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Johannesburg - The fiscal cliff is rapidly approaching for the South African government, according to Frans Cronjé, CEO of the SA Institute of Race Relations (IRR).
Cronjé told Fin24 that the only way SA can get out of this threat would be through policy reform that opens the country to attract investments - both domestic and foreign - to drive growth and create jobs to see revenue pick up quicker.
"The power to do that lies in South Africans' own hands. We must demand that sort of policy shift from our political leaders. Until the pressure is there for them to move, I don't think we will see much," said Cronjé.
"I have seen government leaders starting to get worried as the fiscal cliff starts to bother them. Eventually they will have to stop spending on capital goods in order just to afford their current expenditure. If they don't reform on policy, expect them, once they reach their borrowing limit, to start cutting government capital expenditure, while the hole just becomes deeper and deeper."
If one takes revenue as a proportion of GDP and one sees a trend in mid 1970s of taxation taking a greater share thereof. Expenditure as a proportion of GDP also escalated rapidly, especially over the last decade. The difference is the fiscal deficit as a proportion of GDP.
A Fast Facts report released by the IRR found that, despite taking a larger and larger chunk of the proceeds of South Africans, the government is running out of money.
This report reviewed SA’s revenue base and found that government revenue as a proportion of gross domestic product (GDP) rose steadily in the latter apartheid years, from 19.6% in 1976/1977 to 23.35 in 1990/1991.
The figure then flattened out through the 1990s and into the early 2000s, sitting at 23% in 2004, for example.
However, the past decade has seen a rapid increase and by 2015/2016 it is anticipated that government revenue will account for 29.7% of GDP.
"Yet, what the government is collecting is not nearly enough. Its budget deficits are on a par with what the apartheid government faced after the 1976 uprising," said Cronjé.
In Cronjé's view there are three ways to get out of the fiscal deficit:
Spend less money
Just like a household facing debt, the state can spend less money. Politically that is impossible in SA as 60% of the national budget is spent on social wages - that is free and subsidised services, including welfare grants.
The state cannot reduce these without suffering a political backlash.
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Borrow money
Secondly, one can borrow money. In the case of SA government debt as a proportion of GDP was about 50% when the ANC took over. A decade later through what Cronjé calls "brilliant fiscal management thanks to the likes of Trevor Manuel, Pravin Gordhan and Thabo Mbeki", it was reduced to 27%. During the period between the early 2000s and the global financial crisis government debt remained at that low lever.
Since financial crisis, however, it has gone back to almost 50%.
"If government continues to borrow at the rate it does, it will find itself within a decade in a debt trap where it cannot repay," warned Cronjé.
Grow the economy faster
The third option would be to grow the economy faster to generate more revenue and reduce the deficit over time.
"The growth projections for SA are, however, 1.9% and just due to the Eskom electricity capacity constraints alone we would put a cap on growth of 3% over the next decade. SA won't, therefore, be able to get out of trouble by growing the economy," in Cronjé's view.
"The result is that government is rapidly moving closer and closer to the so-called fiscal cliff and I am interested to see how they will handle it. I think we will see it in the budget speech, for instance look for tax increases."
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