South Africa’s peaceful political transition is known as one of the most remarkable political feats of the past century. The ruling African National Congress (ANC) has been driving the policy agenda since 1994. In August 2016 the country held the most competitive Local Government Election since 1994 in which the ANC-lost majority support in four of the metropolitan cities. Political parties negotiated coalition deals that saw the ANC unseated in the cities of Johannesburg, Pretoria and Nelson Mandela Bay.
Due to consistent and sound budgetary policies, South Africa has been able to tap into international bond markets with reasonable sovereign risk spreads.
The latest Open Budget Index prepared by the International Budget Partnership ranks South Africa top among the countries surveyed, and South Africa has been committed to fiscal sustainability. Nevertheless, low growth, weak revenue collections, and expenditure pressures have been keeping fiscal deficits higher than forecast. This has resulted in several downgrades of South Africa’s credit rating.
The South African economy grew at 1.3% in 2017.
The World Bank estimates a further acceleration in 2018, to 1.4%. Given population growth, gross domestic product (GDP) per capita growth has been stagnant or low since 2014, leaving little room to reduce poverty. Commodity prices remain important for South Africa, a major importer of raw materials. A strong investment response in light of improved business sentiment in 2018 will be critical to propel growth and create jobs.
Key Development Challenges
South Africa has made considerable strides toward improving the wellbeing of its citizens since its transition to democracy in the mid-1990s, but progress is slowing. Based on a poverty line of $1.90 per day at Purchasing Power Parity (PPP), poverty fell from 33.8% in 1996 to 16.9% by 2008. Factors driving this included social safety nets, real income growth, as well as decelerating inflationary pressure on households, the expansion of credit, and growth in formal housing. Yet progress has slowed in recent years due to structural challenges and weak global growth since the global financial crisis of 2008. Poverty was 18.9% in 2015, having increased slightly since 2011. High unemployment remains a key challenge, standing at 26.7% in the last quarter of 2017. The unemployment rate is even higher among youths, close to 50%.
South Africa remains a dual economy with one of the highest inequality rates in the world, perpetuating both inequality and exclusion. According to Statistics South Africa, the Gini coefficient measuring relative wealth reached 0.65 in 2014 based on expenditure data (excluding taxes), and 0.69 based on income data (including salaries, wages, and social grants). The poorest 20% of the South African population consume less than 3% of total expenditure, while the wealthiest 20% consume 65%.
The fiscal outlook remains challenging. To counter weak revenue collections and accommodate the government’s 2017 commitment to free higher education, the 2018 budget introduced new revenue measures, including a 1% increase in the value added tax rate. There is a commitment to limit the high wage bill, while public investment will be cut to make room for new expenditure priorities. Overall, public debt is expected to stabilize in the medium term.
Government Policy Priorities
The current administration is acutely aware of the immense challenges it needs to overcome them to accelerate progress and build a more inclusive society. Its vision and the priorities it is making to address them are outlined in the 2030 National Development Plan, which comprises the two main strategic goals of eliminating poverty and reducing inequality from 0.69 to 0.60 by 2030.
To achieve these goals, the National Development Plan (NDP) lists several factors critical for its successful implementation. These include the sort of focused leadership that provides policy consistency; ownership of the plan by all layers of society; strong institutional capacity at technical and managerial levels; efficiency in all areas of government spending, including management of the public service wage bill and making resources available for other priorities; and prioritization and clarity on levels of responsibility and accountability in every sphere of government, as well as a common understanding of the roles of business, labor, and civil society.