Fiscal deterioration amplifies policy desperation

6 September 2023

The recent deterioration in the South African government’s finances is a reminder of its anti-growth policies and reckless spending habits which are destroying vast amounts of wealth each year. But it also raises the threat of a negative policy feedback loop, in which extreme fiscal strain inspires desperate government officials to escalate the very policies already doing so much harm. This is because such policies are seen as a short-term path to otherwise dwindling lucre and securing vested political and financial interests.

Sakeliga is intensifying its opposition to this rising threat. It is vital to protect the economy's capital structure by restricting government's scope for value extraction and wealth destruction and by pressuring it to cut spending and abandon harmful policy.

Fiscal Deterioration

Government finances have deteriorated sharply in 2023 as tax receipts have fallen further behind the pace of spending. Government borrowing has now swelled to around R100 billion per quarter, from an already-imprudent R50 billion per quarter just a year ago.

But the government has run up so much debt since 2008, that interest payments to service its overall debt have spiralled up to nearly R100 billion per quarter as well. In other words, almost all government borrowing currently is being used cover interest obligations from previous borrowing. Not a healthy place to be.

Meanwhile, other state and government entities such as large state-owned enterprises and municipalities have since 2008 racked up hundreds of billions in new debts, with a rising expectation that these debts will be guaranteed or bailed out by the national government. Therefore, actual and probable liabilities of the national government have soared in the past 15 years while infrastructure investment has been either neglected or wasteful, and economic value added has stagnated. The result is that South African government bonds are less trustworthy than they once were. Lenders require higher interest rates as compensation for taking the (rising) risk of lending to the South African government.

A Spending Problem

Tax receipts falling so far below spending is not a tax problem but a spending problem. South Africa is a high-tax country with a comparatively high rate of tax compliance by global comparison. Tax receipts are a higher percentage of GDP today than at any time in the previous 45 years for which we have data. Adjusting for inflation, tax receipts are higher in 2023 than they were before lockdowns, and around 50% higher than in 2008.

This is not a tax problem. What is evidently lacking is spending restraint and responsible fiscal management. This long-time problem was exacerbated in 2017 by then Finance Minister Pravin Gordhan’s illegal procurement regulations which Sakeliga challenged and the Constitutional Court ordered to be scrapped in 2022. Prioritising BEE and local content in procurement has caused hundreds of billions, perhaps trillions, in wasteful spending, as widely recognised and confirmed by the Zondo Commission findings.

Such a persistent inability to cut government spending and address chronic waste in procurement signals at least three major risks that the business community should prepare for:

Currency and banking system risks – although short- and medium-term fluctuations in the exchange rate are hard to predict, fiscal stress portends a less resilient and more volatile currency which harms business and investment conditions. Fiscal risks are also a direct threat to the stability of the local banking system, not only because government is a major employer and spender in the economic system, but more directly because government bonds are a major asset holding of banks. A bond market crisis, as occurred during the 2020 lockdown, leads to a banking crisis and commercial credit crunch.

State failure risks – fiscal distress almost always goes hand in hand with accelerating state failure. While we see state failure as an opportunity to build a healthier and more independent business environment, swift failure in key areas exposes businesses and communities to a rapid onset of more crime and violence, infrastructure decay, and administrative collapse. It is vital that businesses and communities act decisively to replace failing state programmes where necessary.

Policy risks – diminishing tax receipts and public resources lead to governments seeking desperately to escalate policies that would extract resources from productive sectors of society. This can include tax hikes, printing money, and regulatory devices to extract levies, fees, fines, patronage and control for government officials, including asset grabs like special wealth taxes and land expropriation. We should expect enhanced efforts by the government to escalate BEE, raise taxes and close loopholes, tighten rather than loosen exchange and capital controls, add regulations to scoop fees and levies, and escalate corruption. There is also the ominous risk, although not presently urgent, that the government will seek to use the central bank to print money to finance state activities.

Sakeliga Ramping Up Opposition

Sakeliga is escalating efforts to resist harmful policies that try to extract further resources from productive sectors. We do this through strategic commercial litigation in the public interest and alternative structures to failing state programmes. Our litigation focuses on establishing freer trade and stronger protection of property, enabling businesses to develop and control overregulated economic infrastructure, and dismantling burdensome security regulation.

Outside of the courts, we are developing a nationwide footprint of business and industry groups in our chamber support network, able to tackle and solve local problems resulting from state failure. We establish relationships with foreign chambers of commerce, embassies, and official investment agencies to extend and diversify business opportunities internationally and discuss and respond to policy challenges. We are developing highway security capabilities to combat violent crime affecting key freight routes.

Rather than needing to extract more precious resources from the private sector, the government needs to deal with the rising fiscal pressure by cutting spending in the order of 20-30%. It will not be naturally inclined to start repairing public finances in this way, which is why it is incumbent upon organised business and civil society to limit government's discretion. To ensure this, it will be vital to resist tax hikes, oppose destructive economic policies and overregulation, and ensure the central bank is not used as a tool of money printing. This will require public interest interventions that go beyond mere advocacy and lobbying.

For Sakeliga, deteriorating government finances is a reminder of the urgency and opportunity in the task before us.

Issued by Russell Lamberti, Executive Director: Research & Strategy, Sakeliga, 6 September 2023