Debt that runs up debt will cost SA dearly
The national debt and the interest bill for SA taxpayers grew sharply after 2010 — national debt by as much as R200bn more a year before the Covid lockdowns and by well over R400bn in 2021.
This year taxpayers will be on the hook for an interest bill of the order of R300bn, compared with R57bn in 2008, while the national debt will approach R4-trillion, equivalent to 60% of GDP compared with a mere 18% ratio in 2008. This is a dangerous trend that has to be reversed.
The SA interest bill in 2008 accounted for 8% of all government spending; now it has doubled to 16%. At an average 8% a year yield on the debt, every 1% increase in the average cost of funding the debt adds about R32bn from the interest bill. That is not small change. Adding inexorably to the real national debt will inevitably lead to taxpayers and voters becoming unwilling to meet an overwhelming interest bill.
It could also mean substituting the central bank and its money-making machine for the bond markets. Destruction through inflation of the value of outstanding debt denominated in the local currency would then follow.
Such developments do not come as a surprise to investors. History has made them well aware of the dangers of default, and they demand compensation for the risks of funding national debts — in the form of higher interest rates paid for upfront.
SA has been heavily penalised for its presumed inability to reverse course on its fiscal trajectory. High interest rates paid by the government and then passed on to businesses have compensated lenders for expected inflation and the expected accompanying weakness of the rand. This detracts significantly from the expected returns of foreign investors earning rand incomes, when converted to dollars at some future time.
Government spending was sustained at a generous rate relative to real GDP after the recession of 2009-2010, while growth in revenue did not catch up. The problem was worsened by the lockdowns of 2021. From 2008 to 2021 government spending after inflation grew an average 4% a year, while growth in real revenues increased by an average of only 1.2% a year. In 2010, real revenue fell 10%, and 16% in 2021. Recession was extremely bad news for the Treasury and higher tax rates are bad news for the economy.
Much of the extra borrowing undertaken by the government since 2008 has been used to fund consumption spending rather than capital expenditure — also unhelpful for growth. Real spending on compensation for government employees grew by about 30% between 2010 and 2018. Real capex by the government fell away badly after 2015. It is now 25% below 2015 levels. The numbers employed in the government have not increased meaningfully; it is average real employment benefits that have swelled. A patronage system is obviously at work — a very expensive one directly and indirectly.
The call for fiscal sustainability made by the finance minister in his recent medium-term budget update is founded on restraining government spending on employee benefits, a restraint essential for promoting the long-term interests of all South Africans in economic development — including those who now work for, or hope to work for, the government.
Fiscal reform for SA could extend beyond the objective of reducing the gap between expenditure and revenue. The government could publish a capital budget and commit to raising national debt only to fund capex. That is to permanently close the gap between government borrowing and government capex that was allowed to open up after 2008.
Honest procurement of well-selected cost-of-capitalbeating projects should surely not be regarded as an impossible task. Even for SA.