By Alec Hogg
There’s a sage economics lesson contained in a single paragraph of Treasury’s documentation on the MTBPS. It encapsulates the issue facing the country so well that it’s worth republishing.
“SA’s deep and longstanding fiscal challenges.” Treasury’s documentation reads, “are rooted in a long-term pattern of low economic growth. Government spending has exceeded revenue since the 2008 global financial crisis (BN: the year Zuma came to power), resulting in persistent large budget deficits.
“Moderate budget deficits are not cause for concern. The difficulty arises when deficits are too large for too long, requiring ever-higher levels of borrowing that are unmatched by improvements in public services. This is the problem facing SA and it is reflected in debt-service costs that consume an ever-larger share of public resources and shrinking fiscal space to respond to shocks.”
Put less diplomatically, under Zuma and even since his departure, the state has been spending (or employees stealing) more than it got in, funding the profligacy through taking on more and more debt. These borrowings are now so high that they take 20c and growing in each rand of fresh tax – elbowing out the normal spending priorities of a functional state.
According to National Treasury, over the past decade and a half, South Africa’s debt level increases have been among the highest in the world. Its debt-to-GDP ratio, a critical measure of a nation’s financial health, has risen over the period by 47.2 percentage points, a rate that significantly exceeds virtually all of its peer group.
This rapid debt expansion has only one reason – government overspending. Its consequence is equally obvious – a rapid increase in the country’s annual interest bill, or what economist politely term ‘debt servicing costs’. This expense now consumers over 20% of the annual Budget, and with overspending continuing and interest rates rising, the trend shows no sign of reversing.
As Treasury documents explain: “For every R5 collected in (tax) revenue, government pays R1 to lenders instead of funding education, policing, health and other critical services.” It adds that as the outstanding debt keeps growing, so does the national interest bill because the debt mountain means lenders “are demanding a premium to compensate them for the risks of investing in SA.”
For the last ten years, SA’s interest bill has been rising faster than economic growth. In other words, since 2014, business activity has not been able to expand sufficiently to generate enough tax to meet the growing interest bill – which means paying lenders has been taking an ever-bigger slice away from service delivery.
There are only two ways to turn this around. For a variety of reasons, the first, raising taxes, is simply not in the government’s toolbox. The second is to cut spending, which the MTBPS proposes through an R85bn decrease in spending from the 2023 Budget estimates.
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