This is the third in a series of articles by Michael Sachs, extracted from his paper, Fiscal Dimensions of South Africa’s Crisis. In the last article, he showed how the real value of public services has declined over the past decade, and how substantial off-budget allocations to state-owned enterprises have come at a cost to the poor. In this article, he examines the extent of South Africa’s fiscal crisis as the country struggles to recover from the impact of Covid-19. He argues that the recent budget proposes a path of consolidation that will erode core public services further. It will also be difficult to accelerate the pace of economic growth in the face of a large and sustained negative fiscal impulse. But even if the consolidation achieves its targets, it is unlikely to alleviate the debt burden. Rising interest payments mean that rent is drained from the proceeds of production, with implications for economic growth and the distribution of national income. Without an acceleration in nominal GDP, it is difficult to see how South Africa will avoid a period of fiscal and financial disorder.
The projected increase in the debt-to-GDP ratio is set to occur notwithstanding plans to cut the projected increase in government’s salary bill. If government does not overcome labour union resistance to cuts, the debt burden will increase even more. The mounting public debt and government’s apparent inability to reign it in, raises the question whether South Africa finds itself in a debt trap, and if not, what can be done to escape such a trap.
The debt burden of the national government has steadily increased from 27% in 2007. It is heading towards 70% in 2022/3 if this trajectory is not turned around. Further growth in the debt-to-GDP ratio must at least be halted. Different scenarios show this would require a cut in government expenditure of 2% to 3% of GDP (roughly R100 to R150 billion), phased in over the medium term. This means there is no room for a stimulating fiscal policy.