are four main reasons for this.
First, economic growth is low. Second, tax revenue collection is repeatedly below forecasts. Third, debt levels have risen rapidly and are now at their highest levels in the post-apartheid era. Fourth, the poor performance of state-owned enterprises is necessitating large-scale government support.
Recent developments since the tabling of the 2019/20 budget in February have only made the situation worse.
A downgrade of government debt to "junk" status by a third ratings agency will lead to an outflow of investment and exacerbate matters further. Fortunately for SA, this has not yet happened.
The state of SA's public finances is the outcome of different dynamics in three overlapping periods. The first was the period after the 2008 global financial crisis. The second was the period under Jacob Zuma's presidency. And the third has been the period since Cyril Ramaphosa took over.
Careful consideration of these periods contradicts widely circulated claims in the political space.
Some have claimed SA's woes began with Zuma, but this is not true. They started with the the global financial crisis. Others have claimed Zuma is not responsible for the poor economic and public finance performance, but this is also not true. SA's performance should have been able to recover to a much greater degree than it did under Zuma.
More to SA's economic woes than Zuma years
SA's public finances are in a dire state. There are four main reasons for this.
First, economic growth is low. Second, tax revenue collection is repeatedly below forecasts. Third, debt levels have risen rapidly and are now at their highest levels in the post-apartheid era. Fourth, the poor performance of state-owned enterprises is necessitating large-scale government support.
Recent developments since the tabling of the 2019/20 budget in February have only made the situation worse.
A downgrade of government debt to "junk" status by a third ratings agency will lead to an outflow of investment and exacerbate matters further. Fortunately for SA, this has not yet happened.
The state of SA's public finances is the outcome of different dynamics in three overlapping periods. The first was the period after the 2008 global financial crisis. The second was the period under Jacob Zuma's presidency. And the third has been the period since Cyril Ramaphosa took over.
Careful consideration of these periods contradicts widely circulated claims in the political space.
Some have claimed SA's woes began with Zuma, but this is not true. They started with the the global financial crisis. Others have claimed Zuma is not responsible for the poor economic and public finance performance, but this is also not true. SA's performance should have been able to recover to a much greater degree than it did under Zuma.
Finally, the deterioration of economic indicators (growth and employment), along with further underperformance in revenue collection and public finances more broadly, is being laid at the door of Ramaphosa's presidency. That is simply implausible. The deterioration can often be linked to factors that preceded Ramaphosa's presidency.
Understanding why such claims are likely to be wrong is important to understand what the fundamental drivers are behind the country's current state and future trajectory.
Unfortunately, much of the policy discussion is characterised by recycled disagreements. These date to the era in which the ANC-led government adopted the Growth, Employment and Redistribution (Gear) strategy - which was opposed by left-wing sections of the ANC alliance. That strategy was largely concerned with reducing debt levels inherited from the apartheid government.
For example, left-wing commentators have argued for expansionary fiscal policy. This basically means increasing government spending.
They have also claimed that the National Treasury implemented "austerity" after 2008. This is incoherent. SA adopted a "countercyclical" approach after 2008 and state spending increased faster than revenue. That is how the country's debt initially escalated.
Increasing state spending is, at best, a high-risk strategy. With the country's public finances already under strain, increased spending may lead to a deterioration in public finances.
The reality is that though the Treasury tried to maintain spending to support the economy during the aftermath of the global financial crisis, and then tried to stabilise debt levels using a policy of "fiscal consolidation", it was unable to do either. The economy has not recovered, arguably due in significant part to the ravages of state capture and other state failures in the Zuma era.
There is no consensus among economists or other public finance experts on a specific threshold that is tolerable. What is clear, though, is that the higher the amount of debt relative to the size of the economy, the greater the risk.
Recent developments have only made the situation more dire. In the 2019 budget, the Treasury said it would have to breach its expenditure ceiling for the first time to give support to power utility Eskom amounting to R23bn per year for an intended 10 years. It now plans to give Eskom a further R59bn over two years. It seems unlikely government will be able to cut spending elsewhere, therefore debt targets will be exceeded.
In the face of the crisis, the only way to proceed is to secure a social compact that recognises the need for sacrifices. Ramaphosa is uniquely equipped to secure this. But he is moving too slowly.
- Mfundza Muller is an economics and research associate at the Public and Environmental Economics Research Centre (PEERC) at UJ