Over the past decade, South Africa has been caught in a low-growth, high-interest-rate trap. This has caused debt service costs to explode and forced the National Treasury to reduce spending growth to its lowest level yet.
It has inflicted a cash crunch on most of the government, but nowhere are the consequences more apparent than in the labour-intensive departments of health and education.
The department of basic education estimates that it will have a cumulative budget shortfall of R76.6bn in 2024/2025 and over the next three years, given the cost of providing adequate services.
And if the aim is also to implement the recently signed Basic Education Laws Amendment Act, which makes Grade R compulsory and addresses school infrastructure backlogs and the provision of learner transport, the department estimates that the budget will be short by almost R130bn over this period.
“These things have been building for years, but now the iceberg of the past 15 years has emerged above the water,” says Wits University adjunct professor Michael Sachs. “We can’t keep going in this direction without admitting some major defeat on social policy.”
The 2024 national budget aims to lock in the gains of fiscal consolidation by containing spending growth below CPI for the years ahead. The pay-off for this severe belt-tightening is the prospect that the debt ratio will stabilise at 75% of GDP next year.
Economists expect finance minister Enoch Godongwana to maintain this stance in the medium-term budget policy statement (MTBPS), to be delivered on October 30.
The government of national unity’s (GNU’s) adherence to fiscal restraint has impressed the markets, reduced fiscal risk and helped lower the government’s borrowing costs, so the Treasury is highly unlikely to relax the reins now.
But the social consequences — curtailed basic services and falling public employment — could lead to political problems for the GNU as it faces the hurdles of the 2026 local government election and the 2027 ANC elective conference.
Sachs feels the Treasury’s best bet is to stick to the script: maintain reasonable fiscal restraint and pray that economic growth picks up to create some more fiscal wiggle room.
“This time it could be different because of all this good GNU-related sentiment,” says Sachs. “If by the next MTBPS there is some indication of growth picking up to 2%-3% you can start easing the fiscal constraints — but if not, you’ve really had it going into the political cycle. This really is the last chance saloon.”
Sanlam Investments chief economist Arthur Kamp agrees that a lot will hang on the success of the GNU “because the faster you can grow the economy the more the fiscal metrics will fall into place”.
He adds: “One wants to be positive, but whether we can stay on this path will depend on us showing some wins — some growth and some employment.”
He expects the MTBPS to reveal fiscal slippage of R15bn-R20bn based on current tax collection rates but for it still to be generally well received.
“Over the next two years you can easily sketch a very nice outcome as it’s quite reasonable to forecast GDP growth of 2%-plus, and so the debt trajectory becomes flattish or is only marginally up — and that is what the MTBPS will show,” says Kamp. “That will create a mood of optimism.”
However, the Treasury has budgeted for nominal noninterest spending of only 3.9% in 2024/2025, growing to no more than 5% in both 2025/2026 and 2026/2027.
We can’t keep going in this direction without admitting some major defeat on social policy
— Michael Sachs
The question is whether it will be able to maintain this level of restraint given the spending pressure that is likely from Transnet, the National Student Financial Aid Scheme, the social relief of distress (SRD) grant, the wage bill and, at some point, National Health Insurance.
As someone who takes a longer-term view, Kamp finds it difficult to be enthused by the Treasury’s proposed debt stabilisation trajectory because of all these “opaque risks” on the expenditure side.
To build credibility around its fiscal plan, the Treasury plans to introduce a fiscal rule, possibly by legislating an upper ceiling on the debt-to-GDP ratio. The DA wants to cap it at 70%, but even getting debt to stabilise at 75% is proving to be a stretch.
Sachs’s advice is for the parties to the GNU to announce a clear programme of fiscal targets for its five-year lifespan, arguing that this would be “much more powerful” than introducing legislation that binds it to some distant, unrealistic debt ceiling.
He feels the GNU presents an opportunity for the government to make some clear fiscal choices today. For instance, it could say that because of the commitment to fiscal consolidation it will have to postpone the universal funding of grade R.
This would be more meaningful than the current position of denying that there will be any more bailouts for state-owned entities (SOEs) and then inevitably granting further support to Transnet down the line for the sake of the economy.
Transnet is at present making use of a R47bn guarantee framework from the Treasury, which is conditional on turning its operational performance around. However, Momentum Investments chief economist Sanisha Packirisamy notes that, as the remaining portion of the guarantee is likely to be used in the next few months, the utility is likely to require a direct transfer or an increased guarantee in the coming fiscal year.
“This would likely affect the government’s fiscal metrics [but] a more significant negative impact would come from a weaker growth outlook or greater overspending on wages and social grants,” she says.
Based on the tax revenue run rate, she also expects a slight revenue shortfall of R10bn-R20bn in 2024/2025, while expenditure should be broadly in line with, or even slightly lower than, February’s expectations, based on current data.
She notes that though gross tax revenue is up only 4.3% year on year over the fiscal year to date — against the Treasury’s full-year target of 7% year-on-year growth — a belated boost could come from two-pot retirement withdrawals, which look set to deliver R10bn-R15bn in taxes. This would far exceed the Treasury’s conservative estimate of just R5bn.
However, like Kamp, Packirisamy highlights the pressures that are building on the expenditure side of the budget. For instance, on the wage bill she notes that public sector unions are requesting a 12% pay rise while the government is offering just 3%.
The Treasury has pencilled in an annual average increase of 4.5% in the wage bill over the medium term, which means that huge headcount reductions loom unless workers effectively agree to zero real wage increases in each of the next three years. (The Reserve Bank expects headline CPI to average 4.3% over the same period.)
By comparison, the recently signed five-year municipal wage agreement grants workers an across-the-board increase of 6% for 2024/2025, CPI plus 0.75% in both 2025/2026 and 2026/2027, and CPI plus 1.25% in both of the two outer years.
Nedbank calculates that a 5% escalation would add R3bn-R6bn to the national and provincial wage bill, while a 6% escalation would add R10bn-R14bn.
Another flash point is the potential conversion of the SRD grant to permanent basic income support. The Treasury provided R33.5bn for the SRD grant’s extension into 2024/2025 and has made provisional inflation-linked allocations of R35.1bn in 2025/2026 and R36.7bn the following year in line with President Cyril Ramaphosa’s promise to extend and improve the grant.
However, the government is facing a court challenge from social justice groups which argue that making it unnecessarily hard to apply for the grant unfairly excludes millions of eligible beneficiaries. If the state loses in court, it could blow the medium-term budget out of the water.
But even if it doesn’t, rolling back the SRD grant will be “difficult” in the context of high unemployment and elevated levels of poverty, says Packirisamy. As such, she expects it to be extended in the form of a basic income grant beyond the end of March 2025.
Details are likely to be forthcoming only in the February 2025 budget, but Packirisamy warns that any indication of a significant rise in social spending, an overrun in the wage bill or additional bailouts for SOEs, without offsetting revenue measures or spending cuts to keep these bailouts deficit-neutral, would pose “a major concern” for financial markets.
However, assuming the Treasury delivers a market-friendly MTBPS, as is widely expected, the next question will be: when do we get a sovereign credit rating upgrade?
Most economists think South Africa will remain on a stable outlook for a while yet given that the rating agencies will doubtless want to see faster structural reform and the debt ratio stabilising or declining before they issue an upgrade.
But the important thing is that the GNU has changed the negative narrative about the country. If it can build on this to deliver faster growth while maintaining fiscal discipline, rating upgrades, foreign capital inflows and investment will surely follow.
It simply has to. As Sachs has pointed out — it’s now or never.
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