After more than six years of warnings – South Africa has hit its fiscal cliff

South Africa has now hit its ‘fiscal cliff’ as public sector remuneration, social assistance payments and debt-service costs have effectively absorbed government revenue.

In a written response to Finance minister Tito Mboweni’s Medium Term Budget Policy Statement (MTBPS) this week, the Fiscal Cliff Study Group (FCSG) said that these three costs have steadily increased in the past decade.

It showed that these items made up:

• 55% of tax revenue in 2007/08;
• 75.5% of tax revenue in terms of February 2020 budget;
• > 100% of estimated tax revenue in terms of 2020 MTBPS.

The group said that South Africa was likely to reach the fiscal cliff this year based on the assumption of a revenue reduction of around R312.8 billion.

This will be combined with a once-off social grant payment increase of R41 billion, additional borrowing requirements for government debt and concomitant increase in debt-service costs of R3.7 billion in 2020/21, it said.

The FCSG said that it has been predicting a fiscal crisis since 2014 and that “the fiscal cliff has now been reached”.

“Although some recovery could follow after the 2020/21 expenditure spike; we have seen a structural shift closer to the cliff face,” it said.

It added that steps should now be taken to avoid a permanent fiscal crisis and that disclosure of trends in public-service compensation data should continue.

The group said it was also important to protect institutions that still function well, but refrain from helping non-essential failed state-owned enterprises such as Alexkor, Denel, SA Express, and South African Airways.

It said that government should also limit or reduce the remuneration and bonuses of executives at SOEs.

“Only very rapid economic growth can turn this position around,” the FCSG said. It added that it reserves some scepticism regarding medium-term forecasts, as these are based on a strong ‘V-shaped’ recovery.

It said that global lenders’ willingness to provide funds; should also not be confused with South Africa’s ability to repay it.

“As it is evident that Treasury is already finding it harder to acquire sufficient liquidity in local financial markets, budget deficits should be reduced.”

Simply not good enough

In a separate submission, the head of Economic Research at Old Mutual Johann Els raised concerns around the government’s ability to meet its debt targets.

“While we commend the minister of finance for the continued attention on fiscal consolidation, we see it as a great pity that the June supplementary budget’s ‘active scenario’ to stabilise the debt ratio at 87.4% by 2023/24 was abandoned within four months,” he said.

“Back in June, we viewed the commitment to the active scenario as very positive in reducing the risk of a so-called ‘fiscal cliff’ or a sovereign debt default.

Els said that the new stabilisation target for the debt-to-GDP ratio of 95.3% two years later is ‘simply not good enough’ given the inherent risks at achieving the proposed wage bill savings that make up the bulk of the envisaged improvement in the budget deficit.

The continued risks around the growth profile adds to this risk in not achieving the even later debt stabilisation, he said.

“We are also relieved to see the continued focus on expenditure cuts rather than significant tax increases, but believe larger cuts should have been made to non-wage spending and we are therefore disappointed to see the significant reduction in non-wage spending cuts versus June’s budget.

“So, there are commendable aspects of the MTBPS, but we believe the seriousness of the situation demand faster and more decisive action.”

Read: Companies and wealthy South Africans should pay more tax: think tank