South Africa at breaking point
The South African economy is at a point where it cannot sustain the burden of funding the government and its extensive machinery, with it having to scrape the barrel to find additional revenue to fund its spending.
This is feedback from Efficient Group chief economist Dawie Roodt, who explained that many individuals within the government are asking the wrong question.
Roodt said that instead of asking how the government can find additional revenue to spend, people should be asking how can it make its existing expenditure more efficient.
“The revenue the government collects by way of taxes is very poorly used in South Africa, with much of it not having the desired outcome or being lost before it reaches the end goal,” Roodt explained to Newzroom Afrika.
The national government’s expenditure makes up around 33% of South Africa’s GDP, meaning that the money spent by the state contributes to around a third of all economic activity in the country.
Thus, if this money were used effectively, it would have tremendous benefits for the country and drive better economic outcomes.
Roodt explained that the money spent by the government is largely raised through taxes, meaning that it is taken out of private hands to be used by the state.
While this is not a bad thing in itself, the issue in South Africa is that the government has proven to be an extremely poor capital allocator.
To a large extent, this money would have been better utilised if it had been left in the hands of households or private companies.
Roodt explained that making government spending more efficient does not necessarily mean slashing expenditure, but is more about ensuring the money goes where it is supposed to and results in better outcomes than it currently is.
For example, Roodt said the largest expenditure item in the Budget is education, with South Africa spending much more than its peers as a share of GDP.
However, despite this spending, South Africa’s education is often ranked among the worst in the world as increased expenditure has not resulted in better outcomes.
Another example is South Africa’s huge public sector wage bill, with the national government employing 1.2 million public servants. If provinces are included, this number goes up to 2 million.
“These public servants are mostly overpaid and mostly underworked. Not all of them, but most of them are unproductive,” Roodt said.
This problem is now reaching crisis levels, with the South African economy no longer being able to sustain increased government expenditure.
“What can be done to improve government efficiency? That is the important question, because we spend a lot on the state and its machinery, and the economy can no longer carry this burden,” Roodt said.
This can be seen in the collection of taxes, with personal income taxes and corporate income tax coming under pressure as the economy is not growing.
As a result, to raise additional revenue, the Finance Minister turned to VAT as it was the only option on the table.
Government running out of money
Roodt’s comments echo those of Nedbank chief economist Nicky Weimar, who said that government expenditure simply cannot continue to grow as it has over the past decade.
Weimar explained that domestic demand from the government and individual households are what has been keeping the economy above water.
While domestic demand growth is positive, it is largely flat and not gaining momentum, which is needed to boost the local economy.
Personal consumption expenditures, which account for 60% of South Africa’s GDP, are the largest driver of domestic demand.
Fixed investment also plays a key role in the South African economy. This refers to the purchase of capital assets by businesses, such as machinery or equipment, with the aim of generating profits over time.
“This is where companies, the government, and public corporations go out and take on risk by borrowing money to expand their operations, build schools, roads, water infrastructure, or even power plants,” Weimar explained.
“But, the collapse of this is clear to see. It has just not recovered since the pandemic-era lockdowns and is still struggling.”
Weimar said the government plans to turn this around and is trying to attract private sector investment into projects that require fixed investments.
However, the state has spent most of its money in the past decade on consumption rather than fixed investment, which boosts economic growth in the short term but hinders it in the long run.
“What is carrying us is government expenditure, which, by the way, is largely civil service wages and consumer spending. We have two pillars of demand carrying us,” she explained.
This cannot last long, as consumer spending cannot grow sustainably in a stagnant economy, and the government has no more money to spend.
“So, government consumption expenditure, can it continue like this? No, it cannot. Government is thoroughly out of money and is struggling just to bring the deficit back to 3% of GDP,” she said.
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