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GDP Growth and Public Finance in South Africa: FY2019/20

GDP Growth and Public Finance in South Africa: FY2019/20

The South African economy has faced declining real GDP growth mainly due to high unemployment and inequality which result in subdued aggregate demand, thereby disincentivising private investment and undermining growth. Real GDP has declined from 1.8% in 2014 to an annual average of 1.1% from 2015 to 2017. In response to these shifts in real GDP growth, the Government of South Africa (GoSA) has been restrained due to commitment to fiscal consolidation and relatively high inflation.

 

Figure 1: Real GDP Growth and Inflation in South Africa (2015-2023)

Real GDP Growth and Inflation in South Africa (2015-2023)

Sources: IMF 2018, South Africa 2018 Article IV Consultation Report. Note: (*) Figures from 2018 onwards are projections from IMF, 2018.

The GoSA increased public spending by 5.5% in 2016/17 after real GDP declined to 1.3% in 2015 (2014: 1.8%) by increasing recurrent expenditure by 9.0% and cutting capital expenditure by -16.1%[1]. This was the first countercyclical response by the GoSA which was also viable due to moderate inflation at 4.6% in 2015. When real GDP continued declining to 0.6% in 2016, the government responded by increasing public spending by 8.3% in 2017/18 by increasing capital expenditure by 14.7% and recurrent expenditure by 7.5%[2]. The GoSA could not respond by increasing recurrent expenditure in 2017/18 because inflation had breached the target band of 3-6% in 2016 in spite of the slowing real GDP growth rate.

 

Figure 2: Sources of Government Revenue in South Africa (2015/16-2021/22)

Sources of Government Revenue in South Africa (2015/16-2021/22)

Sources: IMF 2018, South Africa 2018 Article IV Consultation Report; MoF 2019a, Table 2: Main Budget Estimates of National Revenue; MoF 2019b, Table 4: Main Budget Expenditure. Notes: (*) Figures from 2018/19 to 2020/21 are projections from IMF, 2018; (**) Figures from 2021/22 onwards are projections from the MoF, 2019a.

As real GDP growth recovered to 1.3% in 2017, the GoSA has responded moderating public expenditure growth to 7.5% by increase recurrent expenditure by 9.2% and cutting capital expenditure by -5.0% in 2018/19[3]. Although the GoSA increased recurrent expenditure in 2018/19, this was primarily aimed at reducing external public debt. Therefore, the GoSA has responded through countercyclical fiscal policy by moderating public spending growth from an average of 8.1% from 2015/16 to 2017/18, to a projected 7.5% in 2018/19.

 

Figure 3: Government Revenue and Expenditure in South Africa (2015/16-2021/22)

Government Revenue and Expenditure in South Africa (2015/16-2021/22)

Sources: IMF 2018, South Africa 2018 Article IV Consultation Report; MoF 2019a, Table 2: Main Budget Estimates of National Revenue; MoF 2019b, Table 4: Main Budget Expenditure. Notes: (*) Figures from 2018/19 to 2020/21 are projections from IMF, 2018; (**) Revenue figures from 2021/22 onwards are projections from the MoF, 2019a; (***) Expenditure figures from 2021/22 onwards are projections from the MoF, 2019b.

However, the GoSA has increased its recurrent spending in 2018/19 despite the recovery in real GDP growth. In 2019/20 the GoSA is projected to continue increasing public spending by 8.1% by increasing recurrent expenditure by 8.7% and capital expenditure by 2.8% in spite of real GDP recovering to 1.5% in 2018 (2015-2017: 1.1%)[4]. This will be the first procyclical response by the GoSA. Similarly, the GoSA is expected to continue its procyclical spending in the medium-term even though public spending will be moderated. Total public spending growth is projected to moderate from 7.5% in 2018/19 to an annual average of 4.3% from 2019/20 to 2021/22[5]. The growth is mainly driven by recurrent expenditure which is projected to moderate from 9.2% growth in 2018/19, to an annual average growth of 7.6% from 2019/20 to 2021/22[6]. Meanwhile capital expenditure is projected to decline from ZAR 177.4 billion in 2019/20 to ZAR 22.6 billion in 2021/22[7]. Since the GoSA has had a fiscal deficit throughout these periods, public debt and debt-servicing costs are projected to continue increasing.

