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What is required now is economic steersmanship of a high order. Without such leadership, South Africa’s vision of a bigger, stronger, and better economy will remain as elusive as ever, writes Prof. Raymond Parsons.

‘It’s the economy, stupid.’ This is the fundamental, serious message that Finance Minister Enoch Godongwana sought to convey to the nation (and perhaps also to his colleagues) in his Medium-Term Budget Policy Statement (MTBPS) on November 1. After all, South Africa’s economy is the third largest in Africa and the most diverse, industrialised, and technologically advanced on the continent. South Africa is also one of only eight countries in Africa with an upper-middle-income economy. What has gone wrong then? Is South Africa’s global competitiveness a thing of the past?

The sombre tone of the Finance Minister’s mini-budget speech highlighted the extent to which the economy has been falling short both in its general performance and in unlocking its real potential. The MTBPS was transparent in its assessment of the country’s fiscal challenges. In the face of the current global and domestic headwinds, the MTBPS unpacked the economic and fiscal outlook in a realistic way and painted a vivid picture of just how vulnerable South Africa’s public finances are. As one newspaper headline described it: ‘An uneasy budget that speaks of our time’.

Several of the fiscal risks pertinently outlined in the main 2023 Budget in February had materialised, which the Finance Minister acknowledged. Growth was weaker than forecast, net tax revenues were much lower than expected, and government spending remained too high. The National Treasury was therefore compelled to revise the budget deficit and public debt figures upwards. Research suggests that, while not set in stone, the maximum ‘safe’ debt-level ratio set globally for emerging markets is about 60%. South Africa’s public debt-to-GDP ratio is now expected to rise to 77% by 2025, a sizeable jump from the 73% forecast in February 2023.

This dire projection again reinforces the importance of more robust economic growth to drive better fiscal outcomes. Higher rates of economic growth would soon make several fiscal metrics look better. Nevertheless, the National Treasury reduced its GDP growth forecast slightly for 2023 from 0.9% to 0.8%. Thereafter, growth is anticipated to improve gradually, yet rising above 1.5% only after 2025—if the power grid is stabilised and government implements necessary structural reforms. The rate of growth is not keeping pace with population growth and so income per capita has been declining steadily.

Meanwhile, the damage that failing state-owned enterprises (SOEs) like Eskom and Transnet has inflicted on the country’s economic growth performance is highlighted in the SARS estimate that rolling blackouts and an underperforming freight rail system have cost South Africa about R200 billion. The Finance Minister again emphasised the need to impose strict conditions on bailouts for SOEs, including any financial support for Transnet’s latest turnaround plan amounting to about R120 billion.

The MTBPS data confirmed the degree to which failing SOEs continued to be a serious drag on South Africa’s public finances. The chronic structural shortcomings of several public corporations have clearly limited the efficacy of conventional macroeconomic policies and discouraged investment and job creation. The private sector remains a key partner in any growth-revitalisation plan, and the 2024 Budget should more exhaustively address the role that the private sector can play, especially in infrastructure provision. Enhancing the contribution of public–private sector partnerships must remain high on the implementation agenda.

A major complication in the budget planning process has been the expanding public sector wage bill. In the light of the MTBPS, there needs to be renewed commitment to managing headcounts and limiting wage bill spending. The combination of the public sector wage bill and debt servicing costs, the latter growing at an unprecedented rate, absorbs too large a share of the budget. This increasingly comes at the expense of other major social and infrastructure spending and also limits the ability of domestic policy to respond to future shocks.

Budgets always require a delicate balancing act, and the MTBPS is no different, with many complex issues, relationships, and repercussions having to be taken into account in what is, after all, an exercise in political economy. With fiscal austerity, there is also the ever-present danger of cutting out more muscle than fat by weakening growth-driving factors instead of curbing spending excesses. With elections pending in 2024, there was understandably no appetite in the MTBPS for tough fiscal decisions. South Africa’s public finances therefore remain on a slippery slope, and risks to the fiscal outlook remain elevated, despite the conservative language permeating the document.

