South Africa is in deep trouble

Experts have warned that South Africa is running out of money, and its ability to service its rising debt is deteriorating at an alarming rate.

Seasoned economist Dawie Roodt told Nuuspod that local governments are collapsing, state-owned enterprises (SOEs) are failing, and the state’s finances are rapidly deteriorating – all because there is simply no money thanks to grave financial mismanagement.

Local municipalities play a vital role in the economy as new and existing businesses depend on them to operate. However, essential services – such as water, electricity, and roads – are falling apart.

Electricity minister Kgosientsho Ramokgopa noted that municipalities now owe more than R63.2 billion in combined debt to struggling power company Eskom, with the amount owed by local governments rising by R4.7 billion since the beginning of this year.

According to Ramokgopa, municipalities have neglected distribution infrastructure through years of mismanagement and underinvestment. He said municipalities underspend by R2.5 billion a year, resulting in a maintenance backlog of over R30 billion.

“This is why we have communities that sometimes have to go for weeks without electricity,” he added.

There is also no money for public servant wage increases across several municipalities. As a result, Tshwane, for example, has battled almost a month of striking workers, causing further maintenance and service delivery backlogs.

Roodt said most municipalities are mismanaged, corrupt, and without any realistic chance of being turned around.

Another problem is that SOEs are falling apart. Eskom is currently dying, with the private sector increasingly relying on alternative energy production to survive. Yet the government has pledged R254 billion of taxpayers’ money to be thrown into the utility’s R420 billion-sized debt hole.

The same goes for other SOEs, with the South African Post Office falling into business rescue (also requiring billions of rands from taxpayers), while Transnet’s failing rail infrastructure throttles the country’s exports.

Poor economic management has burdened the South African economy with seemingly unending challenges: power shortages, transportation bottlenecks, political uncertainty, stagnation in growth, high unemployment rates, underinvestment, overspending and lack of fiscal consolidation.

These factors have resulted in a debt crisis for South Africa.

Debt Crisis

Roodt stated that South Africa’s fiscal deficit for this year would exceed the budget set by finance minister Enoch Godongwana.

“South Africa’s fiscal deficit for 2023 is set to be between 6% and 6.5% of gross domestic product (GDP), much higher than the minister’s expected 4%,” Roodt said.

Farzana Bayat, portfolio manager at Foord Asset Management, noted that, in 2006, the country’s total debt was a modest R500 billion. By 2011, this had doubled to R1 trillion before quadrupling to R4.7 trillion by 2022.

“It is expected to approach a whopping R6 trillion by 2025,” she said.

Roodt added that Godongwana said the government wants to stabilise South Africa’s debt level at 70% of GDP, but it has already increased to 72%.

Bayat further noted that if not for the statistical rebasing of GDP – the replacement of an old base year used to compile GDP estimates in constant prices – South Africa would be closer to 80% right now.

Even with rebasing, however, Roodt expects the country’s debt to increase to 75% of GDP by the end of the year and reach 80% by the end of 2024.

Roodt gave a few  reasons for the growing fiscal deficit:

• The salary bill for civil servants is larger than budgeted because they received above-inflation increases. This is set to continue with an election year in 2024.

• The government gave more money to failing SOEs than expected. This will continue, especially with the state taking over a large part of Eskom’s debt.

• South Africa’s tax collections are under pressure because the economy is not growing.

• Income from mining is declining because of a downturn in the commodity cycle and problems with South Africa’s rail and port services.

What’s worse is that South Africa currently spends 20% of tax revenue on servicing debt. This debt service cost crowds out other much-needed expenditures – crippling the government’s ability to invest in essential sectors like healthcare and education.

According to Bayat, the only way out is through high growth (unlikely), inflation (probable), drastic curtailing of government spending (politically unpalatable going into elections), or increasing taxes (unsustainable).

Consequently, South Africa finds itself caught in an alarmingly difficult debt trap.

Why increases in taxes won’t make any more money for the state.

According to Efficient Group’s data, the government is expected to collect around R1.95 trillion in revenue for 2023/24. The three most significant contributors are personal income tax (PIT), value-added tax (VAT), and Corporate Income Tax (CIT).

Of the R1.95 trillion, PIT contributes R640 billion (33%), VAT accounts for R471 billion (24%), and CIT provides R336 billion (17%).

However, only 1.12% of taxpayers (roughly 163,702 South Africans) pay 30% of total personal income taxes in the country, while 19% pay a whopping 87% of total personal income taxes.

Additionally, a staggering 0.09% of corporate taxpayers (only 770 companies) pay 62.5% of total CIT, with 4.4% paying 95% of total corporate income taxes.

“This means the country has an alarmingly narrow tax base, which is a massive concern for the state’s finances. You cannot increase this.

“If this increases, the tax base will collapse as many of the 1.12%, as well as businesses, will simply leave the country – which they are already doing,” said Roodt.

Read: The absurd tax changes South Africa would have to make to afford the NHI