Much of the on-going debate around fee-free higher education has centred on its appropriateness and fairness for students, universities and colleges. The unavoidable and large budgetary trade-offs this policy creates – i.e. its effect on other government programmes and expenditures – has however received little attention. While the longer term costs and benefits of fee-free education are difficult to quantify, and will depend largely on how exactly the policy is implemented, the short term effects can already be inferred from the government’s 2018/19 budget.

Former President Jacob Zuma’s unexpected December 2018 announcement of fee-free post-school education for poor      students – defined as those from households with combined annual incomes below R350000 – resulted in an increase in the Higher Education budget of R67 Billion over the three years of the Medium Term Expenditure Framework (MTEF). This amounts to 1.4% of the total government budget for the period. [1]

The fiscal space required to fund this spending could be created by one, or some combination of, three options: (1) increasing revenue (i.e. taxes) (2) increasing borrowing (i.e. debt) or (3) reprioritising expenditure.

In the current fiscal climate, increasing debt (or deficits) was not a viable option. South Africa has been running a large fiscal deficit for a number of years and, as a result, its debt stock has continued on a stubbornly upward trajectory since 2008. As a percentage of GDP, the debt stock is currently at the highest level in 30 years. This has contributed to South Africa’s credit rating downgrades and the country facing high borrowing rates. For 2018/19, debt servicing costs (interest and capital repayments) make up a potentially unsustainable 11.6% of the budget.

In terms of taxation, the 2018 budget included increased tax revenue of R36 billion for 2018/19 alone, primarily the result of a 1 percentage point increase in Value Added Tax (VAT). Given the current fiscal situation, these tax increases were likely already planned before the fee-free education announcement. In the previous year, Personal Income Tax was also adjusted by including an additional tax bracket for wealthy individuals. Any further tax increases would therefore have been risky given the potential negative impact on economic (and hence tax) growth or could have meaningfully hurt the poor if, for example, VAT was further increased. At current levels, South Africa’s tax burden (as a ratio to GDP) is already among the top 10 highest in the world. [2]

Significant expenditure cuts were therefore necessary. In total, government cut R85.7 billion from different programmes over the MTEF. Again, while some of these spending cuts were likely planned already, the fee-free announcement meant that additional cuts close to the R67 Billion increase for Higher Education and Training had to be found and any attempts to significantly reduce deficits were thwarted.

The graph below shows the 12 departments that faced the largest budget cuts: defined as the change in their 2018/19 to 2020/21 allocations between the 2017 budget and the 2018 budget, i.e. before and after the fee-free policy announcement. The combined cuts across these 12 departments amount to R67 billion, equivalent to the Higher Education increase.

Table 1, below, further unpacks these changes by listing the 10 budgetary programmes that faced the deepest cuts, including the size of the cut (over three years) and the proportion of the programme’s budget that was cut. The cuts to these 10 programmes combined made up 60% of the total reduction. The data shows that the cuts span large parts of government, but primarily fall on large programmes, including transfers to government entities (such as SANRAL and PRASA), conditional transfers to provinces (incl. human settlements and school infrastructure) and local government grants (incl. municipal infrastructure and electricity).

The majority of the above cuts relate to capital programmes which, as National Treasury concedes in its Budget Brief, are likely to cause delays in infrastructure projects. It is perhaps inevitable that infrastructure would bear the brunt of an unexpected urgent reprioritisation, since the vast majority of the budget cannot be significantly reduced on short notice. The wage bill, for example, is responsible for 35% of the total budget and is largely based on multi-year employment contracts that cannot be changed without extensive renegotiation processes. As a result, transfers and capital expenditures were inevitably most affected.

Capital expenditure is important not only because it provides necessary infrastructure (e.g. schools) to support social programmes and improve the lives of the poor, but also because it typically has a greater effect on long term growth than other forms of spending. Extended periods of underinvestment in infrastructure can become binding constraints on development, as South Africa has experienced in relation to water and electricity in recent years.

More generally, the unexpected nature of the announcement undermines the MTEF approach. Among other advantages, an MTEF is intended to create certainty and stability in the government’s budget. This allows departments and entities to effectively plan and implement programmes. Unexpected changes not only damage specific programmes, but reduces confidence and trust in the system and complicate government’s ability to plan effectively. Confidence and trust in the budget are also vital to investors or lenders, implying that government’s ability to raise capital and borrow at a reasonable rate can be harmed if the stability of the MTEF is not maintained.

Given the large size and complexity of government, it is easy to forget or underplay the degree to which increasing government spending in one area directly affects other programmes, and hence the lives of citizens. The above results show that the budget increases for higher education have already had real and significant impacts on other parts of the government, many of which will impact directly on the poor. While fee-free higher education for the poor is a worthy aim and could result in significant social and economic benefits over the long term, the gains from this policy change, and any alternative approach, need to be examined against the overall costs to the country. It is likely that the annual costs of sustaining universities and colleges will continue to rise, further impinging on other government programmes and services. Further, open and informed discussion is needed on what South Africa can afford, and the fiscal and policy trade-offs that will undoubtedly be required.

Notes and sources:

[1] Made up of increases of R12.34 Billion in 2018/19, R25.32 Billion in 2019/20 and R29.53 Billion in 2020/21. This includes a provisional R10 Billion that was added to the 2017.

[2] BusinessTech (2018) The highest income tax rates in the world – including South Africa Accessible online at: https://businesstech.co.za/news/finance/233199/the-highest-income-tax-rates-in-the-world-including-south-africa/

[3] National Treasury (2018) 2018/19 Budget data. Accessible online at: http://www.treasury.gov.za/documents/national%20budget/2018/default.aspx

[4] National Treasury (2018) Budget brief in full. Accessible online at: www.treasury.gov.za/documents/national%20budget/2018/review/FullBR.pdf