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Tinkering amid a public finance double whammy

 Authored by Director: Government and Public Services, Life Sciences and Healthcare Industry Leader | Deloitte Africa

South Africa faces a double whammy of a declining tax base while government expenditure demands are increasing.

This is the uncomfortable situation facing Finance Minister Enoch Godongwana and his colleagues at the National Treasury as they prepare to table the 2024 Budget.

Rising costs are a function of several things:

  • Irregular and wasteful expenditure.
  • An increasing public wage bill.
  • A growing need to provide a more extensive social welfare net.

Revenue declines when the government is urged to extend social grants.

We are dealing with a recipe for disaster or the perfect ingredients for a fiscal storm. The government has to go on a substantial cost-saving exercise to avert the storm or a deterioration in the fiscal situation. But that may not be feasible in an election year, and it is a route the government has historically avoided. A genuine cost-saving effort may not be palatable for all as it may mean job cuts in the public sector.

In the past, the idea of reducing the size of the national executive has been mooted. That might mean a much smaller layer of ministers or doing away with the deputy ministers.

Running the national executive, including ministers and their deputies, is a big ticket. Serious money could be saved from that alone.

The idea of rightsizing the cabinet has a lot of proponents, but obviously, it may not be feasible in an election year.

In general terms, it is easy to believe there will be no appetite for tightening the belts in areas that matter. The Finance Minister can end up tinkering here and there.

In the absence of deep cuts, government borrowing will continue.

The problem with such an environment of the double whammy of increasing costs and expenditure, plus the debt spiral, is that the affordability of just about anything will be problematic.

It is more than just the national government that is in a tight space with no fiscal wiggle room. That picture cascades through all the layers, with most public entities facing the same issue.

The broad problem is epitomised by the struggle faced by several state-owned companies which will look to Minister Godongwana for much more than just a helping hand as they do not have the kind of balance sheet that will allow them to invest in the required growth driving capital projects. Saving a struggling SOE creates a perpetual problem in that it invites other state companies to make similar pleas. Given the tight financial position that national government finds itself in, the role of public-private partnership becomes very important in stabilizing the ailing state-owned companies.

The private sector has a definite appetite because it is also in their interest as they are losing money in the current environment and cannot operate efficiently. That also affects the tax the South African Revenue Service can collect.

There will likely be movement from the government's side to prepare the ground to enable the growth of the PPPs by laying out the enabling policies and regulations.

Equity injections alone will not help. What is required in addition to financial support is the introduction of strategic equity partners, as the government calls them. Private sector players can help state companies shore up their balance sheet, giving the entity wiggle room regarding operational expenses. Private players can also bring in expertise, both managerial and technical. One of the benefits of a partnership is the spreading of risks, which currently are concentrated on the government side.SOE failure affects industries and throttles big swathes of the economy. When risk is concentrated in one area, it quickly becomes a systemic risk. That is certainly the case with our SOEs when borrowing introduces a concentration risk among SA-based lenders. The nature of this risk, therefore, cuts across the entire economy.

Suppose the distinctly negative fiscal trajectory does not stop. In that case, South Africa may have to go to institutions like the International Monetary Fund for more loans, which may, on the downside, come with strict conditions. Such loans are akin to a country losing its sovereignty as that nation's affairs fall firmly into the lenders' hands.

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