Debt is SA's destiny - report

accreditation

Cape Town - Rising government expenditure which outstrips tax revenue can only mean higher taxes and more financial pain for households, according to a report.

It all started with a habit of overspending under former finance minister Trevor Manuel, which meant it would never be easy for the government to commit to real reductions in expenditure, say Piet le Roux and Gerhard van Onselen of the Solidarity Research Institute in a report released on Tuesday.

And indeed, nothing of the sort happened. "The Pravin Gordhan years saw a dramatic decline in revenue growth, but for all the regular talk of limits on luxury spending by ministers and tightening of the catering belts, government spending maintained course for the stars."

Amid much debate on the merits of austerity, Finance Minister Nhlanhla Nene delivered his first budget speech in February 2015. "Judging by his budget, Minister Nene agreed that austerity was a good thing... austerity for Joe Taxpayer, that is," says the Solidarity Research Institute.

Nene promptly announced the first explicit income tax increases in years to finance the burgeoning government budget - and growing interest payments.

GRAPH: Sharp increase in government debt

Bribes of welfare grants and bloated salaries

With South Africa's very narrow tax base and fragile economy, there is a reason for Nene's action: the government has "long been committed to appeasing a restless population with welfare grants and over-paid civil service jobs".

The report continues: "In addition, state policies are manifestly anti-business and by government's own account the state sector is plagued by corruption. These sharp features of local politics show no sign of subsiding... In short, the spending won't stop, but the income will. Debt is our destiny."

Since the financial crisis of the late 2000s, government's budget deficit has experienced major expansion. And fiscal deficit means government borrowing needs are growing.

The combined net borrowing requirement in nominal terms of R16.1bn over the five-year period 2004/05 to 2008/09 jumped to R694.3bn for the five-year period 2009/10 to 2013/14.

There is no sign of any marked rise in revenue or of a significant drop in spending, which means one thing: government debt is set to rise.

More debt, higher servicing costs

More debt translates into higher servicing costs - and even in a low interest rate environment, servicing rising debt can become pricey. "The South African government's borrowing costs grew steeply in nominal terms since 2009 and is estimated to reach R153bn in 2017/18, which is 12.1% of projected interest," says the Solidarity Research Institute.

Interest is now payable on increased total debt. Should interest rates go up, it creates the risk of even higher servicing costs for future debt. "In such a case debt servicing costs are likely to expand even faster above annual increases in revenue," says the report.

GRAPH: The nominal increases in debt service cost

State debt and interest is normally financed by tax revenues and mild currency inflation. But since 2009, tax revenue has been unable to keep up with state spend. It stands to reason that lower revenues will deliver a negative effect on a government's capacity to service its debts.

The Solidarity Research Institute issues a stark warning: "When revenues relative to the cost of debt servicing reach critically low proportions, a national debt crisis is on hand."

The news gets worse, as much of government debt will likely need refinancing under lower credit ratings and unfavourable future conditions. "A weak economy, lambasted private sector, narrow tax base and a virtual impossibility of lower state expenditure preclude any real reduction in state debts," says the report.

So what does this mean for the average taxpayer? "For us, mounting debt then is a reality that means higher taxes, inflation or crisis," says the Solidarity Research Institute.

*Add your voice by sharing your debt  experiences, debt-busting tips and insights. Have a question? Ask our experts.

Disclaimer: Fin24 cannot be held liable for any decisions made based on the advice given by debt experts. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

We live in a world where facts and fiction get blurred
In times of uncertainty you need journalism you can trust. For only R75 per month, you have access to a world of in-depth analyses, investigative journalism, top opinions and a range of features. Journalism strengthens democracy. Invest in the future today.
Subscribe to News24
Rand - Dollar
16.14
-1.3%
Rand - Pound
21.36
-0.4%
Rand - Euro
18.26
-0.4%
Rand - Aus dollar
11.30
-0.4%
Rand - Yen
0.14
-0.4%
Gold
1,783.48
0.0%
Silver
22.55
0.0%
Palladium
1,816.00
0.0%
Platinum
936.31
0.0%
Brent Crude
69.88
+0.3%
Top 40
64,307
-0.4%
All Share
70,808
-0.3%
Resource 10
66,503
-1.6%
Industrial 25
93,791
+0.1%
Financial 15
13,982
+0.7%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot