South Africa facing a fiscal cliff: implications for socioeconomic development in 2024

The term “fiscal cliff” refers to a situation where a government faces a significant drop in revenue combined with increased expenditure, leading to a sharp deterioration of its fiscal position. This situation can arise from various factors, such as economic downturns, unsustainable debt levels, or inadequate budgetary policies. South Africa’s economy has exhibited dismal performance since its remarkable transition to democracy (Mail & Guardian). The country’s economic growth rate has also decreased from approximately 2.5% annually to 1.5% (as reported by Professor Ricardo Hausmann (Wits University)). Likewise, Mail & Guardian reports that the country will have had 18 years of declining average living standards by the end of 2025.

Additionally, the Institute for Economic Justice (IEJ) projects a revenue deficit of R67.2 billion for the remaining period of 2023/24 unless decisive actions are taken. Furthermore, the 2023 budget also had unrealistic spending goals, anticipating a reduction in non-interest expenditure for the fiscal year 2023-24 as highlighted by the Mail & Guardian. South Africa is currently facing significant challenges with high levels of unemployment, poverty, and inequality. In the face of such high unemployment and poverty, Finance Minister Enoch Godongwana is confronted with significant pressure to expand the South African welfare state (Prof. Philippe Burger of the University of the Free State). Furthermore, several commentators and activists advocated implementing a permanent Basic Income Grant (BIG) to replace the Social Relief of Distress Grant (SRDG). However, Finance Minister Enoch Godongwana opted not to introduce a BIG, instead extending the SRDG (R350 per month) by another year. South Africa is at risk of experiencing a severe financial crisis, commonly referred to as a fiscal cliff, which has substantial consequences for the country’s social and economic progress in 2024.

Implications for socioeconomic

The following section briefly discusses the implication of fiscal cliffs for socioeconomic development in South Africa.

1. Economic Instability: Economic instability refers to uncertainty, volatility, or turbulence within an economy, characterized by fluctuations in key economic indicators such as GDP growth, employment rates, inflation, and financial markets. A fiscal cliff could indicate underlying economic instability, which can deter investment, hamper growth, and lead to higher unemployment rates. This instability could exacerbate existing socioeconomic disparities and hinder progress in poverty alleviation efforts.
2. Reduced Investment and Increased Borrowing Costs: A fiscal cliff could erode investor confidence, leading to capital flight and a further decline in economic activity. This, in turn, could constrain the government’s ability to access external financing and implement critical infrastructure projects necessary for socioeconomic development. Furthermore, fiscal cliffs can also reduce investment as they can exacerbate economic instability, hinder long-term growth prospects, and prolong the recovery from the fiscal crisis. Moreover, when a country faces a fiscal cliff, it may need to borrow more money to meet its financial obligations or stimulate the economy. However, if investors perceive the country’s fiscal situation as precarious, they may demand higher yields on government bonds to compensate for the increased risk of default. Higher borrowing costs make it more expensive for the government to raise funds through debt issuance, leading to higher interest payments and exacerbating the fiscal crisis
3. Austerity Measures: To tackle the fiscal crisis, the government could find itself compelled to enact austerity measures. This implies that if the government is forced to cut spending abruptly to avoid default or mitigate the fiscal cliff’s impact, essential services such as healthcare, education, and social welfare programs may be severely affected. This could disproportionately impact marginalized communities and hinder progress towards achieving development goals.
4. Social Unrest: Adopting austerity measures aimed at resolving the fiscal cliff, such as tax hikes or cuts in public services, might ignite social unrest and political instability. This would further undermine efforts to promote inclusive growth and development. Furthermore, a fiscal cliff can exacerbate unemployment as governments may implement layoffs or pause hiring to reduce expenditures. High levels of unemployment or underemployment can lead to economic insecurity, social unrest, and feelings of resentment among those affected. Unemployed individuals may become disillusioned with the government’s ability to address their needs, leading to heightened social tensions. Also, when the social unrest is prolonged, it can erode social cohesion and trust in institutions.
5. Credit Rating Downgrades: A deterioration in South Africa’s fiscal position could lead to downgrades by credit rating agencies, making it more expensive for the government to borrow money. Higher borrowing costs would divert resources from development priorities and limit the government’s capacity to invest in infrastructure and human capital. Likewise, a credit rating downgrade can reduce a country’s access to international capital markets and can tarnish the country’s credibility and reputation in the eyes of investors and international lenders.
6. Structural Reforms: In response to a fiscal crisis, South Africa may need structural reforms to restore fiscal sustainability and promote long-term socioeconomic development. These reforms could include improving governance, enhancing revenue collection, reducing wasteful spending, and promoting private sector-led growth. Restoring fiscal sustainability can provide momentum for enacting reforms that improve economic efficiency, competitiveness, and resilience. Furthermore, structural reforms that enhance productivity, competitiveness, and employment opportunities can lift people out of poverty, reduce inequality, and build resilience to future economic shocks.

In conclusion

A fiscal cliff in South Africa would have significant implications for socioeconomic development, potentially leading to economic instability, reduced government spending on essential services, decreased investor confidence, social unrest, higher borrowing costs, and the need for structural reforms. Addressing these challenges will require concerted government, civil society, and the private sector efforts to ensure inclusive and sustainable development. The government must prioritize fiscal reforms to restore fiscal sustainability, stimulate growth, and protect social welfare programs. Additionally, the government needs to foster an enabling environment for investment and business growth through regulatory reforms, infrastructure development, and support for innovation. Likewise, civil society can advocate for policies prioritizing social equity, protecting vulnerable citizens, and promoting transparency and accountability in public finances. Also, the private sector can collaborate with the government and civil society to identify opportunities for public-private partnerships (PPPs) and innovative financing mechanisms to fund critical infrastructure projects and service delivery initiatives. By leveraging the expertise and resources of the private sector, the government can enhance the efficiency and effectiveness of its fiscal intervention.

Dr. Lizzy Oluwatoyin Ofusori is an academician and a researcher. She writes in her capacity.