Government has run out of money written by Shaun Jacobs

[Nat Quinn]

Government has run out of money written by Shaun Jacobs

South Africa’s government has run out of money, with the state unable to continue spending like it is without significantly faster economic growth.

Nedbank chief economist Nicky Weimar recently outlined the tough situation the government finds itself in ahead of the delayed Budget Speech on 12 March.

Weimar explained that domestic demand from the government and individual households are what has been keeping the economy above water.

While domestic demand growth is positive, it is largely flat and not gaining momentum, which is needed to boost the local economy.

Personal consumption expenditures, which account for 60% of South Africa’s GDP, are the largest driver of domestic demand.

Towards the end of 2024, consumer spending grew strongly as inflation declined to below 3%, and the Reserve Bank began cutting interest rates in September.

Weimar said this resulted in retail sales growing by 10% year-on-year in October 2024 and 7.7% in November. In December, retail sales also grew strongly.

However, this means that the economy is highly susceptible to inflationary shocks and interest rates, which can either boost spending or crush it.

Fixed investment also plays a key role in the South African economy. This refers to the purchase of capital assets by businesses, such as machinery or equipment, with the aim of generating profits over time.

“This is where companies, the government, and public corporations go out and take on risk by borrowing money to expand their operations, build schools, roads, water infrastructure, or even power plants,” Weimar explained.

“But, the collapse of this is clear to see. It has just not recovered since the pandemic-era lockdowns and is still struggling.”

Weimar said the government plans to turn this around and is trying to attract private sector investment into projects that require fixed investments.

However, the state has spent most of its money in the past decade on consumption rather than fixed investment, which boosts economic growth in the short term but hinders it in the long run.

“What is carrying us is government expenditure, which, by the way, is largely civil service wages and consumer spending. We have two pillars of demand carrying us,” she explained.

This cannot last long, as consumer spending cannot grow sustainably in a stagnant economy, and the government has no more money to spend.

“So, government consumption expenditure, can it continue like this? No, it cannot. Government is thoroughly out of money and is struggling just to bring the deficit back to 3% of GDP,” she said.

The good news is that personal consumption expenditure still has some room to run as South African households are in a much better position than they were 12 months ago.

Consumer spending picked up strongly towards the end of 2024 as inflation and interest rates came down, freeing up disposable income.

This was further boosted by the implementation of the two-pot retirement system, which gave South Africans early access to a portion of their retirement savings.

However, this spending is highly susceptible to inflation picking up and interest rates remaining higher for longer, which will put pressure on household finances.

“Everything depends on where inflation will go and, secondly, where interest rates will go. Whether the consumer will keep on carrying the economy will depend on those two things,” Weimar said.

Weimar warned that inflation is unlikely to remain around 3% in 2025 as many components have come down as low as they can.

Thus, they are likely to pick up once again off a low base. In particular, the decline in goods inflation has run its course.

The same applies to food inflation, which came down dramatically in 2024. However, it has come down so far that its next move will likely be up.

“Now, fuel prices are starting to rise, with increases implemented over the past few months. This will effectively push headline inflation higher as it is a universal input,” she explained.

“Thankfully, services inflation is likely to remain constrained. But that low inflation rate is going to start increasing again.”

Weimar said the Reserve Bank would be watching this closely, but because it is coming from such a low level, there is still space to absorb any shock.

And so, there is likely to be one more cut in 2025, but no more as the Reserve Bank adopts a wait-and-see approach to what goes on in the US.

source:Government has run out of money – Daily Investor

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