Within minutes of starting his revised budget speech last week, finance minister Enoch Godongwana acknowledged the crucial issue facing the South African government: “As much as the debate on the budget has been dominated by the proposed increase in VAT, the bigger debate must be about how we grow the economy and increase tax revenue over time.”
After years of battling to curb growth in spending, and raising taxes to avoid a debt crisis, South Africa has now reached a point where the only sustainable path forward is breaking the economy out of its low-growth trajectory.
Again, Godongwana acknowledged this, noting: “Over the past decade, our economy has struggled to sustain the growth needed to meet our developmental challenges. GDP growth has remained below 2%, limiting our fiscal flexibility.”
What is clear to anyone living and working in South Africa is the perilous state of basic infrastructure. While South Africans are endlessly resourceful and remarkably capable of responding with humour, the persistent degradation of infrastructure has the economy trapped in a low-growth environment. This is preventing any progress in addressing poverty, inequality and unemployment.
Making things worse are increasingly frequent and extreme weather events, such as the devastating floods in KwaZulu-Natal in recent years. Extreme weather diverts already limited funding to repairing and restoring existing infrastructure, rather than providing new facilities for the rapidly urbanising population.
Historically, economies that have invested heavily in infrastructure have experienced far stronger growth rates than those that haven’t. The obvious example is China. The IMF estimates that investment accounted for half of China’s GDP growth in the 2000s, driving its rapid transformation from a poor nation to the world’s second-largest economy. The World Bank describes it as “the fastest sustained expansion by a major economy in history”.
In China, investment as a share of GDP has consistently exceeded 35% since the mid-1980s, according to the Federal Reserve Bank of New York. While the median global fixed investment rate now hovers in the mid- to low-20s, total gross fixed capital formation (including both the public and private sectors) in South Africa has averaged just 15.3% of GDP over the past decade.
Underinvestment in infrastructure is a long-term problem in South Africa, as is evident when considering investment spending in the public sector since the 1960s.
General government spending on gross fixed capital formation as a percentage of GDP peaked at 12.2% in the mid-1970s but has averaged just under 3% over the past three decades.
Similarly, despite all the billions in bailouts for state-owned enterprises, there has been little benefit in terms of increased investment in infrastructure and machinery, with public fixed capital formation by public corporations declining from 5.5% of GDP in 1980 to under 2% for the past six years.
Last week’s budget speech included more than R1-trillion in infrastructure spending over the next three years. Though this sounds impressive, it amounts to just over 4.5% of GDP (South Africa’s annual GDP is R7.39-trillion, in 2024 current prices). This would represent a slight increase from current levels of government and public entity investment of just 3.9% of GDP in 2024 — provided it is spent efficiently and effectively.
Any improvement should be welcomed. However, given decades of limited fixed investment spending, and the resultant depreciation of assets, spending in this area needs to be well above whatever the global norm may be, to eliminate major backlogs.
Greater collaboration between the public and private sectors is crucial for scaling up infrastructure investment
Research by the National Treasury reveals that infrastructure investment stimulates both economic growth and employment creation — particularly when focused on the secondary sector industries of construction and manufacturing. The study concludes that the bulk of infrastructure investment should be in electricity and water, as these sectors yield the greatest impact on overall economic growth and employment creation.
Encouragingly, the bulk of the R1-trillion in public infrastructure spending mentioned in the budget will be allocated to these two sectors: energy infrastructure gets R219.2bn and water and sanitation R156.3bn. Transport and logistics gets R402bn.
The lack of funds for additional infrastructure investment was highlighted by the fact that the Treasury was forced to increase the tax burden to provide funds for essential frontline services. This is despite warnings from South African Revenue Service commissioner Edward Kieswetter that South Africa has reached an inflection point: further tax increases are likely to have negative economic consequences.
While a ruthless review of spending priorities may free up some fiscal space for additional investment, it is widely acknowledged that greater collaboration between the public and private sectors is crucial for scaling up infrastructure investment.
To achieve this, new regulations take effect in mid-2025 aimed at simplifying private-public partnerships, which have been identified as a critical mechanism for future infrastructure investment. Furthermore, a credit guarantee vehicle to derisk projects in order to mobilise private sector capital will be launched in 2026.
Though the government has yet to tackle the inevitable spending decisions, it is at least engaging with the private sector to source the necessary funding and skills. Even so, the glaring absence in last week’s budget was any real sense of urgency to tackle the stranglehold of failing infrastructure.
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