Bonds rallied modestly on Wednesday, and the rand held its small gains of recent days after the Finance Minister, Enoch Godongwana, announced that government debt levels had peaked and the budget deficit for this year would come in at a fraction of a percentage point below its February forecast.

Addressing Parliament in his Medium-Term Budget Policy Statement on Wednesday, the minister showed that the national debt number had peaked at 78.4% last year, down from the 78.9% estimated in February, and that this year’s deficit would come in at 3.9% of GDP against a February forecast of 4.0%. The Treasury knew, of course, that it was these two headline numbers that the bond market would be looking at in order to judge whether South Africa was on a sustainable fiscal path, and a great effort was thereby undertaken to “make” the numbers look good.

But a bit of deeper digging shows that this was done at the expense of fiscal prudence and sound management, and that the idea presented of a sustainable fiscal path was, in the main, more apparent than real.

This emerges from looking at the government’s expenditure and revenue projections.

According to the Treasury, government expenditure is set to increase from the 32.6% of GDP forecast in February to 33.4%. So how do you cut the deficit while increasing expenditure, the deficit being the difference between what the government spends and what it earns in revenue?

You do so by increasing your revenue projection as a share of GDP by even more than you are increasing expenditure. The Treasury announced that the revenue-to-GDP ratio would increase from the 28.6% of GDP projected in February to 29.5%. Because revenue is increasing faster than expenditure, the effect is to narrow the deficit in order to create the appearance of a sustainable fiscal track.

The trouble with this is that the revenue number was already way past the point of diminishing returns. When a government extracts an excessive amount from the tax base, the effect is to harm future economic activity and investment to a degree that triggers diminished future growth and thereby tax receipts. And in South Africa, that has been happening at scale for the past 20 years.

The chart below shows the revenue-to-GDP number since 2000 and that it has lifted by more than 10 percentage points.

There is no exact point where diminishing returns begin to manifest. That depends on the country in question, its broader policy environment, and the period of history. But in South Africa’s case, that point was likely breached at around 24% or 25%, and it is now far past that and was increased by a further almost one percentage point yesterday.

To hammer home the assessment that the fiscal prudence story is more apparent than real, consider that the minister, while lifting the expenditure number, was also forced to cut the economic growth estimate for the year from 1.6% to 1.2%.

Weigh the 3.9% deficit against that, and the deficit now amounts to 327% of the growth rate, compared to the 250% of February (the figures come from dividing the deficit by the rate of growth).

On the chart below, we set out that number since 1994.

Run your household finances according to a similar principle, and you will not convince your bank manager that you are on a sustainable path.

The solution, of course, is growth in the economy, which has not been secured, either by the African National Congress (ANC) in government since 2008 or by the ANC/Democratic Alliance coalition since 2024. And the growth rate is so low, at just a quarter of that of South Africa’s emerging-market peers, because the investment rate is half of what it should be. And the investment rate is so low because the policies of the government hound out capital.

The bond market may have gone for the headline numbers this time, albeit modestly, but as analysis of the deeper numbers happens over the coming days, a sense of caution will deepen, and the Treasury will not as easily get away again with what has, in practice, been a fiscal sleight of hand.