South Africa heading for a serious crisis

Award-winning economist Dawie Roodt warns that South Africa is heading towards a serious financial crisis, with runaway expenditure and rapidly increasing debt.

Roodt warned about the looming trouble during an interview with Newzroom Africa in which he discussed South Africa’s economic trajectory.

He pointed to a widening fiscal deficit in the coming years, threatening its plans to stabilise its substantial debt burden.

Finance Minister Enoch Godongwana stated in his 2025 Budget speech that government debt is expected to stabilise at 76.2% of GDP in 2025/26.

However, this optimistic view does not tell the whole story. Roodt said the official debt-to-GDP number does not include debt from state-owned enterprises and municipalities.

When their debt is added to the national government’s, South Africa’s debt-to-GDP ratio is closer to 95%. This is entirely unsustainable.

“South Africa is in deep trouble, and unless the government makes important changes, it is heading towards even deeper trouble,” he said.

“The sooner we start making these changes, the less painful it will be. Unless it is done quickly, the day will come when these changes are rapidly forced on us.”

He warned that if South Africa continues on its current path, the country will face a financial crisis.

Roodt said the government should significantly reduce state spending and avoid further tax increases, which hurt the economy.

Part of cutting spending involves reducing the number of government employees and improving the state’s efficiency.

He said government employees are overpaid and underworked, which requires a large amount of tax revenue to sustain.

“There are 1.2 million national government employees. It goes up to 2 million if you include local authorities,” he said. “South Africa’s economy can no longer carry this huge burden.”

“This is why the finance minister wants to increase VAT. He wants to take more money out of the system to fund the state machinery.”

However, these plans are now on the rocks after Godongwana was forced to hit reverse on the VAT hike.

Instead, the country will now face a R75 billion hole in the budget over the medium term, with few options to plug it.

Increased borrowing may be the only option, which is really bad news for South Africa’s finances.

The government should not focus on job creation

Roodt said that to fix South Africa’s unemployment crisis, the focus should not be on job creation. Instead, the government should focus on economic growth.

“The politicians do not understand this. They think if you keep somebody busy, like waving a flag next to a road, you have created a job,” he said.

“That is not how jobs are created. Employment is created when the economy grows. People will then automatically get jobs.”

South Africa’s problem is that it has the wrong macroeconomic policies, like the Expropriation Bill and Black Economic Empowerment (BEE).

These policies make South Africa an unattractive investment destination for local and international investors.

“Our politicians are pre-conditioned to make bad decisions, which harm South Africa’s economic growth.”

Roodt said government spending, which has reached 33% of GDP, is one of the biggest problems. This money is taken out of the economy in the form of taxes.

The government is inefficient at spending this money, which means it is a net drain on the economy. The money would have been far more valuable in the hands of the private sector.

Political economist Moeletsi Mbeki also stated that South Africa’s civil service is the highest paid globally as a percentage of GDP and should be drastically reduced.

Mbeki said South Africa needs to reduce civil service pay to a level comparable to that of similar countries and invest the saved money in productive assets.

In an interview with BusinessTech, Mbeki explained that moving money from the private sector, through taxes, to the public sector is not productive.

“This means that the private sector does not have the resources to develop and reinvest in the South African economy,” he said.

Simply put, the government takes money from the private sector to pay exorbitant salaries to state employees and people working for state-owned enterprises.

He said to ignite economic growth, the government must cut public sector salaries to 6% to 7% of GDP. This means around a 50% cut in the civil service salary bill.