Finance Minister Enoch Godongwana has delivered the news no one wanted to hear, that there is going to be less food on the table as the government has to pay bloated interest on its debt.
Godongwana yesterday warned that South Africa’s fiscal outlook had severely deteriorated as the rising debt-service costs were “crowding out” priority expenditure and consuming a greater share of the national budget.
“The main budget deficit has increased by R54.7 billion compared with the 2023 Budget estimates. This reflects lower revenue performance, higher wage bill costs and higher projected debt-service costs,” Godongwana said.
This comes as the government is expected to significantly raise its borrowings to average R553.7bn per year over the next three years.
This borrowing will be used to finance the gap between what the government spends and the revenues it collects; to refinance the redemption of maturing debt; and to finance the Eskom debt‐relief arrangement.
As a result, gross debt will rise from R4.8 trillion in 2023/24 to R5.2trn in the next financial year, and then exceed the R6trn mark by 2025/26 financial year.
Godongwana said the government spending had exceeded revenue since the 2008 global financial crisis.
He said these rising annual budget deficits had reached an extent where the government would borrow an average of R553 billion per year over the medium term.
“We now expect gross government debt to stabilise at 77% of GDP (gross domestic product) by 2025/26. This is higher than the level we forecast in February,” Godongwana said.
“Over the next three years, debt-service costs as a share of revenue will increase from 20.7% in 2023/24 to 22.1% in 2026/27.”
Over the past 15 years, South Africa has had one of the largest increases in government debt as a share of GDP.
This debt accumulation has led to a rapid increase in debt‐service costs, which now consume more than 20% of main budget revenue.
For every R5 collected in revenue, the government pays R1 to lenders instead of funding education, policing, health and other critical services.
Relative to the 2023 Budget, debt‐service costs were revised up by R14.1bn due to higher interest rates, exchange rate depreciation and a wider budget deficit.
Godongwana, however, pointed out that debt levels and rising debt service costs were not problems in and of themselves.
“Our challenge is that rising debt services costs are crowding out important social spending, and our economy has not grown fast enough to support increasing expenditure or our current debt levels,” he said.
“The cost, or interest of this debt, for next year alone, amounts to around R385.9bn. Over the Medium-Term Expenditure Framework, interest costs amount to R1.3trn.”
As a result, Godongwana set out a strategy for avoiding a fiscal crisis and preventing the build-up of systemic risks to the economy when he tabled his Medium-Term Budget Policy Statement (MTBPS).
Godongwana proposed a strategy of spending adjustments based on policy priorities, and a reconfiguration and rationalisation of the State, which includes closing or merging ineffective entities and programmes, and enhancing the complementarity of its functions.
In the current financial year, spending has been revised down by R21bn, and proposed further reductions of R64bn in 2024/25 and R69bn in 2025/26.
The government finances are also being squeezed by under-performing corporate tax collections, primarily the mining sector revenue as a result of falling commodity prices.
The gross tax revenue estimate for 2023/24 has been revised down by R56.8bn compared with the 2023 Budget, while tax‐to‐GDP ratio is expected to decline to 24.7% in 2023/24 from 25.1% in 2022/23.
Tax revenues, however, are expected to increase to R2.1trn, or 25.1% of GDP, by 2026/27.
In spite of this, revenue collection is projected to fall short of 2023 Budget estimates by R121.4bn between 2024/25 and 2025/26, with tax buoyancies generally lower over the medium term.
Godongwana said the result of the shortfall was a substantial worsening in the main budget deficit in the current fiscal year.
“We are now projecting a deficit of 4.9% of GDP compared to our previous estimate of 4.0%,” he said.
“Under these circumstances, measures to stabilise public finances and reform the economy to generate higher growth are essential.”
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