Free education will cost SA

CRIPPLING: R15BN MORE TO R50BN EXPENDITURE

The plan introduced by President Jacob Zuma at end of 2017 will plunge the country into a deeper financial crisis if it isn’t adjusted.

Funding will have to come from tax hikes, significant austerity, budget reallocations or additional borrowing.

SA’s free higher education plan, introduced by President Jacob Zuma at end of 2017, will plunge the country into a deeper financial crisis if it isn’t adjusted. Cyril Ramaphosa will need to be politically and financially adept to manage this. He can’t reverse a populist decision and clearly won’t be able to meet it fully without serious adjustments to SA’s finances.

Zuma’s plan seeks to provide fee-free tertiary education to students from households with a combined annual income of less than R350 000 with immediate effect.

The cost of this proposal could be disastrous for a country that is already burdened by significant debt, considering it’ll cost SA between R15 billion and R50 billion per year. At current debt levels, SA’s public finances are already highly constrained. It’s struggling to fill the R50.8 billion budget deficit, projected to rise to R89.4 billion by 2020.

Sovereign debt

The government’s debt has been rising steadily for the last decade. It reached a record high of R790 billion (51% of GDP) in 2017’s second quarter. It’s expected to rise even further, with some estimates suggesting it’ll shoot up to over R2 trillion (60% of GDP) by 2020.

At this debt level, government is paying approximately R13 of every R100 (13%) collected in revenue as interest payments to sovereign lenders. This is much higher than expenditure in general public services (5.5%), defence and security (4.8%), police services and (6.7%), basic education (7.3%), tertiary education (9.2%), and economic infrastructure (6.8%).

The government debt servicing costs for 2018 are estimated at R183 billion, and forecasted to rise to R223 billion by 2021. This means government debt repayment is the fastest-growing expenditure item of the budget. The implication is that in the next three years government will be spending more money on repaying its debts than on key service delivery priorities.

Available options

Retracting or delaying the policy aren’t options because either would likely spark civil unrest. But populist policies such as these condone financial indiscipline at the expense of fiscal consolidation. The consequences will be severely damaging to SA.

It’s vital that government tackles the escalating sovereign debt by drawing up an implementation strategy, in line with austerity measures to allow fiscal consolidation to reduce the widening budget deficit.

It must do this in a way by balancing economic growth, a smaller fiscal deficit and meeting increasing social demands.

Instead of trying to raise funding for free higher education, government should consider disposing of unessential state assets, reducing government debt guarantees to state-owned companies, and clamping down on corruption and wasteful expenditure.

Sean Gossel is senior lecturer at UCT Graduate School of Business, and Misheck Mutize is lecturer of finance and doctor of philosophy candidate at the Graduate School of Business (GSB), UCT.

This article was originally published on theconversation.com/africa and has been edited.