 

Figure 4: Government Expenditure Composition in South Africa (2015/16-2021/22)

Government Expenditure Composition in South Africa (2015/16-2021/22)

Sources: IMF 2018, South Africa 2018 Article IV Consultation Report; MoF 2019a, Table 2: Main Budget Estimates of National Revenue; MoF 2019b, Table 4: Main Budget Expenditure. Notes: (*) Figures from 2018/19 to 2020/21 are projections from IMF, 2018; (**) Figures from 2021/22 onwards are projections from the MoF, 2019b.

As a result of increased public spending in response to the real GDP downturn, the fiscal deficit widened from an annual average of -ZAR 174.6 billion (approx. -4.2% of GDP) from 2015/16 to 2017/18, to -ZAR 226.4 billion (approx. -4.8% of GDP) in 2018/19[8]. Public debt therefore increased from an annual average of 51.3% of GDP from 2015 to 2017, to an estimated 55.0% of GDP in 2018[9]. In addition to the rising public debt, the GoSA rebalanced public debt towards increased reliance on external debt which is not prudent fiscal policy. Hence, external public debt increased from an annual average of 42.9% of GDP from 2015 to 2017, to a projected 49.6% of GDP in 2018[10]. As a result, the debt-servicing costs also increased from an annual average of ZAR 156.2 billion (approx. 12.4% of total government revenue) from 2015 to 2017, to ZAR 195.2 billion (approx. 13.2% of total government revenue) in 2018[11]. Therefore, the fiscal position has worsened from 2015/16 to 2018/19 despite the counter cyclical fiscal policy because the GoSA implemented imprudent fiscal policy.

 

Figure 5: Gross Government Debt in South Africa (2015-2023)

Gross Government Debt in South Africa (2015-2023)

Sources: IMF 2018, South Africa 2018 Article IV Consultation Report; MoF 2019c, Table 10: Total Debt of Government. Notes: (*) Figures from 2018 to 2021 are projections from IMF, 2018; (**) Figures from 2022 onwards are projections from the MoF, 2019c.

In the forward-looking medium-term the fiscal position is expected to improve only slightly due the procyclical fiscal policy in spite of the GoSA implementing prudent fiscal policy. The fiscal deficit is projected to narrow slightly to an annual average of -ZAR 214.3 billion (approx. -3.9% of GDP) from 2019/20 to 2021/22. Public debt is projected to continue increasing from 55.0% of GDP in 2018, to an annual average of 57.4% of GDP from 2019 to 2023[12]. However, the increase in public debt is mainly through increased domestic public which is prudent fiscal policy. External public debt is projected to decrease slightly from 49.6% of GDP from 2018 to an annual average of 47.4% of GDP from 2019 to 2023[13]. Domestic debt is projected to increase from 3.4% of GDP in 2018, to an annual average of 9.3% of GDP from 2019 to 2023[14]. Despite the prudent fiscal policy, debt-servicing costs are projected to increase to an annual average of ZAR 237.7 billion (approx. 14.2% of total government revenue) from 2019/20 to 2021/22[15]. Therefore, the fiscal position is only improved slightly because public debt levels and debt-servicing costs are projected to continue increasing in spite of the prudent fiscal policy which is projected to narrow the fiscal deficit.

