BUSINESS NEWS - Government’s budget deficit and debt level numbers are scary and getting worse. While government has managed to curb spending over the next three years, this has been more than offset by allocations to Eskom to the tune of R23 billion a year and allocations to a new infrastructure fund (good news). As a result, the expenditure ceiling has been revised upwards by R14 billion in 2019/20, R1.3 billion in 2020/21 and R732 million in 2021/22.
However, the story is not all bad, with government taking steps to shift consumption-led expenditure to investment-led expenditure by tackling the wage bill and prioritising infrastructure spending, which should boost job creation and growth over the medium to long term.
The tough economic environment is visible in the numbers. The economy will grow by 1.5% in 2019, less than the 1.7% forecast, rising to 2.1% in 2021. Slower growth means revenue collection continues to underperform; it was R15.4 billion less than estimated in October.
To bridge the gap between revenue and expenditure, government will borrow R15.3 billion more than planned, bringing borrowings to about R239.5 billion for the year.
South Africa’s total debt will reach R2.52 trillion in 2018/19, or 49.9% of GDP, increasing to R3.47 trillion or 55.5% of GDP by 2021/22. Net debt is expected to stabilise at 57.3% of GDP in 2024/25 and gross debt (which is less government cash) will cross the 60% threshold in 2023/24 thanks to efforts to stabilise Eskom’s finances.
These look like small, incremental changes, but debt is a slippery slope. Sanlam economist Arthur Kamp points out that the 2017 budget projected that the debt ratio would peak at 52%.
“South Africa’s government debt ratio is not unusually large in the global context, but the problem is the trajectory. It jumped by almost 30% points since 2009, and continues to rise,” he says.
The cost of servicing this debt will rise to 4% of GDP by 2021/22, just ahead of the 3.9% projected in October.
Finance minister Tito Mboweni put it bluntly when he explained to the nation that the country will earn R1.58 trillion and will spend R1.83 trillion this year. The shortfall is R243 billion, which will be funded by borrowing. “Put another way, we are borrowing about R1.2 billion a day, assuming we don’t borrow over the weekend.”
It’s the cost of this borrowing that is killing us. The crucial difference between South Africa and many developed countries is that in the US and Europe, borrowing costs are historically low. “US nominal economic growth is around 5% and long-term borrowing costs only 3%. It makes sense for the US or European governments to borrow to fund long-term investments that will pay for themselves, such as infrastructure upgrades,” says Kamp.
In South African nominal growth is 7% and the long-term bond yield 9%. “The arithmetic is as brutal as it is simple. Hence it is crucial to stabilise the growth in borrowing and boost GDP growth,” Kamp says. That is the bottom line.
