South Africa’s fiscal precipice: The chickens have come home to roost
9 October 2023
According to media reports in the past few weeks South Africa is facing a fiscal cliff. Due to lower-than-expected commodity prices, higher-than-expected expenditures, government finances are facing the worst combination of circumstances. The answer lies in creating the conditions for long-term economic growth and mercilessly shrinking the size of government but these options are not without political costs in the short term.
Over the past two years South Africa benefited from higher commodity prices due to deficit spending by governments around the world to make up for their lockdowns and the uncertainty caused by the war in Ukraine. Now interest rates are on the increase as governments try to deal with the inflation they caused and markets have a better idea of how the war in Ukraine affects the costs of critical commodities. This has led to a collapse in commodity prices and therefore a collapse in the windfall revenue national treasury has been receiving since the covid lockdown.
Making matters worse is the increase in expenditure that the national treasury has had to fund outside of their initial projections. In February the government budgeted R36.1 billion up to March 2024 for the Social Relief of Distress (SRD) grant, the R350 grant given to all unemployed people since the covid lockdown. This was never meant to be a permanent grant and would not exist if the government had not pursued the disastrous lockdown policy.
At the time the SRD was first introduced as a temporary lockdown measure, some of us warned that with our high, structural unemployment rates the government would not be able to get rid of this grant once it was introduced. It would simply not be politically possible to take away money from 10 million unemployed people once they started receiving it. Three years after the initial lockdown and government is now looking for a way to make the grant permanent.