Treasury’s planned budget cuts ‘dangerous to the economy and well-being’, say SA economists, civil society

18 Oct 2023

In an open letter released on Tuesday, 17 October, more than 100 South African economists, researchers and civil society representatives called on President Cyril Ramaphosa and Finance Minister Enoch Godongwana to halt severe budget cuts for government entities and departments.

A collective of more than 100 South African economists, researchers and civil society representatives are opposing National Treasury’s planned budget cuts for government entities and departments.

In an open letter released on Tuesday, 17 October, they called on President Cyril Ramaphosa and Finance Minister Enoch Godongwana to halt the cuts, describing the austerity measures as “misguided”, dangerous to the economy and “not supported by robust evidence”.

“The Minister of Finance and National Treasury officials have cited expected revenue shortfalls and budget overruns as grounds for this drastic action. This is being wrongly characterised as an imminent ‘fiscal crisis’... A sense of panic is being created in order to force through these rushed, chaotic and indiscriminate cuts in the Medium-Term Budget Policy Statement in November 2023,” the letter states.

There should be people chained to the office of National Treasury, we should be shutting down the ministry.

“If implemented, these cuts will slow economic growth, undermine service delivery and curtail social protection, thus exacerbating unemployment, hunger and social instability… This strategy is self-defeating as economic contraction resulting from such cuts would make debt repayment more difficult.”

The letter was supported by organisations from a broad range of sectors, including the Institute for Economic Justice, early childhood development (ECD) programme Ilifa Labantwana, Equal Education, the Socio-Economic Rights Institute, SECTION27, Black Sash and Youth Capital.

One of the letter’s signatories, Institute for Economic Justice executive director Dr Gilad Isaacs, said the fact that such a broad range of policy analysts and civil society organisations were prepared to declare support for a view which departed from the Treasury-aligned “hegemonic narrative” was significant.

Read more in Daily Maverick: National government inflicting death by a thousand budget cuts on SA and the Western Cape

“It’s not enough for us to act individually. We have to push the organisations which we are a part of to mobilise to oppose this, and that has to include the new and old social movements, the unions, the civil society groups, the churches and other faith-based groups, the community organisations. In my mind, this is on the scale of significance that… there should be people chained to the office of National Treasury, we should be shutting down the ministry,” he said.

“The budget cuts are going to have so profound an impact on service delivery and social welfare. And we need the organised forces in our society to be leading us in a campaign.”

The harms of fiscal consolidation

The proposed budget cuts are reportedly a result of South Africa’s poor financial situation and the government’s inability to cover growing societal demands with the revenue generated from corporate and personal income tax.

Daily Maverick reported that as a result of the worsening financial situation since Godongwana presented the Budget in February, Treasury has told all government departments in provinces that no new spending will be allocated to them. Major cuts in state expenditure this year are expected to affect vital service delivery programmes in education, health and criminal justice, with further budget cuts likely to be implemented throughout 2024.

Read more in Daily Maverick: SA’s delivery of crucial services under threat after Treasury desperately calls for public ‘fiscal consolidation’

“Treasury has been convinced this is the right path for a decade; Treasury is ideologically and dogmatically committed to a path of fiscal austerity… So, this is just an extremely opportune moment for National Treasury to push through the types of expenditure cuts which it’s wanted all along,” said Isaacs.

Tuesday’s open letter referenced recent research by the International Monetary Fund showing that, on average, fiscal consolidations did not reduce debt-to-GDP ratios. Rather, cutting spending was predicted to hamstring economic growth, making it harder to address debt in the future.

“The existing budget mismatches can be readily resolved through other measures. Instead, we urge the government to undertake a thorough, transparent and evidence-based budget review process over the next 12 months,” the letter continued.

The budget cuts will entrench poor access and low quality in the ECD sector, in which more than 90% of the mainly black, female workers earn below the minimum wage.

It further stated that the current year’s revenue shortfall – projected to be R53-billion – was of similar magnitude to shortfalls in previous years. In 2017/18, 2018/19 and 2019/20, the shortfall stood at R61-billion, R58-billion and R70-billion, respectively.

