South Africa running out of time

Government efforts to restore fiscal health are colliding with a stubborn reality: weak economic growth. Without faster, sustained expansion, consolidation alone will not fix South Africa’s finances or stabilise debt.

On the positive side, National Treasury’s fiscal consolidation has delivered consecutive primary budget surpluses. That is meaningful progress. Yet primary surpluses, by themselves, are not enough to put debt on a firm downward path any time soon. Debt stabilisation has been promised for over a decade and still lies years away.

Globally, few countries are tightening their belts, and South Africa deserves some credit for trying. But the strategy cannot rely indefinitely on spending cuts or tax hikes. Both are politically costly and dampen activity. Efficiency gains at SARS help, but there is a limit to what enforcement alone can achieve. Ultimately, the fiscus needs the economy to grow faster so that revenues rise organically, without heavier tax burdens.

Growth too slow to carry the debt load

Recent activity data are mixed. After flatlining in the first quarter, real GDP grew 0.8% in the second quarter, leaving the economy only 0.6% larger than a year earlier. More importantly for the budget, nominal GDP growth — the broad measure of income the state taxes — was just 2.5% year-on-year.

That is well below the average interest rate on government debt, which sits just under 10%. When nominal growth trails the interest rate by such a wide margin, debt dynamics deteriorate. Without a clear acceleration in growth, the country remains on an unsustainable path and risks a fiscal cliff.

A supply-side problem, not a demand shortfall

South Africa’s hurdles look different from the typical modern economy: bottlenecks are largely on the supply side. The GDP deflator — a broad inflation gauge across producers and consumers — slowed to 1.4% year-on-year in the second quarter, the lowest since the 1970s. This suggests that maintaining a 3% inflation target is plausible over time.

Even so, the Reserve Bank is unlikely to cut rates further until it is confident actual and expected inflation will hover around 3%. Some argue for aggressive easing to spur growth, but that logic is stronger when weak demand is the main constraint. In South Africa, demand shows signs of gradual improvement: real consumer spending rose almost 3% year-on-year in the second quarter. Credit growth appears to have bottomed, mortgage applications are reportedly rising at double-digit rates, and new car sales remain resilient. Elevated interest rates are a headwind, but they are not crushing household demand.

Investment is the missing engine

The biggest shortfall lies in fixed investment. In real terms it remains below pre-pandemic levels, and as a share of GDP it is roughly half of the 30% rule-of-thumb associated with rapid, sustained growth. Interest rates influence investment decisions, but the dominant factor is the perceived size and reliability of the opportunity set.

Businesses need confidence in a stable regulatory and political environment, predictable rules, and strong institutions. They also need assurance about the rule of law, protection of property rights, and the safety of staff and suppliers. Uncertainty around trade policy and market access further dampens appetite for long-horizon commitments. Until these concerns ease, capital formation will lag, and with it the economy’s capacity to grow, hire, and generate tax revenue.

What would move the needle

To break out of the low-growth trap and stabilise public finances, South Africa needs a credible, accelerated programme of supply-side reforms that crowd in private investment. Priorities include:

• Fixing energy and logistics performance to reduce costs and eliminate bottlenecks.
• Speeding up permitting, licensing, and approvals to shorten project lead times.
• Ensuring regulatory and policy certainty, with transparent timelines and consistent enforcement.
• Strengthening the rule of law and protecting property and contract rights.
• Improving municipal and SOE governance to enable reliable service delivery.
• Deepening public–private partnerships to unlock infrastructure investment.

The clock is ticking

Primary surpluses are a necessary foundation, but they are not a destination. With nominal growth far below the interest rate on public debt, the math does not work in the state’s favour. If investment does not recover and nominal GDP does not accelerate, the country will edge closer to a fiscal cliff despite diligent consolidation efforts.

South Africa still has choices. By removing supply-side constraints, restoring confidence, and catalysing private capital, it can lift growth and place debt on a sustainable footing. But the window is narrowing. The longer reforms are delayed, the harder and costlier the adjustment will be. The time to act is now.