The aborted national budget of February 19 confirmed that South Africa’s economy is in serious difficulty after low economic growth over the past 15 years.
Since the global financial crisis of 2008, the ANC government has been using a policy approach modelled on Keynesian deficit spending in its effort to stimulate economic growth. However, this resulted in a huge increase in government debt as a percentage of GDP.
Unfortunately, the government did not heed warnings that its economic policy was steering the country and taxpayers to a disastrous outcome owing to investment being stymied by state capture, corruption and so forth.
More than a decade ago the Fiscal Cliff Study Group (the FCSG, of which this writer is a member) first cautioned that South Africa’s fiscal path was unsustainable. In response FCSG members were ridiculed and called alarmist academics who did not understand the real world of government finance. Less ridicule and more attention might have averted the current fiscal crisis.
There are major differences between the now dead budget of February 19 and the budget of March 12. The latest version includes a smaller VAT increase than the first, does not provide for the effect on personal taxpayers of fiscal drag and bracket creep, and features a larger deficit before borrowing. In addition, a further VAT increase of 0.5 percentage points awaits South Africans in the 2026/2027 fiscal year.
The depiction on a graph of the growth trajectory of government debt relative to GDP reminds one of the slope of Devil’s Peak in Cape Town. This is a very apt metaphor, as any further growth above the 76.2% announced in the March 12 budget will push South Africa into the hell of an IMF loan, with a concomitant structural adjustment programme.
It is disconcerting that the expected peak is higher than the estimate of 75.5% used in the 2024 medium-term budget policy statement. This increased growth looks more like Devil’s Peak than Table Mountain, which a levelling-out would resemble.
The government predicts a Lion’s Head outcome, with the relationship of debt to GDP declining after the budgeted peak of 76.2%. Such a decline is predicted every year, but South Africa’s fiscal history of the past decade testifies against this view — the ratio exceeded the estimate in each instance.
This raises the concern that the tax increases and promises of lower spending might not avert hell beyond Devil’s Peak. If this growth trend continues unabated, there might not be many more national budgets tabled without featuring the conditionalities of the IMF.
One area that requires further scrutiny as a possible source of saving is the Southern African Customs Union agreement
The growth in government debt is accompanied by an increase in interest costs. For the new tax year the interest burden is budgeted at R424.9bn, or more than R1.1bn every calendar day. Clearly, this burden puts a cap on the level of debt the country can afford.
There is a straw of hope in the government’s commitment to a primary budget surplus, with current revenue exceeding current expenditure before interest payments. The 2025 Budget Review states that a primary surplus sufficiently large to stabilise the ratio of government debt to GDP has been adopted as the fiscal anchor. This anchor provides a clear future yardstick against which the fiscal performance of the GNU can be measured, and is therefore welcomed.
One area that requires further scrutiny as a possible source of saving is the Southern African Customs Union (Sacu) agreement. In terms of this agreement, South Africa’s transfer payments to Botswana, Eswatini, Lesotho and Namibia include a development aid component.
The Sacu transfer payment for the current fiscal year is budgeted at R73.6bn. This amount does not specify the development aid component separately, but in response to a question the National Treasury said it estimated it at R9,7bn. Given South Africa’s fiscal crisis, one must ask whether the country can still afford such generosity.
Accelerated economic growth will enlarge the tax base. As it will also eradicate unemployment, this is where the GNU should focus its attention. If economic growth accelerates, the debt-to-GDP ratio will move from Devil’s Peak to Table Mountain and then descend Lion’s Head. This is what South Africans hope to see in the future.
Rossouw is an honorary professor at Wits Business School and a former head of the school, as well as a former deputy general manager and currency specialist at the Reserve Bank
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