Paying wages, repaying debt

SA CAN’T SEEM TO BE KEEPING UP National fiscus is under increasing pressure amid new spending demands and disappointing growth.

also mean that South Africa is a relatively less attractive investment destination. The 10-year government bond yield has risen over the last few months as markets have become aware of the fiscal pressure.

At the moment, SA is borrowing about R200 billion a year to maintain the current level of expenditure, and a lot of pressures are emerging, Stuart said.

To close the gap, the country will have to raise taxes further or reduce spending. “Both are very difficult decisions and they have big implications for growth.”

Stuart said there is no free lunch – South Africa has big social priorities, is spending a lot of money, and has raised taxes significantly over the past five years.

“The level at which we spend is not supported by the size of the economy as it stands. There are going to be additional decisions to be made I think over the next three years,” he warned.

For example, the SA National Defence Force spent 38% of its budget on wages in 2008, compared to 57% last year.

“This unfortunately is true for a whole host of very large and important departments including provincial health,” said Stuart. “We’ve seen basically across the board that wages are eating up a larger and larger share of spending.”

While cutting wages might seem like the obvious answer, wages account for about 80% to 90% of the provincial budget in a department like basic education. Cutting wages would effectively mean cutting back on education, he said.

Even a decision to reposition spending in favour of infrastructure, which is generally considered more growth friendly in the long run, has its challenges. Stuart referenced major problems in the water infrastructure sector as one such example.

The International Monetary Fund recently said South Africa was not hard enough on fiscal consolidation and suggested that government should introduce a debt ceiling at about 55% of GDP.

To introduce such a ceiling would also mean that additional spending cuts or tax increases would be necessary.

“Those have costs as well,” said Stuart.

Picture: Moneyweb FEELING THE PRESSURE. Treasury is under increasing pressure to raise spending and might not be able to stick to its plans for fiscal consolidation as announced in the February budget.