South Africa’s economy is running out of road

The two most important facts about the South African economy over the past decade are that growth has been exceptionally disappointing, and this has been accompanied by a vast build-up of public sector debt.

These are the major findings of a new report released independent policy research and advocacy organisation, the Centre for Development and Enterprise (CDE).

Titled ‘running out of road’, the report shows that government’s response to the fiscal crisis has been inadequate: it has not reined in spending sufficiently, and the increase in tax rates has not resulted in higher revenues because of the crisis in SARS and slowing growth.

“South Africa’s government and its state-owned companies (SOCs) have outstanding debts of over R3 trillion, a figure that is almost four times higher than it was in 2008 and 15 times higher than in 1992,” the CDE said.

“Expressed as a percentage of GDP, debt now exceeds 60%, a return to the highest levels recorded at the end of apartheid. Critically, it shows little sign of slowing its upward trajectory.”

The CDE said that the main reason for the debt explosion is that, in the immediate aftermath of the global financial crisis in 2008, a large gap opened up between government spending and the taxes that it collects.

This gap has not been closed in the intervening years, it said.

“It would have been inappropriate to cut spending at the time of the global recession (when the collapse in growth meant that tax collection fell).

“And there was a strong argument for a temporary increase in spending to help the economy recover. However, the actual policies adopted were all built on the idea that the economy (and, therefore, tax collection) would quickly return to the rapid growth that had characterised the five years before the crisis.”

These policies – which included an increase to the size of government and an increase in remuneration for public servants – have permanent effects on spending levels, the CDE said.

“Had they been accompanied by a return to rapid growth, they would not have led to the explosion of debt.

“But growth has never returned to the levels achieved in the five years before the global financial crisis, and, as a result, public spending continues to be far greater than tax revenues. Since 2009, the two fastest growing expenditure items in the budget have been debt service costs and public sector payrolls, both of which have grown much faster than the economy.”

Action needed

Responding to these mounting challenges is going to require action – much of it urgent – on a range of fronts, the CDE said.

“Urgent action must include reining in spending, improving tax collections, fixing failing SOCs and rethinking the sector as a whole, and implementing growth-enhancing reforms.

“It is far from clear that government fully grasps the depth of the changes required and how much leadership it will take from the president to get this done.

“While there have been some good signs in some areas (notably in relation to the exposure of state capture), there has also been a woeful lack of leadership in others. This will not do for very much longer.”


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South Africa’s economy is running out of road