South Africa’s financial situation since Finance Minister Enoch Godongwana presented the February Budget is turning out to be worse than initially thought.

The government is now reluctant to embark on new spending priorities, which will have dire consequences for crucial service delivery across the country. It is heading for a much bigger financial crisis, with the revenue it generates from corporate and personal income tax not being enough to cover growing societal demands.

To prevent a total collapse in the country’s finances, National Treasury has told all government departments in provinces that no new spending will be allocated to them. The Treasury is even prepared to implement budget cuts in 2024, which will be a blow to departments that are already reeling from previous cuts that threaten the delivery of services to the vulnerable and poor.

A resident on the roof of a tower block in Johannesburg, South Africa, on 15 August 2023. Budget cuts threaten the delivery of services to the vulnerable and poor. (Photo: Michele Spatari / Bloomberg via Getty Images)

Economists and watchers of government spending canvassed by Daily Maverick have warned that the government will be forced to cut expenditure this year by at least R25-billion. The budgets of crucial service delivery programmes in health, education and criminal justice are on track to be cut, negatively impacting the fabric and stability of the nation.

The government realised as early as April, the start of its new fiscal year, that its economic fortunes would react negatively when global commodity prices, especially of platinum group metals, started to decline.

Over the past two years, the global commodities boom meant that the government collected higher tax payments from the profits of mining companies. This enabled it to easily meet requests for funding from government departments to fund their spending programmes, even if it ran into billions of rands or was more than what was pencilled into their existing budgets.

But commodity prices have tumbled in recent months and mining companies are not as profitable as they once were, which has major implications for South Africa’s public finances and spending.

(Source: National Treasury EPRE data, Persal / GTAC PEPA, Public Economy Project Calculations)

No new money

Now Treasury, in preparation for the Medium-Term Budget Policy Statement (MTBPS), which is presented in October and provides an update to the February Budget, has asked government departments to implement “fiscal consolidation measures” throughout 2024.

In other words, they have been asked to cut their budgets further throughout 2024 on top of spending reductions already written into the expenditure framework presented in the February Budget. And the Treasury told government departments that any new spending priorities will be funded from their already approved and existing budgets, meaning it is not prepared to raise new money to fund service delivery initiatives.

What also worsened the government’s financial situation is that it decided to award public servants a 7.5% wage increase in 2023, implemented from 1 April, which would cost R37.46-billion. Treasury did not budget for this expense, leaving a gaping hole in the government’s finances.

Provincial governments are expected to accommodate the wage increase from their existing budgets because Treasury refuses to raise new money. Provinces are projecting to overspend their 2023/24 budget of R728.2-billion by a total of R24.8-billion, mainly owing to the implementation of the wage increases. The wage agreement had not been concluded by the time of the February Budget, which factored in pay increases of 1.6% instead of the agreed 7.5%.

Absa senior economist Miyelani Maluleke has described the state of public finances as “dire”. Since the February Budget, the economy’s performance has deteriorated further as a result of Eskom power cuts and the substantial weakening of the rand against major currencies. Morale among investors has also taken a knock owing to South Africa’s questionable stance on the Russia-Ukraine war in Europe.

Adding the impact of lower commodity prices, government tax revenue has been under significant pressure.

Maluleke estimates that, for the second quarter of 2023, corporate income tax collections are down 22.5% compared with a year ago. Because of this, it is broadly expected that the government will face a revenue shortfall of between R30-billion and R60-billion this year, said Sanisha Packirisamy, an economist at Momentum Investments.

The February Budget projections are now widely seen as having been too optimistic. The government was aiming to achieve a positive primary budget balance — where revenue exceeds non-interest expenditure — this year. But in the year to date, South Africa’s budget position is the inverse, with a deficit of R47-billion as revenue collection is estimated to be at R406-billion, whereas government expenditure is much bigger at R453-billion. Around this time last year, the government had already pencilled in a surplus of R11.5-billion, thanks to the commodities boom.

