While the government has committed to providing financial help to South Africans impacted by the social unrest and Covid-19 lockdowns, Treasury has also made it clear that the country’s fiscus is not in great financial shape.

In a media briefing this week, finance minister Tito Mboweni said it is vitally important that the country reflects on its fiscal challenges and how to address them.

“South Africa’s fiscal situation remains serious and should not be conflated with the capacity of advanced economies, as some commentators mistakenly do,” he said.

“Government finances remain at substantial risk, including due to the debt burden of over 80% of GDP and the rising debt service costs, which now consume more than R1 out of every R5 raised in taxes.”

Mboweni said that South Africa is not an advanced economy, and he said it is untrue that a government that prints its own currency cannot experience a debt crisis.

“Fiscal adventurism is not the solution to South Africa’s problems. We will continue our strategy of restoring the health of public finances.

“Against this backdrop, a package of measures is proposed which will be carefully financed to avoid further damage to the public finances. It should also be underpinned by greater urgency in the implementation of growth-enhancing reforms.”

A basic income funded through debt

One area that could certainly be described as ‘fiscal adventurism’ is the introduction of a Basic Income Grant (BIG).

While Mboweni was at pains to say that the reintroduction of the R350 Social Relief of Distress (SRD) grant would only be temporary, the government has faced growing calls to introduce a more permanent universal income.

Economists warn that a BIG will not be sustainable given the current fiscal situation in the country.

“A debt-financed social programme would not be sustainable. Social protection will absorb an average of 13.6% per annum of consolidated government over the three years to 2023/24,” Nedbank said in a research note on Thursday (29 July).

“Considering the estimated 7.2 million unemployed individuals, a permanent basic income transfer would bring the total number of people on the social protection system to 26 million, just over 45% of the population.

“A permanent solution will be higher economic growth rates and better developmental outcomes. Job creation requires the acceleration of measures to boost investment, and the economic growth potential will help create jobs and alleviate poverty. This will also help to broaden the tax base.”

This was echoed by Carmen Nel, economist and macro strategist at Matrix Fund Managers, who said that while temporary support measures, such as the SRD grant, are quantifiable and currently fundable, a permanent grant will require a dedicated revenue stream as financing.

Nel said that this will be over and above the existing grant system and will be in addition to the rollout of other costly schemes like the National Health Insurance.

“Given the potential negative long-run impact on the tax base, financing UBI will be extremely challenging, if not impossible, in the context of fiscal sustainability.”

Nel said that any long-term financial pressures, such as the UBI or NHI, could also impact the outlook of South Africa’s sovereign credit rating.

“If the potential negative dynamics from social unrest are not arrested soon, then it is highly likely that South Africa will fall further into sub-investment territory.

“As we have often noted in commentary and presentations, moving into the B-rated credit band implies notably higher borrowing costs to compensate for higher credit risks, as well as less certainty of consistent market access.

“South Africa would probably still attract some degree of portfolio inflows, but the trade-off will be to pay up for these even more fickle flows.”

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