South Africa’s debt burden will cross the R5 trillion mark for the first time in history over the next three years, mainly due to the R254 billion partial takeover of Eskom debt, which will reflect on the national balance sheet henceforth.
This was revealed by Finance Minister Enoch Godongwana as he warned of the risks to the fiscal outlook when he tabled his 2023 Budget speech.
These risks include a worsening of the economic outlook, a further weakening of the finances of state-owned companies, and an unaffordable public-service wage agreement.
Godongwana said if these risks were to materialise they would require the government to make difficult budgeting trade-offs.
“For these reasons, we must continue exercising fiscal restraint,” he said.
“Accordingly, government non-interest spending will be kept below the level of revenue into the future, and we will continue targeting the stabilisation of debt.”
South Africa’s gross debt stock is now projected to increase from R4.73 trillion in 2022/23 to R5.84 trillion in 2025/26, and debt-service costs will also increase in line with this debt burden.
This means that the government debt will now stabilise higher than previously projected and also later than previously thought.
“Mainly due to this Eskom debt relief, government debt will stabilise at a higher level of 73.6% of GDP in 2025/26. This is three years later than anticipated in the 2022 Medium-Term Budget Policy Statement (MTBPS),” Godongwana said.
However, Godongwana insisted that the government would achieve a main budget primary surplus – meaning revenue exceeds non-interest expenditure – in the current financial year and maintain it over the medium term.
He said the fiscal consolidation strategy adopted several years ago had restrained growth mainly in consumption expenditure, and allowed the government to use part of higher-than-expected revenues to reduce the deficit.
In this regard, the consolidated fiscal deficit is projected at 4.2% of GDP for 2022/23, and this will reach 3.2% in 2025/26.
“As a result, we are bringing the fiscal deficit down without resorting to tax increases or further cuts in the social wage and infrastructure. This is a critical policy stance,” Godongwana said.
Interest payments on public debt remain the fastest-growing expenditure.
At 8.9%, debt service costs are the fastest-growing spending function and will increase by 10.8% to R340.5 billion in 2023/24, accounting for 15.2% of total expenditure and consuming 19% of gross tax revenue.
This item will continue to crowd out spending on critical economic investments and social services over the next three years as it grows by a faster 8.9% per year over the medium term, costing R1.1 trillion.
“Debt-service costs are projected to average R366.8bn annually over the medium term, reaching R397.1bn in 2025/26. These are resources that could otherwise be used to address pressing social needs or to invest in our future,” Godongwana said.
“This is not an austerity Budget. It is a Budget that makes tough trade-offs in the interests of the country’s short- and long-term prosperity.”
Tax revenue collections for 2022/23 are expected to total R1.69 trillion, exceeding the 2022 Budget estimate by R93.7bn and the 2022 MTBPS estimate by R10.3bn.
However, the 2023 Budget review sees consolidated government spending growth of 4.5% over the Medium-Term Expenditure Framework to R2.48 trillion in 2025/26, with the lion’s share to be allocated to the social wage.
Nedbank economist Isaac Matshego said Godongwana wanted to illustrate the government’s continued commitment to restoring fiscal discipline and returning the country’s finances to a more sustainable footing.
Matshego said while the revenue estimates appeared realistic, the expenditure targets require significant restraint and discipline.
“The underlying message is admirable, but the government is highly unlikely to achieve these targets. It has consistently exceeded its expenditure budgets over the past decades,” he said.
“The upcoming fiscal year will be no exception. Expenditure demands will increase even further as load shedding dampens economic growth and job creation. At the same time, we believe the unions will secure a higher wage increase than budgeted for this year.
“Finally, the takeover of a sizeable slice of Eskom’s debt is encouraging. If Eskom uses the breathing space this debt relief provides wisely, it could help ease load shedding in the years ahead. However, we believe that much of Eskom’s operational and financial inefficiencies relate to corruption and criminality, which will require political will to eliminate,” Matshego said.
Click here to view Business Report’s full coverage of the budget speech.
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