Treasury’s main budget deficit of 4% (about R284-billion) of GDP, mentioned in the February Budget, is now unrealistic, with most economists expecting it to rise to at least 5%.

Annabel Bishop, the chief economist at Investec, said the deterioration in public finances is made worse by a weak domestic economy, which she expects to grow marginally by 0.4% this year. Bishop said this growth is not enough to provide a substantial boost to state revenue.

Health, education and criminal justice service budgets – even though they are protected but have faced cuts (in real terms) since 2009 – are set to bear the brunt of the government’s financial malaise.

Apart from damaging healthcare, budget cuts also make a mockery of the government’s rush to finalise the National Health Insurance Bill. (Photo: Leila Dougan)

Hollowed-out health sector

In a detailed analysis of the public health budget, prepared for the Presidential Health Summit in April 2023, Michael Sachs, from Wits University’s Public Economy Project, and Dr Fareed Abdullah, a director at the Medical Research Council, sounded the alarm about budget cuts damaging the public health sector. They argued that “fiscal constraints and budget shortfalls are eroding the capabilities of the public healthcare system … contributing directly to falling levels of service provision”.

The pair predicted that “the retrogression in the resource envelope for healthcare is likely to intensify in the years ahead”. Six months later, a further round of budget cuts will have a devastating impact on public healthcare services, which have now endured almost a decade of per-capita cuts.

Apart from damaging healthcare, these cuts also make a mockery of the government’s rush to finalise the National Health Insurance (NHI) Bill. The NHI’s implementation can only begin after a massive reinvestment in public health services so that they can be accredited as meeting quality standards that will be set by the NHI Fund.

About the public service wage increase, Alex van den Heever, adjunct professor at the Wits School of Governance, said: “Failing to budget for drastic increases in public sector conditions of employment has become a feature of the budget process in South Africa. One of the key victims of this conduct, provincial health departments, are, however, in no position to withstand unplanned shocks of the scale frequently and currently imposed.

“They lack the flexibility to radically change direction in a single financial year – or even over the medium term.”

Van den Heever said, although “more capable health departments, such as that of the Western Cape”, can mitigate these shocks and protect service delivery, “other health departments will default to crude measures of survival – such as post freezes, cuts in maintenance expenditure, poaching funds from conditional grants meant for HIV and TB, and increased debt levels – all while patient care is compromised…”

A senior member of Treasury expressed despair at the looming cuts in the health budget, telling Daily Maverick it could possibly be as much as R8-billion to R9-billion in the current financial year. “The dynamics are being driven by reducing debt, not maintaining services, making it difficult to protect departments.”

The official said that, in light of a large shortfall in anticipated tax revenue, 2024 would be “a budget of cuts”.

According to Russell Rensburg, director of the Rural Health Advocacy Project based at Wits University, the total annual cost of the wage agreement in the public health sector is estimated at R8.7-billion for the current financial year.

“In respect of human resources, the R8.7-billion shortfall is the equivalent of 18,000 health posts. Practically, this could mean that provinces will freeze the filling of existing vacancies and the creation of new health posts. The immediate impact is that it will not be able to absorb any post-community service health professionals, including doctors, nurses and pharmacists. While funding for strategic programmes such as the response to HIV is protected, without sufficient staff to deliver the programme there is a risk that current gains will be lost and the target of an additional two million people living with HIV who need to be enrolled in HIV care will not be achieved.”

Rensburg added that “the implementation of the national TB recovery plan, primarily funded from provincial health budgets, could also be constrained, resulting in avoidable deaths”.

“Lastly, provincial health departments spend a significant portion of their budgets on procuring goods and services. These include medicines, consumables, maintenance and repairs, including medical equipment. This is already underresourced as a result of poor management of procurement processes, unbudgeted payment of medico-­legal claims, unbridled corruption and inflation. These areas will face further cuts as a result of the funding shortfall.

“All of this will in effect reduce public provision of constitutionally enshrined obligations in respect of healthcare, further widening health inequalities.”

