If urgent action is not taken now, South Africa could be in a debt trap, with rising interest payments on debt, higher interest rates, and even higher unemployment.
Finance Minister Tito Mboweni issued this cold warning Wednesday amid a sharp lower adjustment in expected economic growth for this year – from 1.5% in February’s budget to just 0.5%.
In addition, by 2023 government debt could amount to more than 70% of gross domestic product (GDP), compared to the less than 60% expected in February.
The state’s salary bill will have to grow slower and higher taxes are needed, though there is no longer any room for it, Mboweni warns.
Ministers and provincial MECs will henceforth only have to fly in economy class on domestic flights. These are some of the drastic steps announced by Mboweni after the early retirement of civil servants, lower performance bonuses and the freezing of salaries for top executives and MPs announced in February’s budget have not yet realized the savings they had hoped for.
The budget deficit for this year is now estimated at 5.9% of GDP, compared to the 4.7% still expected in February.
This is largely Eskom’s debt, which with its extra R26 billion lifeline this year is the biggest contributor to the fact that the state’s non-interest expenditure is exceeded by R23 billion this year.
To help offset this, the entire contingency reserve of R13bn was swallowed for the current financial year.
Mboweni used the theme on Wednesday to color his speech and warned that the aloe plant he distributed in his February budget was waning. Unusual and urgent action is needed now, he warned.
At 13.7%, interest on the debt is still the fastest-growing spending item by 2023, at R796bn over this period more than the state spends on health, economic development, security and community development or general public services. Only education and welfare are spent more than interest on the debt.
Some of the other new austerity measures announced by Mboweni:
- The freezing of the salary of cabinet members, premiers and provincial MECs at current levels is subject to further negotiations;
- Office cars may not cost more than R800 000;
- A limit on cellphone claims.
As experts expected, the target for tax revenue is far missed, and this year only revenue of R1 370 billion will be collected, which is 4% or R53 billion less than expected.
Mboweni pointed to the “public service millionaires” – the 29 000 civil servants who each received more than R1 million in compensation over the past year. This is more than double the number of officials who earned more than R1 million in 2007.
In addition, the average salary increase in the state in the previous financial year was 6.8%, which is 2.2 percentage points more than inflation. Over the past decade, civil servants’ salaries have climbed 66%, adjusted for inflation.
- About Eskom, Mboweni said any new lifebuoys would be in the form of loans. So he kicked off the idea of Eskom taking over part of their debt. Eskom will first have to improve its efficiency.
- On the South African Airways (SAA), Mboweni said it is unlikely that SAA will ever be able to generate enough cash to continue its operations in its current form. “How long are we going to be on this flight plan? Always? I do not think so.”
He once again warned that the government effectively subsidizes the middle class and the rich to fly the country, but ordinary workers have to drive to the old town daily from old townships, often delayed and late for work.
- On the Gauteng e-toll system, Mboweni also kicked off and warned that the government would abide by the user-pay principle.
- The South African Revenue Service (SARS) will receive an additional R1 billion over the next three years to improve tax collection, and the national prosecuting authority will receive an additional R1.3 billion to fight corruption. A bill to improve corporate governance at SARS will be introduced in early 2020.