MTBPS: Austerity measures and tax hikes raise economic stability fears

Wednesday’s MTBPS will affect South African households as government’s austerity measures designed to get the country out of its debt spiral will have severe consequences regarding the delivery of crucial public services.

Minister of Finance Enoch Godongwana warned the nation the medium-term budget would not be a happy one and sounded the alarm earlier this week that the country was at risk of running out of money by March 2024, unless significant spending cuts are introduced.

He made it very clear that remedial steps must be taken or South Africa risked a fiscal disaster and unsurprisingly his budget was centred around a plan of action to tackle the fiscal deficit in an effort to compensate for the severe revenue shortfall and manage government debt that has ballooned to over 70% of gross domestic product (GDP).

Neil Roets, CEO of Debt Rescue, says Treasury found itself in trouble after a fall in commodity prices and a deteriorating economy due to ongoing Eskom blackouts and logistics constraints caused mainly by the country’s state-owned logistics company, Transnet. These factors have eaten into the profits of companies that are consequently paying less corporate tax to the government.

In addition, government has spent far more than what was pencilled in in the initial 2023 budget, driven by a higher than expected wage hike of 7.5% for public servants.

ALSO READ: MTBPS: Cutting government spending, keeping the SRD grant

MTBPS cuts to government spending to affect public service delivery

“However, while National Treasury has little option but to make cuts in government spending, experts have sounded the alarm that this will have severe consequences in terms of the delivery of crucial public services.” 

Treasury maintained its prudent stance of fiscal consolidation in the face of a revenue shortfall of R57 billion this year and is projecting deep spending cuts of R213 billion over the next four years, including 2023/2024, with tax increases of R15 billion forecast for the 2024/2025 budget.

Roets is concerned about what the minister’s spending cuts and tax increases will mean for the country’s stability and more importantly, the economic stability of citizens already buckling under the weight of the unsustainable cost of living.

“I would rather see government taking measures to fix the country’s crumbling infrastructure and finding ways to stimulate economic growth,” he says.

Godongwana announced cuts in the provincial budgets which could have a devasting impact on public services. Roets points out that the spending allocated to the public sector wages will inevitably crowd out vital spending.

“The people who will be most affected are the 18.2 million people in South Africa who currently live in extreme poverty, subsisting on just R760 per person per month or R25 a day.

ALSO READ: MTBPS: worse deficit, no major bailouts, but cuts to size of government

Third of nation already battle to put food on the table

“A third of the nation are currently battling to put enough food on the table, in the face of a cost-of-living crisis, the likes of which we have never seen before. It is deeply concerning that government has not elevated this to the top of the country’s agenda,” says Roets.

Against this backdrop, rising inflation is the biggest threat to food security in South Africa, he says. According to Statistics South Africa, consumer inflation rose to 5.4% in September from 4.8% in August) with the food, fuel and transport sectors the biggest contributors.

The Pietermaritzburg Economic Justice and Dignity group reports that approximately 30.4 million people in South Africa currently live below the old upper-bound poverty line of R1 417 per month, and many of these are the breadwinners in their families. The group estimates that another 13.8 million people live below the food poverty line, subsisting on just R663 per month.

“Government must look at the factors that hike the prices of necessities and come up with a plan to mitigate these or we will see these figures rise and rise until soon half the nation is living below the breadline,” Roets warns, adding that far more needs to be done to protect the country’s food security and to manage food prices.”

However, Roets says that although the continuation of and nominal increase in the R350 per month social relief of distress (SRD) grant will help one-third of the population to feed their families, it is simply not a realistic long-term solution.

“More than 18 million people are currently included in the social welfare system, while 5.5 million people submit tax assessments, but far fewer actually pay tax. The solution lies in stimulating job creation, especially among our youth. When unemployment is high, social dependency rises with it.”

ALSO READ: MTBPS: Godongwana tries to tackle municipal debt, electricity and Transnet

Tax increases coming in February according to MTBPS

Roets also notes that the minister opted to focus on tax increases for the 2024/2025 budget to the tune of a whopping R15 billion.

“This will bring in substantial additional income and will undoubtedly bring the government closer to making up the budget shortfall. The downside is that tax increases reduce the spending power of consumers, leading to lower growth and higher inflation.”

Roets agrees with the Institute for Economic Justice (IEJ), an economic think tank, that says: “Intensifying austerity is in no one’s interest. The poor will suffer disproportionately, women will be worst hit, the state will see its capacity further crippled and businesses will experience a worsening of economic infrastructure and reduced spending while increasing demands will be made on a shrinking tax base.”

Roets says he believes there are better options, such as curbing spending at all levels of government and freezing public sector wage increases.

“I would like to see government allocate more funding to economic development, such as infrastructural development for energy, water and roads and making the necessary structural changes in terms of SOEs. Such spending could facilitate faster economic growth and will create jobs and generate tax income over time.”

Roets says while Godongwana succeeded in treading the fine line between being realistic about the outlook for government revenue and curbing government spending, it remains to be seen whether he has reassured investors that the government has a workable plan to manage the debt spiral.