Large national debt is not yet a problem, Gigaba tells MPs

Gross national debt of 60% is not necessarily a problem, Finance Minister Malusi Gigaba said in Parliament on Tuesday.

Responding to questions in the National Council of Provinces, Gigaba said rising national debt became a problem when economic growth continued to slow down, unemployment increased and the state failed to find new tax revenue.

After last week’s mediumterm budget policy statement, sovereign credit ratings agencies raised concern about SA’s debt sustainability and its poor tax revenue collection.

In his speech, Gigaba painted a bleak picture of the state of SA’s economy, with the projected revenue shortfall for 2017-18 a staggering R50bn, due to slow growth and poor tax collection. The consolidated budget deficit would jump to 4.3% of GDP in the next fiscal year, against a target of 3.1%.

The Treasury also expected the gross national debt to reach 60% in 2020-21 and for GDP growth to average 1.7% over the medium term.

“On the face of it, 60% is not a problem,” Gigaba said in Parliament on Tuesday.

“It becomes a problem when the economy is not growing, unemployment is high and we have no new tax revenue. If the current trend of slow growth persists, it will have an impact on growth in the long term and lead to a decline in employment, confidence and investment,” Gigaba said.

The government remained committed to implementing fiscal consolidation and curbing spending to stick to its budget framework. However, fiscal consolidation was not economic policy, but a short-term intervention, Gigaba said.

“What we need to do is boost confidence in the economy and drive aggregate demand up and get the economy growing … that is what we are focusing on….

“We need to implement structural reforms, which will be critical in boosting confidence and ultimately to recoup the R50bn [shortfall].”

The government would announce more fiscal consolidation measures in 2017, additional revenue-generation mechanisms, and plans to reduce guarantees to poorly governed state-owned entities, Gigaba said.

“Clearly, we need to be stringent with regard to government guarantees,” he said.

Moody’s Investors Service said on Monday that the low tax revenue and the subsequent widening of the budget deficit and mounting debt levels were major problems. The agency noted that the cost of borrowing was rising, with interest payments projected to reach 15% of revenue by 2020-21, which surpasses the 9.8% median of similarly rated peer countries.

Moody’s downgraded SA’s bonds and put the country on negative outlook in April.

Fitch Ratings, in its response to the medium-term budget policy statement, also noted a change in policy direction, saying that the budget had no measures to contain the effects of the fall in revenue.

IF THE TREND OF SLOW GROWTH PERSISTS, NATIONAL DEBT WILL HAVE AN IMPACT ON GROWTH WE NEED TO BOOST CONFIDENCE IN THE ECONOMY AND DRIVE AGGREGATE DEMAND UP