Finance Minister Enoch Godongwana has issued a stark warning that South Africa could go over the fiscal cliff by March 2024 if it does not make additional borrowings as the government finances have severely deteriorated on the back of rising expenditure and dwindling tax revenues due to weak economic growth.
Delivering the keynote address at the annual Kgalema Motlanthe Foundation Investment Growth Forum on Friday night, Godongwana explained a catch-22 situation in which the country found itself.
Godongwana said the government needed to increase its borrowing to prevent drastic reductions in expenditure.
“The first thing we've done is to manage this in a more prudent way through a combination of cutting expenditure and bumping up borrowing,” Godongwana said.
“We've been forced to bump up borrowing a bit more than we have predicted in the year because if we didn't do that the [budget] cuts would have been more massive. So we have to do a combination of both.”
However, the finance minister warned of the current state of government borrowing, saying that imminent debt repayments could deplete the fiscus by the end of this financial year.
Godongwana said debt servicing costs alone were averaging a massive R366 billion per year and exceeded the annual budget allocation to the police department.
“If you see that the police budget in this current financial year is R111bn, health is about R253bn, education is about R306bn, debt service costs are the single biggest item sitting at R366bn,” he said.
Godongwana further cautioned that the government could soon face a critical shortage of funds as several government debt instruments were maturing this year.
“What complicates your problem is that not only you’ve got debt service costs [but] you have to redeem old debt. This year alone the amount we are going to redeem is such that if we don't do anything, we won’t have cash by the end of March, starting from December,” he said.
“The problem with debt is the capacity of the economy to service it. Our ability to service debt is becoming constrained and therefore we need to do something about it.”
This comes as Godongwana will on Wednesday deliver the Medium-Term Budget Policy Statement (MTBPS) in Parliament which will reveal the real state of public finances.
Real gross domestic product (GDP) growth is expected to be slightly lower than the National Treasury’s February forecast of 0.9% and 1.5% in 2023 and 2024, respectively.
This is due to uncertainties surrounding load shedding, transport bottlenecks, fading global growth momentum, subdued international commodity prices and the slowdown in domestic demand due to higher interest rates.
Economists are expecting a tax revenue shortfall of around R47bn in 2023/24 and R156bn over the Medium-Term Expenditure Framework (MTEF) period, from the February 2023 budget estimates.
The consolidated budget deficit is also expected to widen to 5.5% of GDP in 2023/24, much higher than the 4% projected in the National Budget.
Nedbank economist Isaac Matshego said they were forecasting aggregate expenditure growth of 6% in nominal terms in 2023/24, overshooting the 3.4% projected in Budget 2023, as a result of higher-than-budgeted public sector wage bill and social transfers.
There is a big push to expand the Social Relief of Distress (SRD), which accounts for R36bn from the fiscus, to a permanent Basic Income Grant (BIG).
“The rapid increase in debt does not only threaten the sovereign’s debt sustainability. Higher debt will push the debt service costs even higher when South Africa already has one of the highest debt service costs compared with its emerging market peers,” Matshego said.
“National Treasury faces the challenging task of ensuring that the higher public sector wage bill and debt service costs do not significantly widen the budget deficit and push the public debt stock even higher.
“To achieve this, the government will have to contain spending growth in most areas and cut spending in non-essential areas.”
North West University’s Business School economist Professor Raymond Parsons said government bailouts to struggling state-owned enterprises remained a persistent problem.
Transnet recently asked the government for R100bn financial support to implement its turnaround plan.
Parsons said a long-range fiscal plan was, therefore, now needed to steadily wind down spending and debt and bring them under control in a way that establishes clear priorities for the future.
“Fiscal policy will inevitably have to be pragmatic and realistic to deliver sensible trade-offs in order to project a credible medium-term budget that offers more predictability and certainty,” Parsons said.
This fiscal balancing act will, therefore, require a skilful but level-headed revised Budget ‘mix’ and projections.
“The forthcoming medium-term Budget must be a credible fiscal plan that does enough in challenging economic circumstances to placate nervous markets and not allow excessive borrowing to 'crowd out' the private sector.
“It is apparent that, whatever other steps may be needed to ‘balance the books’, all roads eventually run through inclusive growth if South Africa wants fiscal sustainability in the longer term.”
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