Treasury warns of R2-trillion loss over next decade, with 20% of tax paying back debt

By Jarryd Neves."But debt is our weakness. We have accumulated too much debt; this downturn will add more. This year, out of every rand we pay in tax, 21 cents goes into paying the interest on our past debts.".Worrying words from the South African Finance Minister, Tito Mboweni. But how did we get to that point? How is it possible that for every R1 paid in tax, more than 20% is going into just paying the interest off on past debt..___STEADY_PAYWALL___.The Covid-19 pandemic has obviously done our economy no favours. The lockdown that was intended to curb the virus has done plenty of harm to the already brittle finances of the country, with many losing their jobs and businesses as industries struggle to stay afloat. However, a recent report from the Organisation for Economic Co-operation and Development (OECD), has suggested that while Covid-19 has dealt a considerable blow to the country's stomach, government spending has certainly had a go at roughing up the country, too..Read also: Asset manager Piet Viljoen: SA stocks are cheap – and these ones offer value.In their detailed report, the OECD draws attention to a number of alarming statistics. Public servants guzzle the equivalent of 12% of the country's GDP, just in wages alone. Mentioned too are the infamous SOEs (state-owned enterprises) which almost daily, scrounge about, looking for their next mismanaged million..Recently, the National Treasury has released a document, detailing the need to curb government debt, with worries that a whopping R2-trillion could be lost over the next decade..The guidelines – intended mainly for government departments and public institutions – are to be followed as the government prepares in anticipation of the 2021 budget..Since the 2008/2009 financial years, the Treasury has noted a large gap between spending and revenue generated from tax. Worryingly, that already large chasm seems to be growing. "In response, government has taken steps to reduce non-interest spending growth and raise tax revenue. However, due to lower nominal GDP and revenue growth, these interventions have not stabilised debt." reads an excerpt from the report..The report goes on to say that "Covid-19 has further exacerbated the precariousness of the public finances, which had already reached an unsustainable position before the pandemic." As a result of the pandemic and the weakening financial situation, the South African economy is expected to contract by 7,2% this year – the largest contraction in 90 years.."The current spending path implies that fiscal deficits would remain higher than 12 % of GDP for the foreseeable future. This is a key reason for South Africa losing its investment-grade credit rating by all ratings agencies." the report goes on to say that high deficits such as this place an immense amount of pressure on the country's financial sector and "real economy."."With savings levels quite low, high government deficits will expose the country to higher borrowing risks, push interest rates upward and extract from growth through lower private sector investments. In the event of a debt default or fiscal crisis, the National Treasury has estimated that this would cost the country at least R2-trillion in lost economic activity by the end of the decade."So, what is being done to avoid that potentially dark and gloomy day in South Africa's future? Well, the Treasury says that – for the 2020/2021 fiscal year – gross tax revenue has been revised, from R1,43-trillion to R1,12-trillion. This creates a R304,1-billion deficit."The 2021 MTEF will achieve R230-billion in savings over the first two years, beginning with R90-billion reduction in overall non-interest spending in 2021/2022."The treasury goes on to say that if these cost reductions are not attained – and fiscal consolidation proves ineffective – government arrears will exceed 100% of the GDP in the medium term.It's not all bad news, though, Treasury providing a glimmer of hope. "South Africa's economy is resilient and can be rebuilt and stabilised. For the purposes of the medium-term, measures towards fiscal consolidation and debt stabilisation should be accompanied by a refocusing of spending from consumption to investment in strategic economic infrastructure."The National Treasury will be working closely with government departments, carrying out spending reviews "to contribute to the fiscal consolidation process."The report goes on to say "In this regard, there should be no "holy cows" and no spending items will be automatically protected from possible downward adjustments."Read also: Drowning in debt: Harsh reality for many South Africans – and alarm bells for banksThe financial situation that government finds itself in is replicated – albeit on a smaller scale – by many South Africans. As jobs continue to be snatched away and businesses cave in under the immense pressures the economy faces, those lucky enough to retain their jobs are now finding themselves taking out loans just to survive.As we encroach on the time for South African banks to release their profit results, it seems pretty grim – with all forecasting varying degrees of profit slumps.Everyday South Africans with money entrusted to these various financial institutions are naturally worried. At a webinar for the Cape Town press Club, Lesetja Kganyago, Governor of the South African Reserve Bank, said that they shouldn't be too concerned (Listen to the clip below)."I don't think that you should be worrying about the South African banking system. The banking system is well capitalised – it has got ample liquidity – and if there is a shortage of liquidity, as you have seen, the South African Reserve Bank stands ready to pump in the liquidity."https://www.biznews.com/wp-content/uploads/2020/08/LK-bank-question.mp3

Treasury warns of R2-trillion loss over next decade, with 20% of tax paying back debt

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