Budget’s reserve account withdrawal reflects the failure of the Treasury
● The most unusual element of this year’s budget illustrates the National Treasury’s failed approach to budget policy and its unwillingness to leverage the budget as a vehicle for growth, employment and development.
I am referring to the decision to draw R150bn from the Gold and Foreign Exchange Contingency Reserve Account (GFECRA). This is a portion of the more than R500bn sitting in the Reserve Bank account owed to the national government.
The manner in which the Treasury is accessing and deploying these funds highlights three things.
First, the R100bn drawn for the 2024/25 financial year is arguably the only thing that saves South Africa from even more devastating budget cuts. While this is extremely important, it isn’t reflective of a broader rethink of the wisdom of budget cuts.
Following a lower-than-expected tax intake, the Treasury continues its decadelong strategy of slashing expenditure and hoping for private sector spending to fill the void. Between 2019/20 and 2026/27 the Treasury will have cut a whopping R270bn from actual government programmes (“main budget non-interest expenditure”). This comes on top of budget cuts made between 2014 and 2019.
The fall in spending is even more dramatic when calculated per person. Per capita non-interest expenditure is due to fall from R34,607 in 2019/20 to R27,283 in 2024/25 and further to R26,405 by 2026/27.
This has very real impacts, and will disproportionately affect lower-income earners, black women and children, who rely more on essential public services. Spending per health-care user and learner, for instance, falls meaningfully.
Despite the applause the minister received when announcing a R100 increase to the old-age pension, the picture for social grants is grim. These see an increase of 4.8%5% from last year, compared to an inflation rate of 5.6%. This comes on top of an erosion in their value over previous years. The lifesaving social relief of distress (SRD) grant continues to be strangled by insufficient budget allocations, unfair barriers to access, and a falling real value.
This is all being sacrificed on the altar of fiscal consolidation — attempting to reduce borrowing through expenditure cuts. Debt targets are more severe than in both the 2023 medium-term budget policy statement and previous budgets. Whereas the 2021 budget considered the stabilisation of debt at 88.9% in 2025/26 as “a sound platform for sustainable growth”, the Treasury now aims to cap debt at 75.3% in that year.
Such forceful debt stabilisation is unnecessary and self-defeating. We know that such budget cuts lead to a decrease in GDP, and therefore will result in a higher debt-to-GDP ratio. South African debt levels are roughly in line with our peers, with official international statistics putting South African debt at 71% and the developing country average at 68.3%. The government should instead prioritise reducing the cost of borrowing, which it rightly identifies as too high.
The impact of these budget choices would have been many times worse had it not been for the GFECRA’s R100bn injection. The decision to utilise this money does not, however, signal a rethink of the Treasury’s path of fiscal arson. Rather, it is utilising just enough of these idle resources to make the existing path a little more palatable.
Second, the Treasury’s original strident opposition to utilising the GFECRA resources in the first place is testament to its reluctance to mobilise the maximum resources available to the government.
The GFECRA balance has been growing for two decades and was untouched by the Treasury until the Institute for Economic Justice shone a spotlight on the account in October 2023. Originally, private-sector research group Krutham put the chances of the Treasury using these funds at almost nil, as the Treasury worried that doing so may spook markets and derail plans for budget cuts. The minister reportedly had been unaware of the account until this point, while the Reserve Bank governor warned against its use.
Acting in concert with Treasury bureaucrats, the business press hysterically closed ranks against our proposal to release a portion of its balance to the fiscus. For example, Peter Bruce referred to the proposal as “arrogant alternative economics” and Claire Bisseker, under a picture of the minister riding a My Little Pony beneath a rainbow, scornfully dismissed the proposal as purporting to uncover a hidden “pot of gold”.
As I argued at the time, the underlying undemocratic impulse was to restrict access to these funds because facilitating access risked scuppering the Treasury’s plans to take a chainsaw to government spending.
The same is true of other potential revenue sources that were conspicuously absent from the tabled budget. In 2023, approximately R83bn in handouts was given to those earning above R750,000 through medical aid, retirement fund and other tax breaks, while the SRD grant sees a further budget cut. The recent reduction in the corporate income tax rate, which has done nothing to spur investment, is costing the fiscus about R12bn to R13bn a year. Wealth remains undertaxed in South Africa, with high-income earners benefiting from inheritance and dividend income at well below the applicable personal income tax rate. This only exacerbates our already astronomical levels of wealth inequality.
As illustrated by the GFERCA experience, it will likely take a concerted effort by those outside the Treasury to see movement on a net wealth tax. This will be opposed by business-aligned forces until it is eventually accepted as the logical course of action.
Third, the decision to deploy the GFECRA in the manner in which it was — piecemeal and as a small cushion against budget cuts — is emblematic of the dysfunctional approach to national investment adopted by the Treasury.
In the face of crumbling economic and social infrastructure and rising levels of destitution there is no viable vision for economic renewal. As we argued at the close of 2023, the GFECRA funds could be dedicated to bold and strategic investment plans in critical infrastructure, state-owned enterprise (SOE) support, a basic income grant, or capitalising development finance institutions or a sovereign wealth fund. This list is not exhaustive, but it offers an opportunity to use these one-off funds cleverly and break from a fiscal policy stance that fails to ramp up state investment.
Instead, the Treasury is counting on private sector investment to ride to the rescue. It has doubled down on the use of private-public partnerships and leveraging private finance for infrastructure development and rescuing key network industries and SOEs.
This is a fanciful solution to the government’s mismanagement and underinvestment. Worldwide, private financial investment in infrastructure has slowed and failed to meet development targets. When investment does occur, the state assumes disproportionate risks and the private sector is guaranteed profit, often at the expense of the environment and the poor accessing critical services. Also ignored is that private sector investment is not itself a solution to government incapacity as it requires significant capacity (of a different sort) to ensure proper regulatory oversight and the harnessing of private investment for developmental gains.
The GFECRA balance — of which R350bn still remains untapped — could have been a basis for the type of investment the economy sorely needs.
In all these respects, while we welcome the R150bn cushion, the Treasury’s use of these funds is a reflection of, rather than a departure from, its worn and failed fiscal conservatism.