 

The GoSA has had a tendency to implement counterintuitive responses to real GDP growth performance. As earlier noted, fiscal policy has been countercyclical whilst imprudent because the GoSA increased recurrent spending when real GDP growth was declining and is projected to decrease spending as real GDP growth recovers in 2018/19, but has increased its dependence on external public debt. In the historic period from 2015/16 to 2017/18 the GoSA responded to declining real GDP growth with countercyclical fiscal policy using an imprudent fiscal stance, which changed in 2018/19. Therefore, as real GDP growth recovered from an annual average of 1.1% from 2015 to 2017 to a projected 1.5% in 2018, the GoSA increased its recurrent expenditure growth from the medium-term average of 8.4% to 9.2%; compared to the decrease of -5.0% on its capital expenditure in 2018/19 (2015/16-2017/18: 7.7%)[16]. The typical countercyclical fiscal response to deteriorating real GDP growth is to increase government spending through recurrent expenditure in order to boost aggregate demand and enable real GDP growth; and when real GDP growth is high, the typical countercyclical response is to increase public savings or investment through capital expenditure.

 

During this time domestic public debt has decreased from an average of 6.4% of GDP from 2015 to 2017, to a projected 3.4% of GDP in 2018; which is imprudent fiscal policy given that the GoSA has increased its external debt to a projected 49.6% of GDP in 2018 (2015-2017: 42.9% of GDP)[17]. In the forward looking medium-term, as real GDP growth continues improving to an annual average of 1.8% from 2019 to 2021, the GoSA is expected to continue increasing its recurrent expenditure at an annual average of 7.6% compared to its capital expenditure which is projected to contract an average of -26.4% from 2019/20 to 2021/22[18]. Domestic public debt is projected to increase to an annual average of 9.1% of GDP from 2019 to 2021, meanwhile external public debt is projected to decrease to an average of 46.9% of GDP[19]. Thus, the GoSA is expected to change from its current countercyclical fiscal policy taking its imprudent approach towards procyclical fiscal policy taking a prudent approach in the forward-looking medium-term.

 


[1] IMF 2018. South Africa 2018 Article IV Consultation Report, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 18 August 2019].
[2] IMF 2018. South Africa 2018 Article IV Consultation Report, ibid.
[3] IMF 2018. South Africa 2018 Article IV Consultation Report, ibid.
[4] IMF 2018. South Africa 2018 Article IV Consultation Report, ibid.
[5] IMF 2018. South Africa 2018 Article IV Consultation Report, ibid.; NT 2019a. Table 4: Main Budget Expenditure, National Treasury: Pretoria. Available At: http://www.treasury.gov.za/ [Last Accessed: 18 August 2019].
[6] IMF 2018. South Africa 2018 Article IV Consultation Report, ibid.; NT 2019a. Table 4: Main Budget Expenditure, ibid.
[7] IMF 2018. South Africa 2018 Article IV Consultation Report, ibid.; NT 2019a. Table 4: Main Budget Expenditure, ibid.
[8] IMF 2018. South Africa 2018 Article IV Consultation Report, ibid.
[9] IMF 2018. South Africa 2018 Article IV Consultation Report, ibid.
[10] IMF 2018. South Africa 2018 Article IV Consultation Report, ibid.
[11] IMF 2018. South Africa 2018 Article IV Consultation Report, ibid.
[12] IMF 2018. South Africa 2018 Article IV Consultation Report, ibid.
[13] IMF 2018. South Africa 2018 Article IV Consultation Report, ibid.
[14] IMF 2018. South Africa 2018 Article IV Consultation Report, ibid.
[15] IMF 2018. South Africa 2018 Article IV Consultation Report, ibid.; NT 2019a. Table 4: Main Budget Expenditure, ibid.
[16] IMF 2018. South Africa 2018 Article IV Consultation Report, ibid.; NT 2019a. Table 4: Main Budget Expenditure, ibid.
[17] IMF 2018. South Africa 2018 Article IV Consultation Report, ibid.
[18] IMF 2018. South Africa 2018 Article IV Consultation Report, ibid.
[19] IMF 2018. South Africa 2018 Article IV Consultation Report, ibid.

 

 


Xolisile Tsitsi Ntuli

Role: Regional Analyst
Contact: xolisile@politicaleconomy.org.za
Xolisile is a Researcher specialising in African human security...

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