The Government of National Unity’s (GNU) Cabinet Lekogtla on 29-30 January discussed South Africa’s Medium-Term Development Plan (MTDP), which sets the programme of action for the next five years. This will be followed in February by the State of the Nation (SONA) Address and the 2025 National Budget.
For the MTDP to successfully tackle South Africa’s urgent economic challenges it must be accompanied by a supportive fiscal framework. Unfortunately, current indications are that the National Treasury’s dogma of austerity continues to dominate the government’s fiscal strategy. The National Treasury is reportedly resisting providing funding for groundbreaking social programmes such as the Social Relief of Distress (SRD) Grant and Presidential Employment Stimulus and looking to reinforce deep cuts in critical public services, such as health and education while failing to adequately resource economic and infrastructure investment. This is done based on a commitment to a primary budget surplus and an overreliance on the private sector to drive growth and infrastructure development.
This trajectory must be rejected if the government aims to “drive inclusive growth and job creation; to reduce poverty and tackle the high cost of living; and to build a capable, ethical and developmental state” as the President stated.
As the government considers the MTDP we offer six key tenets for the fiscal framework that must accompany it. These are, (1) fiscal strategy that targets unemployment and poverty reduction rather than centering debt reduction and fiscal rules, (2) raising maximum available resources by taxing the wealth, (3) centering the state in investment to social and economic infrastructure development, (4) targeted spending in key sectors of the economy, (5) maintaining social wage expenditure, and a (6) review of inefficient spending.
- A fiscal strategy that targets unemployment and poverty reduction rather than centring debt reduction and fiscal rules
South Africa’s fiscal policy cannot afford to dogmatically and narrowly concentrate on debt reduction and must prioritise employment creation and poverty reduction. While the trajectory of South Africa’s debt requires attention, attempts at debt reduction through expenditure cuts, to be entrenched through the proposed implementation of a “fiscal rule”, will come at the expense of programmes vital for economic expansion, employment creation, and poverty reduction. If implemented, this will undermine our ability to achieve the MTDP targets and lead to a counter-productive economic contraction that makes debt servicing more difficult in the long term.
A more gradual and holistic approach should be taken to stabilising South Africa’s debt, which at 75% (debt-to-GDP ratio) compares favourably to the upper-middle-income economy average of 73%. The challenge is the cost of our debt – South Africa pays around 5% on public debt interest payments as a share of GDP, while developing countries and upper-middle-income countries pay, on average, 2.2% and 1.8% respectively. Instead of slashing expenditure a broader debt management toolkit includes the prudent use of capital management techniques such as capital controls to stabilise short-term, speculative capital flows and provide room to reduce interest rates; capital allocation tools such as regulated lending by banks to steer credit to productive sectors of the economy at affordable rates, including through Reserve Bank lending; central bank intervention in the primary market to purchase government bonds; and using prescribed assets to make large pools of capital available at affordable rates.
The proposal for a fiscal rule, which would place legal limits on government borrowing, will only exacerbate across-the-board budget cuts as opposed to fostering a rational process of budget prioritisation. International evidence shows that fiscal rules close the space for democratic participation in the budget process while limiting the government’s flexibility to use fiscal policy in times of crisis. They encourage creative accounting practices for the government to give the illusion that it is abiding by the fiscal rules. Therefore, the government should explore alternative ways to address debt, such as direct measures to reduce the cost of borrowing as discussed above.
- Raising maximum available resources by taxing the wealthy
Despite repeated rhetoric that “there is no money”, the National Treasury appears unwilling to consider proposals that various economists and organisations have made, to raise additional resources. Their austerity fixation flies in the face of the government’s constitutional obligation to immediately and progressively realise socio-economic rights.
Particularly, renewed attention to taxing South Africa’s wealthiest is needed, with the IEJ previously showing that R250 billion can be raised by taxing high-income earners and the wealthy. This can be done by removing existing rebates for high-income earners such as retirement fund tax breaks for those earning above R750,000; capturing excessive mining profits through a resource rent tax; and addressing the under-taxation of wealth, with a special VAT on luxury goods and a wealth tax.
Taxing wealth is increasingly being identified as one of the policy interventions for the world to address inequality and to address climate-related challenges. Instituting a permanent net wealth tax between 3% to 7% on the richest 1% could raise R70 to R160 billion.
In one of the most unequal countries in the world, taxing wealth should be high on the government’s agenda if it is to achieve even the modest targets of the National Development Plan (NDP) or the Sustainable Development Goals.
- Centering the state in investment to social and economic infrastructure development
While everyone agrees that South Africa faces significant investment and infrastructure backlogs, in both economic and social sectors, we must avoid a growing misconception that private finance will ride to the rescue. Rather, state investment is needed in areas like rails, ports, roads, and education to revive economic growth and employment.
Instead of investment, we are seeing pitiful allocations on top of successive cuts. The Department of Basic Education revealed that due to budget constraints, only one school was built in 2024, despite a target of nine. According to the Minister of Public Works, such a lack of investment in infrastructure has cost the state close to R3 billion in foregone revenue due to delayed construction projects over past financial years. The previous budget had seen a moderate increase in economic regulation and infrastructure spending, with a growth of 4.1% between 2024/25 – 2026/27 (in 2024/25 rands) expected. However, this is far too little to increase the tepid level of Gross Fixed Capital Formation of 15% up to the 30% target set out in the NDP. Modeling shows that if SA increases its annual investment in infrastructure by 1% of the GDP, it could increase GDP by 1.3% immediately and by 2.4% for the five years that follow.
