The R2 trillion warning for South Africa

The National Treasury has published its Medium -Term Expenditure Framework (MTEF) Technical Guidelines which aim to provide public institutions with guidance on how to prepare their medium-term budget estimates for the 2021 Budget.

The guidelines are primarily intended for national government departments and public institutions, and contribute to the budgeting process in provinces.

Treasury said that since 2008/09, there has been a large and growing gap between government spending and tax revenues, resulting in exponential growth in borrowing to fund the fiscal gap.

In response, government has taken steps to reduce non-interest spending growth and raise tax revenue.

“However, due to lower nominal GDP and revenue growth, these interventions have not stabilised debt. Debt-service costs continue to be the fastest growing area of spending, accounting for 21 cents out of every rand of government revenue raised in 2020/21.”

It added that over the last 12 years, the stock of government net loan debt rose six-fold from under R500 billion in 2007/08 to nearly R3 trillion at the end of 2019/20.

Treasury said that Covid-19 has further exacerbated the precariousness of the public finances, which had already reached an unsustainable position before the pandemic.

All sectors have experienced a sharp downturn and millions of jobs are at risk,while government has had to deploy a range of fiscal and monetary measures to address the adverse effects of the pandemic, limit the economic damage, and support recovery.

A warning

Treasury said that South Africa’s current spending path implies that fiscal deficits will remain higher than 12% of GDP for the foreseeable future.

This is a key reason for South Africa losing its investment-grade credit rating by all ratings agencies, it said.

“Allowing fiscal buffers to weaken hampers South Africa’s policy response to shocks, including the current pandemic, and government has resolved that this should be rectified going forward.”

Such high deficits place enormous pressure on South Africa’s financial sector and the real economy, it said.

“With savings levels quite low, high government deficits will expose the country to higher borrowing risks, push interest rates upward and extract from growth through lower private sector investments.

“In the event of a debt default or fiscal crisis, the National Treasury has estimated that this would cost the country at least R2 trillion in lost economic activity by the end of the decade.”

Cuts

Treasury said that gross tax revenue for the 2020/21 fiscal year has been revised down from R1.43 trillion to R1.12 trillion, which has created a R304.1 billion shortfall.

It said that the 2021 MTEF aims to achieve R230 billion in savings over the first two years, beginning with R90 billion reduction in overall non-interest spending in 2021/22.

The 2023/24 baseline will carry through these measures, with the aim of achieving a primary surplus and stabilising debt in that year, it said.

“If these reductions are not achieved, and fiscal consolidation is unsuccessful, government debt will exceed 100% of GDP in the medium-term.

“This will signal the emergence of debt distress episodes as a vicious cycle of high borrowing rates and low growth leading to ever deeper debt spirals, lower investment and lower economic output.”

Targeting sustainable public finances is also critical for maintaining policy flexibility and sovereignty, as harsher measures will be required by lenders of last resort, the group said.

Hope

Despite this bleak position, Treasury said that South Africa’s economy is resilient and can be rebuilt and stabilised.

“For the purposes of the medium-term, measures towards fiscal consolidation and debt stabilisation should be accompanied by a refocusing of spending from consumption to investment in strategic economic infrastructure,” it said.

“The National Treasury in collaboration with departments will be undertaking spending reviews to contribute to the fiscal consolidation process.”

In this regard, there should be no “holy cows” and no spending items will be automatically protected from possible downward adjustments, Treasury said.

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