Escape from the debt trap
Government makes huge savings on interest
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