South Africa is facing a conundrum: the government’s financial equation doesn’t balance, with spending exceeding the revenue it is able to collect in a pedestrian economy. Economic mismanagement has cast a shadow, creating an array of intractable constraints. These include debilitating electricity shortages and logistical bottlenecks that stifle economic activity, persistent policy ambiguity hindering investment prospects and alarming levels of unemployment, contributing to a widening gap in inequality.
After the global financial crisis of 2008, real growth in GDP in South Africa decelerated markedly. It has struggled to regain momentum since then, hovering at an average annual rate of 1.3%. Per capita growth, according to the International Monetary Fund (IMF), has essentially stagnated over this period, leaving average South Africans no better off than they were 15 years ago.
Faltering growth has been accompanied by deepening fiscal imbalances, pushing gross government debt levels (including interest) from R577bn (24% of GDP) in the 2007/2008 fiscal year to a staggering R4.7-trillion (71.1% of GDP) in the latest fiscal year.
Despite expenditure cutbacks and a post-Covid nominal boom in economic growth (partly attributable to higher-than-expected inflation), prospects of reining in the budget deficit and containing the debt ratio in the medium-term framework, as outlined by the National Treasury in February, appear increasingly remote.
Navigating a path towards a more sustainable fiscal reality for South Africa will prove challenging amid mounting social pressures. Under the guidance of Operation Vulindlela — a government initiative to unlock growth, investment and job opportunities — structural reforms in key sectors are expected to boost medium-term growth towards the 2% mark. But a combination of tax hikes and further government spending cuts will also be imperative.
Fewer fiscal levers left to pull
Yet this endeavour is far from straightforward, given the country’s limited tax base and the punishing cuts already made in crucial areas such as health care, education, security and public services.
The 2022 South African Revenue Service’s tax statistics lay bare the narrow tax base: 20% of personal income tax was contributed by a mere 1.5% of individual taxpayers — the 44,300-odd individuals earning more than R2m a year. Almost 45% of personal income tax is borne by the top 7.3% of income earners (those with an annual taxable income exceeding R1m), equating to about 217,000 individuals.
Corporate income tax reveals an even narrower base, with roughly 60% of corporate taxes paid by the top 8.4% of corporate taxpayers (those with an annual taxable income of more than R200m), constituting just 325 companies.
Notably, as inflation subsides and key export commodity prices wane, the outlook for tax buoyancy, or the increase in tax revenue relative to economic growth, appears weaker.
Navigating a path towards a more sustainable fiscal reality for South Africa will prove challenging amid mounting social pressures
A growing fiscal quagmire
The burgeoning fiscal morass poses a formidable challenge for the National Treasury.
Its expenditure estimates in the February budget were met with scepticism by the market. The notion that there will be no further allocation for the social relief of distress grant beyond March next year, particularly in an election year, seemed improbable. In addition, below-inflation increments in public sector wages appeared unlikely in the midst of a cost-of-living crisis.
And given the financial predicaments of numerous state-owned entities — think Transnet, the Land Bank, SAA and the South African Post Office — additional financial support may yet be granted.
Adding to expenditure pressures is the precarious financial health of South Africa’s municipalities, resulting from unpaid consumer bills, financial mismanagement and uncompetitive procurement practices. In its annual review of local municipalities, the auditor-general revealed that only 38 of the country’s 257 municipalities received a clean audit for 2021/2022, down from 41 the previous year.
While the IMF acknowledges that South Africa’s institutional strengths reduce its risk of debt distress, it has cautioned that the growing public debt burden could swell to more than double the size of the health budget in the next five years. This could crowd out an even larger share of the essential services relied upon by the poor, weakening the potential for sustained and inclusive growth.
Mitigating fiscal stresses will necessitate difficult trade-offs, greater spending efficiency and accelerated structural reforms to generate consistent, longer-term growth and enhance resilience against unforeseen economic shocks.
A more credible medium-term fiscal framework ultimately helps maintain economic stability through the responsible management of government finances, lowering borrowing costs, boosting investor confidence and enhancing policy flexibility to address challenges proactively.
Repairing South Africa’s fragile political and social consensus could play a pivotal role in aligning fiscal objectives to curtail the budget deficit and stabilise the nation’s debt ratio. Through the pursuit of fiscal consolidation, South Africa can chart a course to safeguard its economic future.
* Packirisamy is an economist with Momentum Investments
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