Taxpayers on the hook for R1.2 billion a day as government keeps digging

 ·22 Feb 2024

While economists and the market have responded positively to Finance Minister Enoch Godongwana’s decision to tap into South Africa’s forex reserves to plug some gaps in the national budget, the growing cost of debt is still a cause for alarm.

Experts have flagged interest payments – the fastest-growing expenditure item in the budget – noting that in two years, 21 cents of every rand collected by the government will pay off interest on debt, equating to R1.21 billion a day.

Responding to the 2024 Budget Speech delivered on Wednesday (21 February), various economists have come out in mild support of the tabled budget.

Described as broadly “sensible”, “generally positive”, or even “better than expected”, commentators have expressed a degree of relief that most of the macroeconomics from the speech were in line with forecasts and that the solutions put forward to deal with issues like a tax shortfall and growing debt were, at least on the surface, credible.

However, this does not mean that the finance minister got off with a perfect score, nor that South Africa will have an easy time navigating the next few years trying to stabilise its economy.

One of the biggest problems highlighted by economists is the country’s growing debt bill.

According to Momentum Investments, since FY13/14, South Africa’s interest payments on debt have surpassed economic growth, indicating that the economy is failing to generate adequate revenue to cover rising interest expenses.

“As a result, a significant portion of government resources is allocated to servicing the interest bill instead of being utilised for providing essential services to South African citizens,” it said.

Growth in debt-service costs of 2.7% (previously estimated at 4.2% in November last year) in real terms on average in the medium term is expected to outpace the average anticipated real growth in consolidated revenue of 1.9% (previously projected at 1.5% last year November).

This is due to a weaker currency, a sizeable deficit and high borrowing costs.

The interest bill is expected to peak at 5.2% of GDP (17.1% of expenditure and 21.3% of revenue) in FY25/26.

This means that debt-service costs will, on average, consume 21c of every rand the government collects in the medium term.

“Alarmingly, by FY26/27, the government will be spending R1.21 billion a day to service its growing debt pile,” Momentum noted.

At 7.3%, debt-service costs are the fastest-growing expenditure item in nominal terms between FY24/25 and FY26/27, with spending on health and peace and security expected to grow at a mere 3.4% (-1.2% in real terms) and 4% (-0.6% real), respectively, over the same period.

The government spends more on debt-service costs than on basic education, social protection and health,” the group said.

Momentum was not alone in flagging this as a massive issue, with experts at Tax Consulting SA, Old Mutual Wealth, KPMG, 1Life, Sanlam, PPS and many others raising concerns about debt spending exceeding 20% of revenue.

National Treasury is also fully aware of the problem, having turned to the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to secure R150 billion over the next three years to ease debt service costs.

However, while this is seen as a generally positive move – which should stabilise debt at around 75% of GDP in 2025/26 – economists are worried that this is a very temporary fix and does not address the government’s spending habits.

The Treasury plans to use the R150 billion to help mitigate fiscal risks by reducing borrowing over the medium term. The use of further GFECRA funds has not been ruled out but will have its own set of conditions.

Momentum said that “disappointingly, the GFECRA funds are largely used to fund the wage bill overrun, which represents recurrent expenditure.”

Carla Rossouw, head of tax at Allan Gray, said that government spending remains a huge issue, and there appears to be no realistic way of walking back on this, at least not in the medium term.

“The upward trajectory of government spending remains a concern, particularly regarding the public sector wage bill, which remains the government’s biggest expenditure,” she said.

The other major expenditure concerns are the country’s exorbitant debt-servicing cost – the fastest-growing item of state expenditure – and additional spending pressures associated with state-owned enterprises, specifically Eskom and Transnet.

“The Minister announced that further measures will be implemented to rein in government spending and expedite structural reforms, but the results will not be visible immediately and will take time to deliver.”

Read: 2024 Budget in a nutshell – the biggest winners and losers

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