Spending outstripping revenue may trigger downgrade

FINANCE Minister Malusi Gigaba’s candid setting forth of the government’s financial challenges in his Medium-Term Budget Policy Statement should not have come as a surprise given the large fiscal deficit in July.

In July, government spending soared 13.8% year on year after a 16.9% year-onyear jump in June, while revenue fell 0.5% year on year after a 6.7% year-on-year gain in June.

Since then there has been a slight turnaround. The fiscal deficit narrowed by almost a quarter (24.4%) year on year in August to R12.6 billion as revenue growth of 5.9% year on year outpaced spending growth of 1.5% year on year.

In September, revenue growth continued to outpace inflation and grew 5.3%, while spending picked up to 5.2%. Why is this important? If expenditure growth consistently exceeds revenue growth, the fiscal deficit will widen. Just as a household goes further into debt if spending outpaces income, so does the government. This debt has to be serviced, so an increasing amount of income has to be set aside to pay interest.

As servicing debt has the first call on income, the larger the deficit, and therefore the higher the debt, there is less money available to pay social grants, build hospitals and pay public servants. That is only one part of the problem. Moody’s currently rates government bonds as investment grade. However, their patience with the economy not recovering is wearing thin.

In the past fiscal year, which ended in March 2017, expenditure growth was below revenue growth, so Moody’s gave South Africa the benefit of the doubt. When Fitch Ratings and S&P Global Ratings downgraded the country to junk status in April after the cabinet reshuffle, Moody’s kept South Africa at investment grade.

In the first six months of Gigaba’s tenure, expenditure growth has outpaced revenue growth, with expenditure growth of 6.6% year on year, while revenue growth has been only 3.7% year on year.

The ratings agencies are due to deliver their verdict on November 24.