Cut spending or risk a financial crisis – BLSA

CEO Busi Mavuso said it appeared that only the national treasury understood the need to curtail government spending 

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Business Leadership South Africa (BLSA) chief executive Busisiwe Mavuso has said that “dangerous” narratives about increasing government spending when the fiscus is under severe pressure could push the country into crisis. 

In her Monday newsletter, Mavuso said there was little choice but to constrain government spending. 

“There are only two choices: cut back spending or induce a financial crisis,” she said, adding: “There is no option in which spending can somehow increase without putting the solvency of the state at risk”. 

Mavuso dismissed the idea that high government spending would lead to more social spending and growth. 

She said it appeared that only the national treasury understood the need to curtail government spending. 

The national treasury has instructed government departments to pare back their budgets in the lead-up to the tabling of the medium-term budget policy statement (MTBPS).

A proposal by the finance department to cut spending and reconfigure state departments was leaked to the media, in which the treasury allegedly outlined various measures to President Cyril Ramaphosa that may need to be taken to make room for big expenditure line items, such as a larger-than-budgeted-for public sector wage bill and extending the Covid-19 social relief of distress grant. 

Key among these alleged measures was to cut down the size of the cabinet. Other far less palatable measures included increasing VAT by 2%. 

Mavuso agreed that improved social security would be a good thing, “but it cannot be done at the cost of a financial crisis, which would instantly remove the social safety net even as it is”.

She referred to the mid-2000s when government finances were strong and social spending could be increased without risking the financial health of the state.  

“Growth creates the opportunity for social spending, not the other way around.”

The government’s current purse is in stark contrast to that of the mid-2000s, she said. 

“We already know that government revenue has been falling short of targets because economic growth has been worse than forecast. Already government is having to borrow more than it had expected,” said Mavuso. 

Further budget adjustments the treasury proposed included that government departments freeze hiring, as well as the process of advertising new procurement for infrastructure projects, unless approved by the treasury.

But the ANC-led government and unions have rejected the proposed budget cuts.

Cosatu, the ANC’s alliance partner, said the “solutions offered by treasury of slashing expenditure and further de-capacitating the state when the economy is in desperate need of stimulus and a well-oiled and capacitated public services, will only serve to choke the economy and further weaken an already enfeebled government”.

The Budget Justice Coalition said that the treasury’s proposal would widen inequality in the country. “We caution that these budget cuts will have long-term detrimental effects on the economy and the progressive realisation of socio-economic rights….The measures will further impede the state’s ability to increase much-needed capacity in key areas, such as crime prevention, health, education, social development and early childhood services.”

In her previous newsletter, Mavuso pointed out that as next year’s national election is nearing, “the pressures are obvious for increased spending on both welfare and the government payroll”. 

But, she said, “a vicious cycle will ensue if government finances are not kept well under control, which ultimately leads to low growth and financial collapse.”

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