In May this year, Police Minister Bheki Cele told Parliament expenses were set to increase. (Photo: Leila Dougan)

Policing, law and order threatened

Budget cuts will also bite into the police and justice sectors as the country grapples with persistent crime, corruption and the aftermath of State Capture. Daily Maverick spoke to sources linked to those sectors.

One said budget cuts would be “devastating” for the South African Police Service (SAPS) as it would mean the functioning of specialised units would be negatively impacted. Police stations that were already struggling would be further hamstrung.

In May this year, Police Minister Bheki Cele told Parliament expenses were set to increase. “Over the current Medium-Term Expenditure Framework period (2023/24, 2024/25 and 2025/26 financial years), the SAPS total expenditure is expected to increase at an average annual rate of 3.9%,” he said. “This is from R102.6-billion in the 2022/23 financial year to R114.9-billion in the 2025/26 financial year.”

As for the justice sector, a source said a budget cut would mean vacant posts could not be filled. “Both quality and quantity of work will be negatively affected.”

Necessary security at courts and critical units, including witness protection, could also be impacted.

At the end of May, Justice and Correctional Services Minister Ronald Lamola said his department’s budget for 2023/24 stood at R23.2-billion. “The budget allocation … is imperative for promoting safer communities and instilling trust in our criminal justice system,” he said.

“We have allocated a significant portion of our budget towards this critical mission [of fighting crime, fraud and corruption].”

In June, it emerged in Parliament that the National Prosecuting Authority (NPA) was pressing ahead to get more staff on board. “On 1 January 2023, the NPA had a staff establishment of 6,432 posts, of which 5,203 are filled and 1,229 are vacant, with a vacancy rate of 19%,” read the minutes of the meeting.

“The NPA has embarked on mass recruitment to address shortages of capacity and necessary skills needed to investigate and prosecute complex matters within the NPA environment.” Its Investigating Directorate’s staff numbers were also being boosted.

During the same meeting, deficiencies at the Office of the Public Protector of South Africa (PPSA) also emerged, pointing to how a cut budget could exacerbate things.

“[A] skills audit outcome revealed critical competency and skills shortages on specialised knowledge areas such as finance, management accounting, supply chain and procurement as well as project management,” the minutes read. “Due to the lack of funding, the PPSA is unable to source skills in the following specialist areas: forensic investigation; forensic accounting; forensic and investigative auditing; public procurement and supply chain practices; and technical skills in the built environment.”

Basic education is among the labour-­intensive government departments, and budget cuts in the past have often led to headcount reductions. (Photo: Leila Dougan)

More failures in basic education

The budget for basic education is a large component of government expenditure, with R309-billion allocated for 2023/24. Even this budget looks set to be cut by Treasury – just as in the past decade.

Research by Sachs; Arabo Ewinyu, a research manager at the Southern Centre for Inequality Studies; and Olwethu Shedi, an economist at the Centre for Competition, Regulation and Economic Development; has shown that the government spent about R20,000 per pupil in 2009, which has since fallen to about R16,500 per pupil by 2021.

The trio has argued that, if Treasury persists with budget cuts over the next three years, spending could fall to R14,000 per pupil. This will negatively impact education standards at state schools, which are already ranked poorly globally.

Basic education is among the labour-­intensive government departments, and budget cuts in the past have often led to headcount reductions. The government employs one teacher for every 33 pupils enrolled in the public school system. This could rise to as many as 39 pupils over the next three years – Sachs, Ewinyu and Shedi have argued – with fewer teachers employed and those left having to take on more pupils.

Wits University education expert Professor Ruksana Osman said the impact of budget cuts or the reprioritisation of public funds goes beyond the classroom, as it also affects the government’s policy response to basic education. “This would suggest that any planning that has been done falls by the wayside and that the consequences on service delivery are dire,” Ruksana said.

Redirecting funds can have detrimental effects on important strategic initiatives, including food schemes at schools and staff development. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.