Budget reflects a decade of overspending

Finance Minister Pravin Gordhan provided SA with as good a national budget as was possible under difficult circumstances. However, this budget is a holding operation.

Increased taxes were imposed to restrain the deficit and prevent it from widening. Greater spending had to be deferred to a future date when, hopefully, faster growth will deliver increased tax revenue to fund it.

The budget must be seen against a decade-long backdrop of increased government spending outstripping both GDP growth and rises in tax revenue. As a result, government spending jumped from 24.6% of GDP in 2007 to 30% of GDP today.

Taxes failed to keep pace. Tax collections were about 24% of GDP from 2010-14. They rose to 26% of GDP in 2016 as a result of improved corporate profits and increases in tax rates. To reach the projected 26.2% of GDP in the coming year, tax collections will have to be the highest in our history.

Yet even this will not be enough to cover expenditure, let alone calls for more.

Past increases in tax rates, as well as recent hikes in the tax on petrol and higher rates for top-income earners, were needed not just to appease the global credit ratings agencies — which have threatened to downgrade our rating to junk — though this is important.

Reducing the deficit is also imperative to halt the growing burden of interest payments on the government’s mushrooming debt. This debt has increased fourfold since 2007 to R2.5-trillion, doubling as a percentage of GDP to more than 50%.

The minister has to find R162bn in the coming year to pay the interest due to those from whom the government borrowed all this money (mainly pension funds). To put this figure in perspective, it means 11c of every rand the government spends in the coming year has to go on interest on its debt. And debt will rise R149bn in 2017. This is the amount the government must borrow to fund the projected budget deficit. Interest on this additional amount will be a further R12bn each year.

And because governments almost never pay back what they owe, R12bn will be paid in 2018 and every year thereafter. When the debt falls due, the government’s response will simply be to borrow more, requiring more interest payments, until Shakespeare’s “last syllable of recorded time”.

Interest payments in the coming year are equivalent to 6.6% of the government’s debt. This effective interest rate reflects the much lower interest rates of the past. Today the government has to pay 8.5% on the new bonds it issues to fund new debt or refinance maturing debt. The overall interest rate it pays will climb in future as historical borrowings are replaced by new borrowing at higher interest rates.

As the interest burden grows relentlessly, less and less will be left to spend on education, welfare and other government services.

Against this backdrop, to increase spending where it is most needed, the government must use existing funds more efficiently. An example noted by the minister is the halving of the cost of building new schools as a result of more cost-effective design standards. More savings of this kind are needed so available funds can be used more effectively.

Most of all, as Gordhan repeatedly stressed, the economy needs to grow. If the economy grows, the tax base grows. Revenue increases, allowing higher government spending where it is urgently needed. Without growth, the government must keep trying to squeeze more tax out of a stagnant tax base. A revenue shortfall of R30bn in the past year demonstrates how difficult this is, even when tax rates are increased.

The budget projects GDP growth will rise from 2016’s 0.5% to 1.3% in 2017 and then 2% and 2.2% in 2018 and 2019, respectively. But we need much faster growth than this to fund essential government spending.

Keeton is with the economics department at Rhodes University.