“In addition to a revenue shortfall there is also an expenditure overrun. The expenditure overrun is predominantly due to the National Treasury failing to budget adequately for foreseeable expenditure and departments should not be punished for this. The largest share of this is R37.5-billion from the predictable public sector wage bill increase,” according to the letter.

A different approach

The letter’s signatories have called on Ramaphosa and Godongwana to “immediately close the budget mismatch” by drawing on reserves and increasing shorter-term, less-expensive borrowing.

“This includes drawing on the R459-billion owed to the South African government in the [South African Reserve Bank’s] Gold and Foreign Exchange Contingency Reserve Account. Even if the entire mismatch were closed through borrowing, it would only increase debt levels by 1-2 percentage points and keep them well below recent estimates,” stated the letter.

The signatories recommended that the government raise additional revenue in the next budget cycle, saying that reducing tax breaks for those earning above R750,000 per year could raise up to R83-billion. It was also pointed out that the reduction in the corporate income tax rate, from 28% to 27%, was costing R11-billion to R13-billion a year.

Other recommendations in the letter include:

Reducing the cost of borrowing by moving to shorter-term loans, which are cheaper, and renegotiating the terms of particular debt;

Instituting a “transparent, consultative and evidence-based expenditure review process”, which could result in spending cuts in some areas and increases in others; and

Exploring the implementation of a wealth tax in the medium term.

“Some of what we’re proposing, I wouldn’t consider radical – to restore corporate income tax from 27% to 28%, which was three years ago… To say we should limit handouts to those earning over R750,000 or over R1-million… wherever you want to set the benchmark, that’s not a radical kind of proposal,” said Isaacs.

“I do think that it’s possible to mobilise a significant segment of society behind us, but that’s really a matter of which institutions or social movements, unions, political parties are prepared to take up those issues.”

Intersectoral support

The broad support for the open letter indicates that there are many people thinking about how to approach South Africa’s fiscal challenges in a different way to Treasury, according to Daniel McLaren, public finance economist at Ilifa Labantwana and signatory to the letter.

“Our priority as a country must be to ensure universal access to quality public services, so it is absolutely critical that Treasury starts engaging with the ideas put forward in this open letter,” he said.

Drawing attention to the situation in the ECD sector, McLaren said that services such as childcare, early learning programmes and interventions to improve child nutrition and support for caregivers have been poorly funded to date, receiving only 0.3% of government expenditure.

Historically, in South Africa, austerity has never led to growth – we need an increase in public investment in our communities to reap economic and social rewards.

“The per-child ECD subsidy only reaches about 700,000 of the 4.5 million eligible children and has been frozen at the extremely low level of R17 per child per day for four consecutive years,” he said.

“If government implements the budget cuts proposed by National Treasury, this will entrench poor access and low quality in the ECD sector, in which more than 90% of the mainly black, female workers earn below the minimum wage. And we will continue to miss the crucial opportunity to tackle intergenerational poverty that investments in ECD present.”

Another signatory, Youth Capital communication and network lead Clotilde Angelucci, said the collective statement against budget cuts was important in light of high youth unemployment in the country, where eight in 10 young people who were unemployed had never had a job.

“This is not business as usual. For a sustainable present and future, we desperately need faster and more sustainable growth to reduce unemployment, and this collective statement shows National Treasury that this isn’t the time to cut spending. Historically, in South Africa, austerity has never led to growth – we need an increase in public investment in our communities to reap economic and social rewards,” she said.

Youth Capital is petitioning for the extension of the Presidential Employment Stimulus, which involves direct public investment in job creation and protection, as well as livelihood support programmes.

“What we need is to expand on solutions that are already working, and monitor them closely to ensure that the stimulus impact promotes an economy and society that works,” said Angelucci.

Daily Maverick asked National Treasury about the claims in the open letter, but had not received a response by the time of publishing. DM

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South Africa

The harms of fiscal consolidation

A different approach

Intersectoral support