Deloitte, a leading auditing firm, has issued a warning to South Africans, urging them to prepare for “short-term” pain as the government continues to implement expenditure cuts. The aim of these cuts is to stabilise the country’s unsustainable debt burden.
In its pre-Budget briefing, Deloitte emphasised the importance of maintaining a fiscal policy stance that would not only stabilise debt but also unlock much-needed economic growth and address social and developmental challenges.
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Hannah Marais, Chief Economist at Deloitte South Africa, highlighted the significant weakening of South Africa’s public finances, both in the present and future outlook. The National Treasury now expects a Budget deficit of R56.8 billion, with gross debt projected to rise to 77.7% of gross domestic product (GDP) in the 2025/26 fiscal year.
The budget deficit is also expected to increase to 4.9% of GDP, up from the 4% estimated a year ago. These figures paint a challenging economic picture, with real GDP growth forecasted at 1% in 2024 and an average of only 1.4% between 2024 and 2026, falling behind the outlook for advanced economies of 1.7%.
Marais emphasised the need for tough decisions, stating, “The options are cutting expenditure or increasing revenues, and I think on both we have a lot of pressures. It has become difficult now to service the debt.
“So there might need to be some short-term pain that needs to be put in place to make sure that we get to stabilise debt.
“It’s not going to stabilise this year. It’s probably going to stabilize in the next three or five years, but then to create that fiscal space and to not take on debt that is more expensive, because it keeps on creeping into particularly social expenditure, as well as investing in the future infrastructure.”
The South African government will need to borrow an average of R553 billion per year over the medium term to finance its programs.
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According to the Treasury, one in every five rand collected in tax revenue is spent on servicing the debt.
Finance Minister Enoch Godongwana is set to table the 2024/25 national Budget this month, amidst competing spending priorities such as a permanent basic income grant and the National Health Insurance (NHI) scheme.
While some analysts and ratings agencies believe that the government may delay implementing its reform agenda this year to fulfill election promises and increase social expenditure, Deloitte’s government and healthcare industry leader, George Tshesane, warns that South Africa is facing a double whammy. The tax base is declining while government expenditure demands are increasing.
Tshesane points out that rising costs are a result of various factors, including irregular and wasteful expenditure, an increasing public wage bill, and the growing need to provide a more extensive social welfare net.
He highlights the inefficiencies in the system, with wasteful expenditure trending upwards year after year. Tshesane states, “We are dealing with a recipe for disaster or the perfect ingredients for a fiscal storm.
“The government has to go on a substantial cost-saving exercise to avert the storm or a deterioration in the fiscal situation. But that may not be feasible in an election year, and it is a route the government has historically avoided. A genuine cost-saving effort may not be palatable for all as it may mean job cuts in the public sector.”
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