The one number that should have South Africa really worried

 ·26 Feb 2024

While commentary on the 2024 Budget Speech has been coming in fast and hard, there’s a simple figure in the cacophony of numbers being thrown around that should make everyone pay attention.

According to Old Mutual Wealth Investment Strategist, Izak Odendaal, National Treasury’s internal estimates show that the South Africa’s “fiscal multiplier” is below one.

A fiscal multiplier is what economists use to measure the effect that increases in fiscal spending will have on a nation’s economic output or gross domestic product (GDP). If the multiplier is above one (1x), spending is at least resulting in nominal growth.

If the multiplier is below one, it means a government is spending more than it is eventually getting out.

In simpler terms, this means that each rand of government spending results in less than one rand’s worth of additional national income, Odendaal said.

“There are two broad reasons for this. Firstly, while spending has increased in quantity, it has decreased in quality. It has often been wasteful or misallocated,” he said.

For instance, education gets the biggest allocation in the budget – “but clearly the country is not producing the skills it needs”.

“Another example is the hundreds of billions that have been poured into Kusile and Medupi, neither of which function properly despite being brand new power stations,” the strategist said.

The second cause of this financial conundrum is that much of the government’s increased spending has been funded through borrowing.

“As the bond market’s assessment of government’s creditworthiness has deteriorated, borrowing costs have risen – not just for the government, but also for the private sector – acting as a drag on economic activity,” Odendaal said.

In turn, the higher borrowing costs mean the government’s debt service burden has risen sharply, crowding out spending on other areas like infrastructure.

“Already, interest payments exceed social grants. The latter boosts consumption in the economy, the former does by much less, since 25% of bondholders are foreigners, while the rest are mostly domestic financial institutions,” he said.

This problem was recently highlighted by many experts, who noted 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.

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.

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

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