South Africa’s updated fiscal cliff forecast

South Africa’s decision not to introduce any austerity budgets in the last 15 years combined with a highly expansionary fiscal stance means the country is continuing towards its fiscal cliff.

The fiscal cliff is the point where civil service remuneration, social assistance payments and debt-service costs will absorb all government revenue.

In a presentation to parliament this week, the Fiscal Cliff Study Group (FCSG) South Africa has been running historically large deficits, at an average of 4.5% GDP, over the last decade.

It added that the budget deficit of 10% of GDP in 2020/21 is one of the largest on record, while expenditure and debt continue to rise.

Data provided by the FCSG shows that compensation of employees, social assistance payments and debt service costs have steadily increased in the last 15 years, as follows:

• 55% of tax revenue in 2007/08;
• 75.5% of tax revenue in terms of the February 2020 budget;
• 100% of estimated tax revenue in terms of the 2020 MTBPS;
• 91% of estimated tax revenue in terms of the February 2021 budget;
• 74.7% of estimated tax revenue in terms of the February 2022 budget.

While the fiscal cliff barometer improved compared to the 2021 Budget, continued vigilance is necessary as the shift is caused largely by the revenue ‘windfall’ driven by the mining sector, the FCSG said.

It added that the longer-term outlook for the fiscal cliff barometer remains worrying as it is likely to trend in the wrong (upwards) direction.

One of the biggest concerns raised by the FCSG is South Africa’s potential growth, which has slowed significantly after reaching a peak in the mid-2000s.

Data from the Reserve Bank estimates that the country’s potential growth declined from around 4% at its peak in the mid-2000s to around 2% after the global financial crisis

While there are estimates of a natural growth rate in the 1.9% – 2.3% range, there is also evidence to suggest that the rate is under considerable downward pressure in the post-2010 period.

The strongest decline can be attributed to the manufacturing and mining sectors, while the financial and other service sectors are seeing some resilience.

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