The problem with debt is risk — Godongwana pushes for curb on government spending and economic structural reform

The numbers are so big they lose meaning: South Africa’s debt is expected to increase from R4.31-trillion, or 69.9% of GDP this year, to R5.54-trillion or 77.8% of GDP in 2024/25. This is marginally better than the 2021 Budget estimate of 80.5% of GDP and will be achieved by maintaining firm control of government non-interest spending.

That said, just paying off the interest on this debt, not the capital amount, gobbles up 21c of every rand of revenue the government earns. Once public sector wages are accounted for — another 50-odd cents on every rand — one can see how debt repayments are crowding out expenditure on social services, critical to improving the lives of South Africa’s almost 60-million people.

Given that the interest rate government pays on its borrowings is higher than GDP growth at present, the ratio of debt to GDP will continue to grow as the debt is growing faster than the economy. 

The only way to stabilise this is by limiting spending until government runs a sufficiently large budget surplus to afford the debt repayments. 

Finance minister Enoch Godongwana is acutely aware of this and appears to have withstood any temptation to raise spending on social grants and salaries in the face of a temporary revenue boom that has, in the short-term at least, helped allay government’s fiscal woes.

This is in the face of a multitude of risks that threaten to derail the best-laid of plans. 

Least among these is public sector wages — the recent public-service wage agreement breached the budget ceiling for compensation of employees by R20.5-billion — and the continued financial deterioration of several major state-owned companies. Despite recapitalising Denel in 2019 and 2020, National Treasury has reallocated R2.9-billion in this financial year to settle a portion of the firm’s guaranteed debt. “The state had to step in,” Godongwana said at the media conference before he presented his maiden Medium Term Budget Policy Statement (MTBPS) to parliament.

This was despite telling assembled media that government planned to practice ‘tough love’ on SOEs. “Tough love is not a blanket issue. We cannot treat them all on an equal basis,” he said.

Of course, this is because in many cases government has guaranteed the debt of SOEs, which means that when the firm concerned cannot pay, government has no choice but to step in.

Contingent liabilities pose another risk to the fiscus. By 2023/24 these are expected to exceed R1-trillion, up from R789.8-billion in March 2021. These include guarantees to SOEs, the Renewable Energy Independent Power Producer programme, some public-private partnerships and obligations to the Road Accident Fund, among others. 

However, the rate of growth of contingent liabilities is easing. Given the precarious financial position of SOEs, Treasury has taken steps to limit new guarantees and has published minimum criteria for new applications from public entities. 

From giant SOEs to small municipalities, the risks continue. Treasury is working with provinces to stabilise the finances of 112 of the worst performing municipalities. It has also partnered with the Department of Cooperative Governance, South African Local Government Association, Financial and Fiscal Commission and the provinces to develop a working plan for five-year local government reform. Further details will be provided in February. 

One risk on the expenditure front that has retreated, for the time being, is NHI. Given that it would require R40-billion a year in additional funding for the first five years, and more thereafter, Treasury notes that NHI is unlikely to be a cost pressure in the medium term.

The bottom line is that without economic growth, and the concomitant growth in revenue, expenditure risks will continue to loom large.

Like many others in government, Godongwana stresses the importance of structural reform of the economy, which will unblock bottlenecks and drive growth.  

In this regard, Treasury has modelled two scenarios that could impact economic growth. In the first, the lifting of the licensing threshold for embedded electricity generation, would catalyse investment in generation capacity, lift overall investment and improve business confidence. This scenario sees the debt to GDP ratio stabilising at 76.5% in 2025/26. 

Conversely, financial conditions could tighten more rapidly than expected, leading to slower global growth, higher interest rates and currency depreciation. This will lead to higher inflation and slower growth in South Africa.

This is not a rosy picture and until faster growth is evident, the technocrats in National Treasury have no choice but to hold the line against increasing demands from government departments for higher spending. DM/BM