Most of the remedies and reforms outlined in the 2023 MTBPS also await finalisation in the 2024 Budget in February, and even beyond. Moreover, several tricky issues were inevitably avoided. The jury is therefore still out on the credibility of the MTBPS’ projections. In the meantime, though, there is no danger of government ‘running out of money’, as some alarmists have put it, or of South Africa facing another imminent investment downgrade. The country’s challenge is one of fiscal sustainability in the longer term, not a short-term technical inability to ‘balance the books’.

Still in South Africa’s favour are its deep financial markets and the fact that the maturing structure of government debt is long and that most of this debt is denominated in local currency, not dollars. Financing government debt is still possible, albeit at an increasing cost, but the country cannot afford to reach a ‘fiscal cliff’ or to ‘crowd out’ the private sector. The proposal to use the SARB’s balance sheet to access more financial resources would be both controversial and costly, and would require deft handling, given South Africa’s circumstances.

There are, however, no ‘free lunches’ in fiscal policy. The markets—having anticipated the 2023 MTBPS as largely a holding operation—will now have higher expectations of the 2024 Budget in February and how it is likely to influence South Africa’s risk premium. The bar will be set high for the main Budget, which will still need to respond appropriately to a challenging set of economic circumstances both globally and domestically.

By then, apart from geopolitical developments, there will also have been two meetings of the SARB’s Monetary Policy Committee to decide on the direction of interest rates, and the country will be only a couple of months away from the 2024 elections. Given the bold commitment made in the MTBPS to rein in spending, all eyes will be on what fiscal decisions are made in the 2024 Budget and what inevitable trade-offs are deemed necessary. Of the R55 billion of planned spending cuts over the medium term, R21 billion (it was promised) would be shed in the current financial year.

The 2024 Budget also needs to reveal the details of where the R15 billion of tax hikes will be found—at a time when tax buoyancy is waning, the tax base is narrowing, and economic growth remains weak. The National Treasury has also promised a new and more sophisticated fiscal anchor next year to better manage the country’s public finances in future. Nonetheless, the constant slippage in fiscal upshots remains a key credibility issue.

Next year’s Budget needs to unveil tangible outcomes that build credibility against a background in which fiscal targets have consistently been missed. “This continuous failure to effectively consolidate the fiscal position,’ said the Financial and Fiscal Commission, ‘has severely eroded the credibility of the endeavour. Consequently, the promised fiscal consolidation had consistently remained elusive, leading to a loss of confidence in the projected trajectory.” South Africa is already at the outer extremities of what it can reasonably do to contain its debt burden and stabilise its public finances.

As the Finance Minister stressed, whatever immediate steps are taken ‘to balance the books’, everything ultimately points to higher, more inclusive economic growth if South Africa is to achieve fiscal sustainability in the longer term. And if job-rich growth can also help to move more of the population out of welfare and into work, the lowering of the costs and risks of welfare dependency will improve the fiscal outlook. Many countries set their sights on higher economic growth, but it is often an elusive goal, as the poor track record of our own National Development Plan has demonstrated.

Global research has shown that the number of countries that have successfully grown out of excessive public debt is actually quite small, whereas the number of countries that have faced major fiscal difficulties, which induced higher inflation and other serious economic setbacks, is quite large. The 2024 Budget must therefore be crystal clear about the determination of the National Treasury to keep South Africa’s fiscal situation manageable. It must prove the sceptics wrong by following through on the pivotal commitments made in the 2023 MTBPS.

Ultimately, the 2024 Budget needs to reinforce the important message that South Africa’s GDP growth trajectory will be driven mainly by the pace and quality of structural reforms (including fiscal ones) in the years ahead. What is required now is economic steersmanship of a high order. Without such leadership, South Africa’s vision of a bigger, stronger, and better economy will remain as elusive as ever.

Prof. Raymond Parsons is a Professor of Economics at the North-West University Business School.

By Editor