ISSUE 01 MAY 2021
Expenditure Trends 2021 Government’s 2020 Budget represented a significant shift in fiscal policy, which was reflected in the 2021 Budget but with a stronger focus on government expenditure. The intention is to hold expenditure increases to below 1% per year over the next three to five years, well below the forecast consumer inflation of 4% per year. To reduce public spending, government plans to make real cuts to the numbers and remuneration of public employees; to squeeze “goods and services” (e.g., medicines, textbooks, spending on maintenance); and to reduce transfers to households in real terms. Core elements of public services (basic education, healthcare, social grants and the criminal justice system) will be fundamentally weakened and affect the most vulnerable segments of the population. The budget contradicts the government’s stated policy intentions in several respects, by reducing allocations to national health insurance, industrial policy and land reform, among others. Yet government has not indicated how its policy commitments will be reworked to accommodate these spending cuts, suggesting that inconsistencies between policy objectives and budget allocations will be managed by fighting fires as they arise.
FISCAL CONTEXT
However, on the eve of the coronavirus pandemic, the Minister of Finance tabled a budget that represented a significant shift in fiscal policy. The February 2020 Budget announced a large fiscal consolidation, whereby public-service wages would be frozen in nominal terms and growth in government consumption spending would be drastically curtailed. All this would take place in the first year of the plan and be sustained over the medium-term framework, rather than be left for future decisions.
PUBLIC ECONOMY PROJECT
POLICYBRIEF
Over the last decade, falling per capita income, slowing tax revenues, and increasing spending pressures made the goal of stabilising the debt-to-income ratio appear unattainable. Government’s fiscal programme assumed that South Africa would turn the corner and growth would rebound. This meant postponing fiscal adjustment in the short term, in the hope that growth over the medium term would ease the strain of expenditure cuts.
A month later the county was in lockdown, forcing a pause in the planned consolidation. In 2020,1 the budget deficit reached 14% of GDP. However, South Africa was able to cushion the worst impacts of the crisis on income, business operations and social distress, through modest additions and huge reallocations of expenditure. At the same time fiscal pressures intensified, as shortly after the lockdown emerging markets experienced a large outflow of global capital. Coinciding with this, Moody’s downgraded its rating of South Africa’s sovereign debt to sub-investment (“junk”) grade. Interest rates on South Africa’s sovereign debt reached new heights (and remain elevated to this day). The combination of anaemic growth and very high interest rates on public debt make South Africa unusual when compared to other countries (Figure 1) and point to an unsustainable debt burden.
1.
Fiscal years are used throughout this document unless otherwise indicated, meaning in this case the 2021 fiscal year, which covers the period 1 April 2021 to 31 March 2022.
PUBLIC ECONOMY PROJECT