SA budget will hurt key public services- Sachs

The Public Economy Project (PEP), based at Wits University and headed by former Treasury budget office chief Michael Sachs, has delivered a stinging critique of last week's medium-term budget, saying it will impose "unprecedented austerity" that will damage key public services and also fail to achieve its key objective to stabilise debt by 2025.

The project presented its critique to Parliament's finance committees on Wednesday.

Says the presentation: Government is proposing a path of austerity that is deeper and more sustained than anything attempted in the past. These items are strongly concentrated on core government services and are likely to lead to a deterioration of service provision and a weakening of the state.

The presentation highlights that government consumption will contract in real terms by 3.2% in 2024 and 0.5% in 2025; spending on salaries will contract by 3% over the medium term, which implies a 40 000 reduction in staffing; and spending on goods and services will contract by 6% over the medium term.

There is little chance that the spending cuts can be achieved without lasting damage to frontline public services, such as health and education, despite the upward adjustments made in the medium-term budget to cover the cost of the 2023 wage settlement, it argues.

Real spending on education declines by R16 billion over the medium term, and on health, it declines by R14 billion. In the education sector, this will impact the hiring of additional teachers, leading to large class sizes, and in health, it will impact overtime payments, medical supplies, and security services and will delay spending on hospital infrastructure.

While social grant payments will not be affected and will grow with inflation, other social development services will have to be cut back as additional wage costs – which have not been compensated for in this case – crowd out spending on social workers and welfare organisations.

Wage

The PEP also questions the Treasury's assumption that it will hold wage costs below inflation – a 2% reduction in real terms – without a large reduction in the headcount. The Treasury has said that no retrenchments are planned and that excess staff in programmes that are cut will be moved around the public service.

"A back-of-the-envelope calculation indicates that the government will have to reduce employees by 40 000 over the next two years. This is likely to have enormous implications for education and healthcare," it says.

The PEP is also doubtful that the savings Treasury hopes to make in the "reconfiguration of government" will produce significant results.

The consequence of all of this is that the PEP believes that Treasury's debt stabilisation target of 77.7% of GDP in 2025 is unachievable. The stabilisation of debt is essential to reining in debt service costs, which continue to grow at an exponential rate.

It projects a "more plausible fiscal outlook" which assumes that wages grow at CPI, support for state-owned enterprises (not included in the medium-term budget) continue and are properly accounted for, and that the macroeconomic assumptions are based on the consensus in the market.

This combination of assumptions sees debt continuing to rise beyond 2025, reaching 79.3% in 2026 and still climbing.

The PEP recommends urgently restoring energy and logistics capacity, which is essential to restoring growth. It also recommends a more careful handling of government debt costs. It concludes that debt stabilisation is unlikely to occur for as long as GDP-per-capita is falling.-Fin24