We cannot delude ourselves that private-sector finance will step into the breach and adequately resource the necessary infrastructure projects. Such financing generally focuses on large-scale profitable projects at the expense of more developmental projects in communities. Rather than capacitating and renewing key State Owned Entities (SOEs) to deliver infrastructure, Public-Private Partnerships (PPPs) mean that the state will assume disproportionate risks while the private sector pockets the profit, often acquired by implementing higher user fees on public goods for citizens.
PPPs are being discontinued as a model for infrastructure development across the world due to the high costs they generate for governments. In the UK, the National Audit Office found that “the effective interest rate of all private finance deals (7%–8%) was double that of all government borrowing (3%–4%).” In France, the French Court of Auditors found that the interest rate for borrowing for the Paris Courthouse PPP was 6.4%, while in 2012 when the contract was signed, the weighted average rate for government bond financing in the medium-long term was 1.86%. The long history of failing PPPs is well documented.
- Targeted spending in key sectors of the economy
Growth cannot come from simply ensuring a ‘conducive environment’ for business, especially if efforts to do so entail cutting public spending. This inevitably backfires, as investors increasingly baulk at South Africa’s fraying social fabric and soaring unemployment, and the risks they pose.
The government needs to actively direct spending into labour-intensive sectors of the economy, such as manufacturing and construction to drive job creation. This can be done, for example, by supporting Developmental Financial Institutions (DFIs) with low-cost funding directly from the fiscus or the SARB, tying this to sector-specific masterplans that drive structural transformation.
It is important however that industrial policy and masterplans are not solely focused on heavy manufacturing, which has contributed a lower number of jobs compared to its value add. For instance, “in 2022, metals and petrochemical refineries contributed 20% of gross value added in manufacturing but only 14% of formal manufacturing jobs” compared to “light industry where clothing, electronics and plastic products generated 12% of formal manufacturing employment in SA, though just 7% of value-added”. Therefore sectoral interventions and improved funding to masterplans must be attentive to new subsectors that can generate jobs at scale.
In addition, financial regulation must tackle the fact that the South African financial sector is currently redirecting funds away from productive, jobs-rich investment towards speculative financial markets and payouts to shareholders, as well as facilitating capital flight.
Appreciating the role of government spending is also essential. For example, research indicates that the Presidential Employment Stimulus’ largest component, the Basic Education Employment Initiative, increased spending by R110 on average for participants in one of the biggest local retailers. This had ripple effects, where the increase in sales led to improved wages for workers in the retailer and their suppliers.
A study on the Social Relief of Distress grant indicates that expenditure on grants has similar stimulus effects on the economy, stimulating both consumer demand and informal trader’s supply by providing them with capital to increase stock. These interventions, alongside targeted spending on labour-intensive sectors of the economy, can drive structural transformation, increase growth, and employment, and alleviate poverty.
- Maintaining social wage expenditure
Disinvestment from key public expenditure will make achieving the MTDP and NDP targets impossible. In discussing the 2024 MTBPS, we noted that “in 2019/20 rands, spending per uninsured healthcare user will decrease from R4 116.78 in 2024/25 to R3 898.42 by 2027/28. On the other hand, spending per learner (in 2019/20 rands) moderately increases from R18 813.82 in 2024/25 to R19 372.11 by 2027/28.” Such disinvestment has a long-term impact on human capital development, especially for poor households that depend on the government for basic services. This will trap the economy on a low growth path while perpetuating inequality along gender, and racial lines. Women will continue to carry the burden of care due to failing public services, while the private sector generates profits by selling services that should be publicly owned and administered.
These impacts can still be addressed if the government considers the impact of its fiscal policy by conducting human rights impact assessments and ensuring that expenditure grows in line with population growth and the number of users at the very least. The recent court judgment handed down by the Pretoria High Court, in a case brought by the IEJ, #PaytheGrants, and the Socio-Economic Rights Institute, criticised government for precisely this failure, stating that “It is unconscionable for government to accept that the number of people who are with insufficient means to support themselves and their dependants is more than 18.3 million but only budgets to provide for 10.5 million.“ The judge also found that the government had deliberately put in place illegal exclusionary barriers to prevent eligible beneficiaries from accessing the grant and that the grant value and means threshold must be increased to progressively realise the right to social assistance. This judgment has profound implications for other areas of socio-economic rights and for the type of fiscal policy needed to give effect to our Constitution.
- Review inefficient spending
A consultative and transparent spending review process must be initiated. Such a process needs to carefully assess government programmes, aimed at scaling up successful programmes, while ineffective ones are revamped or closed if they no longer serve developmental goals. However, this spending review cannot be influenced by a predetermined agenda of hyper-austerity, where programmes are cut indiscriminately. It should be guided by evidence, involve the relevant government departments and the public, and assess all the pros and cons when realigning expenditure and improving government efficiency.
Conclusion
Without a fiscal framework resting on these six pillars, there is no way for the targets in the MTDP to be reached. Continuing the current status quo will ensure that the plan fails even before implementation begins. While we must ensure government funds are well spent, we must also acknowledge that the past ten years have shown how austerity has neither alleviated debt levels nor led to economic growth and job creation. Rather austerity has resulted in an increase in debt and stagnant or declining growth. We must use the MTDP to forge a new path.
[ENDS]
For media enquiries contact:
Dalli Weyers | IEJ Advocacy and Communications Manager | dalli.weyers@iej.org.za | 082 460 2093