Es­cape from the debt trap

Gov­ern­ment makes huge sav­ings on in­ter­est

Finweek English Edition - - Openers - GRETA STEYN

FI­NANCE MIN­IS­TER Trevor Manuel says the ex­tra rev­enue col­lected by the SA Rev­enue Ser­vice will be used to re­duce debt. It’s a re­minder that Gov­ern­ment has al­ready saved mas­sive amounts of money through steady re­duc­tions in debt since Gear was im­ple­mented in 1996.

Gear is the Growth, Em­ploy­ment and Re­dis­tri­bu­tion strat­egy im­ple­mented to achieve a rad­i­cal turn­around in Gov­ern­ment’s fi­nances. From the slip­pery slopes of a debt trap, in which ever-larger amounts are bor­rowed just to ser­vice debt, Gov­ern­ment is now at a point where the in­ter­est bill is no longer a headache. A decade ago, 18% of Gov­ern­ment spend­ing went to­wards ser­vic­ing debt. That’s de­creased to 11% in 2007and it will be 9% by 2009.

Manuel said in his Bud­get speech that the sav­ings on in­ter­est that Gov­ern­ment has ex­pe­ri­enced since 2001 pro­vided an ex­tra R33bn/ year to spend on ser­vices and in­fra­struc­ture – money that SA wouldn’t have had if it had kept on bor­row­ing at the level it was in 1994. The amount saved is more than three times the hous­ing bud­get for 2006/2007.

Manuel said: “In 1994 we had a choice: to ex­pand spend­ing by bor­row­ing or repri­ori­tise while re­duc­ing de­pen­dence on debt. The choices that we have made – con­sciously made – pro­vide us with the fis­cal space to spend more on ed­u­ca­tion, on health, on pub­lic trans­port. It’s also pro­vided us with the pol­icy room to con­tem­plate long-term re­forms to our so­cial se­cu­rity sys­tem that will ben­e­fit all South Africans.”

How­ever, Ef­fi­cient Group econ­o­mist Dawie Roodt says that Manuel can’t claim all the credit for the ro­bust health of Gov­ern­ment’s fi­nances. “Up un­til two to three years ago it was a ques­tion of good poli­cies at work. But now it’s more of a case of luck in the form of un­planned rev­enue over­runs.”

Roodt says the re­duc­tion in State debt and the in­ter­est bill was achieved by in­creas­ing the tax bur­den. “I have the great­est re­spect for Manuel but the tax bur­den isn’t some­thing to brag about.” Rev­enue as a per­cent­age of gross do­mes­tic prod­uct is around 28% – higher than the tar­get of 25% set in Gear. SA’s tax bur­den is lower than that of most rich coun­tries, but they have ex­ten­sive so­cial se­cu­rity sys­tems that push up their tax bur­dens. SA’s tax-to-GDP ra­tio is higher than many emerg­ing mar­kets.

How­ever, Gov­ern­ment’s abil­ity to re­duce the tax bur­den in the last Bud­get was con­strained by the need to pre­vent SA’s econ­omy from over­heat­ing. The idea is to build some fat in the good times so that Gov­ern­ment has a war chest for use in the bad times.

Gov­ern­ment is sit­ting on a mas­sive cash pile of more than R75bn, of which around R46bn is kept with the Bank and won’t be used for debt buy­backs or fi­nanc­ing of spend­ing this fis­cal year.

Con­scious choices were made. Trevor Manuel

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