South Africa Treasury Denies That Budget Cuts Will Stifle Growth

(Bloomberg) -- South Africa’s National Treasury has refuted claims that planned spending cuts announced in last week’s medium-term budget are austerity measures that could hamper the recovery of an economy ravaged by the coronavirus pandemic.

Proposals to reduce expenditure by about 300 billion rand ($19 billion) over the next three fiscal years drew criticism from politically influential labor groups, civil society organizations and some opposition lawmakers, who argue the country should spend its way out of the longest recession in almost three decades. That’s despite a debt burden that has more than doubled over the last 10 years.

South Africa’s overall fiscal stance has been expansionary over the last decade, even as budget allocations to some departments and institutions may have been reduced, said Edgar Sishi, the acting head of the budget office.

“If you were already increasing debt over a 10-year period and you didn’t get economic growth from doing that, why will doing that over the next period cause economic growth to come?” Sishi said Friday in a presentation to lawmakers.

Unproductive Spending

Reducing spending is critical to Finance Minister Tito Mboweni’s plans to target a primary budget surplus in 2026 fiscal year, when debt is expected to peak at 95.3% of gross domestic product. Both these goals have been pushed out by two years. That shows the impact of ongoing discussions in the Treasury and with its partners about the potential steps and speed with which it should address the public debt burden, Sishi said.

“We are, if we don’t do anything, on a path to a sovereign debt crisis,” he said.

Recent Reserve Bank research shows South Africa’s fiscal multiplier -- a ratio used to measure changes in national income relative to government expenditure -- fell to less than zero in 2019 from 1.6 a decade earlier, suggesting the economic benefits of higher public spending decreased, and may have been exhausted.

Steps to narrow the budget gap and stabilize debt, along with structural reforms, are more likely to support growth than continued spending funded by higher borrowing and increased taxes, the Treasury said in the medium-term budget.

The past decade was the worst for South African economic growth, with total output expanding by 15.9% from the first quarter of 2010 to the final quarter of 2019, central bank data show. That compares with 18.9% and 16.7% in the 1980s and 1990s.

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