Debt projections are worse than forecast
THE BUDGET aims to stabilise the debt-to-gross domestic product (GDP) ratio below 90 percent compared with projections in the October 2020 Medium-Term Budget Policy Statement (MTBPS) that saw the ratio rising to 95.3 percent in 2025/26.
The projections are, however, far worse than the February 2019 Budget projection of stabilising the ratio near 60 percent, as the projection then was for the debt-to-GDP ratio to peak at 60.2 percent in 2023/24.
Relative to the 2020 MTBPS projection, the Treasury expects the deficit to narrow at a slightly faster pace, while improved cash balances reduce the borrowing requirement and debt issuance over the medium term. Debt is now projected to stabilise at 88.9 percent of GDP in 2025/26.
The Treasury said then, as it does now, that without intervention, a continued increase in debt and debt-service costs will crowd out economic and social expenditure.
If economic growth does not strengthen, more difficult fiscal adjustments will be required to return public finances to a sustainable path.
The Treasury said there were three main risks to the financing strategy.
The first was a widening budget deficit, which would most probably increase the cost of funding alongside the stock of debt.
Compared with the MTBPS, the fiscal deficit to GDP ratio was cut to 14 percent from 14.8 percent.
The second risk related to inflation and exchange-rate risks, as unanticipated increases in inflation or a depreciation in the rand exchange rate would increase the cost of outstanding inflation-linked or foreign-currency debt.
The third risk related to South Africa’s sovereign credit ratings, which have been downgraded to junk status since April 2017. Further downgrades deeper into sub-investment grade would result in a higher budget deficit, rising debt levels and weak economic growth.
The Treasury has forecast that debt service costs will rise to R338.6 billion in 2023/24 from R162.6bn in 2017/18.
It was to counter a similar rise in debt service costs between 1990 and 1994 that the government, between 1996 and 2007, made fiscal austerity a key policy platform, so it could reduce outstanding debt and use the saving in debt service costs to fund other services.
To reduce debt service costs, the Treasury aims to reduce the growth of the wage bill and the share of spending on wages, while sustaining real spending increases on capital payments, specifically for buildings and other fixed structures, as infrastructure investment was a key aspect of increasing economic growth in future years.
This means that the consolidated budget deficit, which is estimated at 14 percent of GDP in 2020/21, narrows to 6.3 percent by 2023/24, with the government aiming to achieve a primary surplus, which means that total revenue will exceed non-interest expenditure in 2024/25.