The National Treasury has once again sounded a warning that South Africa’s debt levels and trajectory are unsustainable, adding that a fiscal consolidation failure would have dire consequences for the economy.
The warning is contained in the Medium-Term Expenditure Framework (MTEF) Technical Guidelines issued last week.
Treasury said there has been a large and growing gap between government spending and tax revenue since the 2008/2009 financial year. This has resulted in “exponential growth” in government borrowing to bridge the fiscal gap.
From R500b to R3tn debt
It added, “Debt-service costs continue to be the fastest-growing area of spending, accounting for 21 cents out of every rand of government revenue raised in 2020/21. Over these years, the stock of government net loan debt rose six-fold from under R500 billion in 2007/08 to nearly R3 trillion at the end of 2019/20.”
The onset of the COVID-19 pandemic, which has necessitated more borrowing and resulted in a projected R304 billion tax shortfall, has worsened South Africa’s fiscal and debt situation, Treasury added.
The government has borrowed around R70 billion from the International Monetary Fund (IMF), R17 billion from the BRICS New Development Bank, and R5 billion from the African Development Bank as part of its COVID-19 response. Mboweni told Parliament last month that it could approach the World Bank for further funding if needs be.
Treasury said the current spending patterns mean that South Africa’s fiscal deficits would remain higher than 12 percent of GDP for the foreseeable future. This is a major reason for South Africa losing its investment-grade credit rating by all ratings agencies, it added.
Debt default could cost economy R2tn
Treasury further warned, “Such high deficits place enormous pressure on South Africa’s financial sector and the real economy. With savings levels quite low, high government deficits will expose the country to higher borrowing risks, push interest rates upward and extract from growth through lower private sector investments.
“In the event of a debt default or fiscal crisis, the National Treasury has estimated that this would cost the country at least R2 trillion in lost economic activity by the end of the decade.”
The government aims to achieve R230 billion in savings over a three-year period, starting with R90 billion reduction in overall non-interest spending in 2021/22. It also hopes to achieve a primary surplus and stabilise debt in 2023/24.
“If these reductions are not achieved, and fiscal consolidation is unsuccessful, government debt will exceed 100 per cent of GDP in the medium-term.
“This will signal the emergence of debt distress episodes as a vicious cycle of high borrowing rates and low growth leading to ever deeper debt spirals, lower investment and lower economic output,” Treasury said.
Despite its dire warning, Treasury said South Africa’s economy is “resilient and can be rebuilt and stabilised.” However, spending should mainly be on investment in strategic economic infrastructure instead of consumption as is the case currently.