A flurry of recent news articles have referred to South Africa as approaching a “fiscal cliff” due to a “debt blowout”, with the possible “total collapse in the country’s finances” feared. Such panic-inducing statements will be made repeatedly prior to the medium-term budget policy statement in late October.
There should be little doubt that this is a carefully orchestrated campaign by the National Treasury, which is exploiting the fear of economic disaster to drive through unpopular, and unwise, spending cuts.
This is not to dismiss the reality of unplanned-for budget challenges. Falling commodity prices, lower-than-expected tax intake, slower-than-projected growth and weakening international conditions all take their toll. South Africa’s relatively high cost of borrowing adds further pressure. Treasury’s deliberate failure to plan for a public sector wage bill increase, or the continuation of the Social Relief of Distress grant over the medium term, makes matters much worse.
We should be approaching budget choices by asking how the positive benefits of government spending can be maximised
But anyone who tells you, in the context of something as multi-dimensional as a national budget, that “there is no alternative” is being economical with the truth. There are always myriad budgetary choices, roughly grouped under the themes of raising tax, increasing borrowing, and reprioritising or cutting spending. Informed public debate requires a detailed assessment of these. The Treasury should engage responsibly in this conversation.
Instead, Treasury’s instructions to government departments dismiss the possibility of raising additional revenue, presenting expenditure cuts as the only option. There is no attempt to grapple with the consequences of such cuts.
If we are to propose cuts to government spending, we must acknowledge their consequences. Put simply: critical services will collapse and people will die. This does not mean budget cuts are disqualified as an option. The difficult trade-offs of managing an economy are real. But we cannot tolerate a budget leadership that refuses to acknowledge this.
Former budget office chief Michael Sachs said that a failure to add additional resources means “we are likely to see widespread failure and disruption of government services, especially health and basic education”.
In the Eastern Cape, this is already a reality. In October 2022, more than a third of posts (1,202 out of 3,269) were vacant, with only 447 of the required 671 ambulances in operation. Budget cuts will worsen this.
Austerity-induced death is well documented. Spikes in suicides, particularly among men, rose by 45% in South Korea and 60% in Thailand in the post-1997 crisis budget cuts, and by 36% in June 2011 in Greece. Mass hunger and “wasting”, particularly among mothers, rose by a fifth in Thailand and Indonesia in 1998. Malaysia, by contrast, facing the same crisis, expanded its food support programmes and saw no rise in malnutrition among mothers.
Women are disproportionately harmed by budget cuts, as they are forced to make up for lack of public provisioning through increased unpaid care work, lose employment in the public sector, and carry the burden of coping strategies.
Inequality and poverty will inevitably worsen. Between 2002 and 2018 across 79 countries, austerity policies increased the incomes of the top 10% of earners at the expense of the bottom 80%. The population living in poverty rose and the depth of poverty increased.
All of this does long-term damage to the economy and our chances of economic recovery. Whereas previously it was believed the harms of short-term fiscal consolidation were offset by medium-term economic gains, this is no longer the case. Recent research shows that fiscal contraction larger than 1.5% of GDP generates a negative effect of more than 3% on GDP even after 15 years. The drop in GDP reaches 5.5% for fiscal contractions larger than 3%.
It is therefore incumbent to explore all avenues for raising additional revenue. These should only be disqualified if there is strong evidence to suggest their social and economic costs would be worse than the devastation of austerity.
Luckily, South Africa has a number of unexplored revenue raising avenues available.
The government should cut tax breaks that only benefit higher-income earners and the wealthy. The removal of subsidies for retirement provisions could raise R97bn. Removing medical aid tax credits for those earning above R500,000 per annum would add an additional R6.4bn. The under-taxation of wealth in South Africa cannot continue, offering large untapped revenue-raising potential.
The current situation clearly indicates the madness of the 2022 reduction of the corporate income tax rate (from 28% to 27%). Rather than raise private investment this will increase inequality without a positive impact on economic growth. The rate should be returned to 28% immediately.
In addition to tax revenue, South Africa continues to have strong access to rand-denominated government borrowing in local and international financial markets. Our debt-to-GDP ratio at 71.4% in 2022/2023 is in line with the emerging market and middle-income country average of 69%. These same countries face a 6% budget deficit in 2023. South Africa is hardly an outlier.
It is, however, concerning that debt service costs take up a high (15%) share of consolidated government expenditure. But this is driven by South Africa’s relatively high cost of long-term local-currency debt, around 10-12% over the past two years compared with roughly 7-8% in emerging markets.
Put simply, South Africa pays too high an interest rate to bondholders and this is the most important factor that the government should be tackling. However, Treasury sees these rates as solely market determined and is unwilling to intervene. Borrowing costs could be lowered by, for example: mandating greater state-lending (including at lower rates) by huge local pools of capital, including public and private pensions; discounted lending by the South African Reserve Bank to finance development projects; or targetted capital controls.
Rather than containing these costs, Treasury’s extreme fiscal consolidation will exacerbate them, with interest rates having been shown to rise in response to spending cuts during periods of fiscal stress.
Something we can all agree on is that growing the economy will boost tax revenue and bring down the debt-to-GDP ratio. Government spending, the largest single source of spending in the economy, has an enormous influence on economic growth. While misspent funds squander this potential, spending cuts invariably shrink the economic pie.
We should, therefore, be approaching budget choices by asking how the positive benefits of government spending can be maximised. This means making budget choices on the basis of tackling unemployment, poverty, inequality and other development challenges. Extreme budget cuts will move us further from these objectives than the alternatives, leaving devastation in their wake.
But a responsible conversation of trade-offs is not what Treasury is interested in. Its agenda is to stoke sufficient panic to steamroll through unpopular and unwise policies. We’ve seen this movie before. It doesn’t end well.
Isaacs, Mncube and Mdutyana work for the Institute for Economic Justice
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