The National Treasury has made it clear that the big tax revenue overruns of the past two years have come to an end and that the mini budget in October will unveil cuts to government spending because public finances are in a perilous position.  

Since the Treasury has taken this position, criticism has come thick and fast, with academics and civil society organisations warning that cuts to government spending will negatively affect the delivery of crucial public services.  

When Finance Minister Enoch Godongwana unveils the Medium-Term Budget Policy Statement on 25 October, he is expected to announce cuts in the already hollowed-out provincial budgets in areas of health, education and criminal justice. 

Michael Sachs, from Wits University’s Public Economy Project and a former head of the Treasury’s budget office, said the soon-to-be-announced budget cuts are a continuous move by the Treasury, with reductions of crucial service delivery programmes persisting over the past decade. 

“If we defund these things [health, education and criminal justice], it will undermine the growth of the economy and undermine the development of society,” said Sachs on Wednesday at a Public Economics Conference hosted by the Treasury.  

The Institute for Economic Justice (IEJ), an economic think tank, shares Sachs’ views. 

“Intensifying austerity is in no one’s interest. The poor will suffer disproportionately, women will be worst hit, the state will see its capacity further crippled, and businesses will experience a worsening of economic infrastructure and reduced spending while increasing demands will be made on a shrinking tax base.

“There can be no path out of our economic and social crisis without economic expansion, and the state must drive, not undermine this,” the IEJ said.

The institute has proposed that the Treasury focus on corporations and the wealthiest individuals to ensure that they “pay their fair share through progressive taxation” as an alternative to cutting the budgets of provincial government departments.

Slowing commodity prices and budget troubles

The Treasury has found itself in trouble after a fall in commodity prices and the SA economy weakening further due to Eskom blackouts and logistics constraints (mainly problems at Transnet) — factors that have bitten into the profits of companies that are consequently paying less corporate taxes to the government.

Early figures indicate that for the second quarter of 2023, corporate income tax collections were down by 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.

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 the Treasury claims would cost R37.46-billion. The Treasury did not budget for this expense, leaving a gaping hole in the government’s finances.

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 at R453-billion.

Because of this difficult position, Daily Maverick understands that the Treasury intends to cut the budgets of provinces this year by at least R25-billion.  

According to the Sunday Times, the Treasury sent a letter to provinces, informing them that it faces “unprecedented” challenges for the current fiscal year. It has instructed departments and provinces to freeze the hiring of new employees and advertising for new procurement contracts for all infrastructure projects (unless approved by the Treasury) and recommended drastic cuts in spending on travel, catering, conferences and workshops.

Service delivery impact

Wits University’s Sachs said the freeze on the hiring of new state employees (which probably also involves headcount reductions) will have a major impact on the delivery of social programmes, especially the most labour-intensive departments, which involve teachers and nurses.  

“You cannot cut the budgets for compensation. If we continue to cut budgets and headcounts, we are essentially compromising our service provision to the population. If the Treasury refuses to provide more resources to accommodate the wage bill agreement, we are likely to see widespread failure and disruption of government services, especially health and basic education.” 

Recent 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, pointed to the adverse impact of budget cuts over the past decade on basic education. The research showed 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 the Treasury persists with budget cuts over the next three years, spending could drop to R14,000 per pupil. This will have a negative impact on education standards at state schools, which are already ranked poorly globally.

The government employs one teacher for every 33 pupils enrolled in the public school system. This could rise to one teacher for every 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. DM