South Africa has run out of money and the only way to resolve this problem is to cut back on state spending, which is politically very difficult to do.
This is the view of Dawie Roodt, director and chief economist at the Efficient Group, who was speaking to the Centre for Risk Analysis’ David Ansara.
President Cyril Ramaphosa recently unveiled the government’s plan to rescue the South African economy following the negative impact of the lockdown.
He has announced numerous initiatives, including large infrastructure projects, rapidly expanding energy generation, and additional grants.
Ramaphosa, however, did not provide details as to how this will be implemented and where the money will come from.
Many experts slammed this plan as a “wish list of imaginary blessings” and the recycling of old and failed policies.
The biggest question is where the money for the additional grants and new infrastructure will come from.
Roodt said the state simply does not have additional money to fund these projects.
Based on Roodt’s calculations, South Africa’s fiscal deficit this year is likely to be around R800 billion, around 18% of GDP.
A fiscal deficit is a shortfall in a government’s income compared to its spending, which means it is spending more than it has.
This large fiscal deficit means the country’s debt to GDP will rise to around 84% – the highest in history.
Roodt, who has been analysing fiscal accounts for decades, said South Africa has never been in such deep trouble.
“We are in very, very deep trouble. I just don’t see where we are going to get additional money from,” he said.
Finance Minister Tito Mboweni’s difficult task to balance the books
Finance Minister Tito Mboweni has recently asked to postpone his medium-term budget policy statement, which Roodt said is not a good sign.
He said there could be two reasons for this postponement:
- He is trying to fit in the new demands the President is putting on the budget, which includes the additional grants.
- He is looking to find the money for South African Airways, which the government seems adamant must continue to operate.
“The mere fact that the minister decided to postpone his medium-term budget is something I am very concerned about,” Roodt said.
The state’s revenue is already under tremendous pressure, and Roodt said Mboweni is most likely struggling to balance the books.
Roodt said even the introduction of new taxes, like the rumoured solidarity or wealth taxes, will not be enough to fill the growing revenue hole.
This is why the government is looking at forcing pension funds to invest in state infrastructure projects.
“The state finances are in such a bad state at the moment that there really is not money available to spend on all the grand plans President Ramaphosa announced,” Roodt said.
He said additional taxes and prescribed assets will still not resolve the financial problems and predicts it is all going to end in one place – high levels of inflation.