Warnings about SA’s push towards the fiscal cliff went unheeded for years
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The supplementary budget tabled in June indicated that SA’s existing dire fiscal position had taken a turn for the worse. The Fiscal Cliff Study Group (FCSG) has been warning since 2014 that SA’s public finances were developing in an unsustainable way. The growth in government revenue could not match the growth in spending, thus pushing government finances to the proverbial cliff.
Despite not having a clear academic definition, the term fiscal cliff was used in 2012 by Ben Bernanke (then governor of the US Federal Reserve) to symbolise the impact the coinciding end of various tax incentives would have on the US economy. It is thus a situation in which problems in public finances spill over to the real economy.
Having identified similar possible problems facing SA, the FCSG used the concept to define SA’s fiscal cliff as the point where government expenditure on social grants, compensation to civil servants and interest on government debt exceeds total government revenue. All three of these items grew sharply in the past decade, a period during which economic growth has mostly underperformed.
Our focus is on financial sustainability rather than the importance or value-for-money aspects of the items.
Due to low economic growth and a concomitant low growth in government revenue, the government reverted to old-fashioned Keynesian deficit spending to try lifting the economy out of its slump. This strategy is the opposite of austerity budgets, which would imply at least a balanced budget. SA has run large budget deficits averaging more than 5% of GDP annually over the past decade. No reserve capacity for future expansion (or shocks) was thus created.
These large deficits stem from aspects such as incorrect economic growth projections by the National Treasury. In the past decade SA’s annual economic growth potential declined from 2.5% to about 1.5%. The decline has been attributed to various factors, including uncertain government policy and structural challenges, while state capture and corruption amplified the problem. This decline in potential growth was not identified by the National Treasury timeously, resulting in overestimations of government revenue. Total government expenditure simultaneously continued to rise strongly, likely justified by the over-optimistic projections. Ultimately, this caused a sharp increase in government debt.
A worrying similarity between the three main expenditure components analysed by the FCSG (grants, remuneration and interest payments) is that these expenses do not generate future assets (and therefore income). The government focused extensively on ...
Despite not having a clear academic definition, the term fiscal cliff was used in 2012 by Ben Bernanke (then governor of the US Federal Reserve) to symbolise the impact the coinciding end of various tax incentives would have on the US economy. It is thus a situation in which problems in public finances spill over to the real economy.
Having identified similar possible problems facing SA, the FCSG used the concept to define SA’s fiscal cliff as the point where government expenditure on social grants, compensation to civil servants and interest on government debt exceeds total government revenue. All three of these items grew sharply in the past decade, a period during which economic growth has mostly underperformed.
Our focus is on financial sustainability rather than the importance or value-for-money aspects of the items.
Due to low economic growth and a concomitant low growth in government revenue, the government reverted to old-fashioned Keynesian deficit spending to try lifting the economy out of its slump. This strategy is the opposite of austerity budgets, which would imply at least a balanced budget. SA has run large budget deficits averaging more than 5% of GDP annually over the past decade. No reserve capacity for future expansion (or shocks) was thus created.
These large deficits stem from aspects such as incorrect economic growth projections by the National Treasury. In the past decade SA’s annual economic growth potential declined from 2.5% to about 1.5%. The decline has been attributed to various factors, including uncertain government policy and structural challenges, while state capture and corruption amplified the problem. This decline in potential growth was not identified by the National Treasury timeously, resulting in overestimations of government revenue. Total government expenditure simultaneously continued to rise strongly, likely justified by the over-optimistic projections. Ultimately, this caused a sharp increase in government debt.
A worrying similarity between the three main expenditure components analysed by the FCSG (grants, remuneration and interest payments) is that these expenses do not generate future assets (and therefore income). The government focused extensively on ...