One of South Africa’s biggest budget problems is getting worse

Government spending remains too high for the tax base, and this gap has only increased as a result of the 2020 recession caused by the global Covid-19 lockdown.

This is a key point in the National Treasury’s 2021/2022 annual performance plan which it presented to parliament on Tuesday (4 May).

Treasury said that the gap between revenue and expenditure has increased significantly in 2020/21, widening the main budget deficit to around 12.3% of GDP.

“Large adjustments to government spending are therefore required to return the public finances to a sustainable position,” it said. “In addition, the impact of the Covid-19 pandemic economic contraction on South Africa’s public finances will be felt for years to come.”

Treasury said that gross debt is projected to reach 80.3% of GDP in the current fiscal year, stabilising at around 88.9% in 2025/26.

“Additional fiscal pressures from the broader public sector – including state-owned companies, social security funds and municipalities – remain unresolved.

“The fiscal trajectory is a major source of uncertainty and, along with unresolved structural reforms, keeps South Africa’s risk premium elevated, and thereby pushes up borrowing costs for the economy as a whole.”

Treasury said that the South African economy continues to battle a low and negative growth trend, which exacerbates high levels of unemployment, poverty and inequality as the GDP per capita continues to decline.

“At the forefront of this state of the economy, are delays in implementing growth-enhancing reforms,” it said.

“Electricity constraints, inefficient network industries such as water and transport, the high cost of doing business, declining productivity, and low confidence (among others) have led to reduced investment and a cycle of weak economic growth.”

Over and above this already weak economic context; the Covid-19 pandemic in 2020 and the subsequent lockdown measures implemented by governments across the world, including South Africa, has eroded the economic base to around 2013 levels, Treasury said.

“Despite the expected rebound in the global economic growth in 2021, it is expected that the South African economy will only return to 2019 levels in the latter parts of 2023.”

A very weak position 

In his foreword to the report, Deputy Finance minister David Masondo said that South Africa entered the current crisis in a very weak position, as one of only two emerging market countries to be in recession.

“In this regard, we already had an unsustainable fiscal trajectory, including one of the fastest rising debt levels in the developing world,” he said.

“We should thus be careful when comparing ourselves to other countries, especially advanced economies with reserve currencies, when considering our policy response. We need to restore fiscal buffers, and investigate other ways of providing services in an efficient way.”

Outside of improved fiscal policy, one of the ways that government plans to improve revenue is through a strategy shift for the South African Revenue Service (SARS), Masondo said.

“Over the next year SARS will adopt a strategic focus on making it easier for citizens to fulfil their tax obligations, while strengthening its enforcement capabilities to pursue all violations of our tax system and laws.

“SARS and management are working hard to close the tax gap and recover lost revenue, including due to illicit financial flows.”

Read: South Africa sets aside extra R4 billion for Covid-19 vaccines and grants

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One of South Africa’s biggest budget problems is getting worse