South Africa’s public finances are in alarming state. There are four main reasons for this. First, economic growth is low or non-existent. 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 2019 have only made the situation worse. A downgrade of government debt to ‘junk’ by a third ratings agency will lead to an outflow of investment and exacerbate matters further. South Africa is, in fact, fortunate that this has not already happened.
The state of South Africa’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 the continued presidency of Jacob Zuma. And the third has been the period since Zuma was succeeded by Cyril Ramaphosa. Careful consideration of these periods contradict widely-circulated claims in the political space.
Some have claimed that South Africa’s woes began with Zuma but this is not true. The first shock to the economy under public financeswas the global financial crisis. Others have claimed that Zuma is not responsible for poor economic and public finance performance, but this is also not true. South African economic performance should have been able to recover to a much greater degree than it did under the era of his leadership. Government revenue collection seems to have been negatively affected by institutional destabilization of the South African Revenue Service.
The reality is that even though Treasury attempted to maintain government spending to support the economy during the aftermath of the global financial crisis, and then attempted to stabilize debt levels using a policy of ‘fiscal consolidation’, it has been 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. Debt targets have been regularly missed. At one point national government debt was expected to stabilized below 45% of GDP, now it has gone above 60% and may reach 70% of GDP within a few years.
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. This is especially true where economic growth is lackluster, as it has been in South Africa for some years. Recent developments have only made the situation more dire. In the 2019 Budget, Treasury indicated that it would have to breach its expenditure ceiling for the first time in order to give support to national power utility Eskom amounting to 23 billion rand ($1.5 billion) per year for an intended 10 years. That was despite planned cuts to public service employment and additional tax measures.