The Medium-Term Budget Policy Statement (MTBPS) stated that debt service costs will continue to grow and would swallow a fifth of revenue this fiscal year.
Compared with the February 2023 Budget estimate, debt-service costs will increase by R14.1 billion to reach R354.5bn in 2023/24. These costs will rise to R455.9bn or 5.4% of gross domestic product (GDP), by 2026/27.
As a share of main budget revenue, debt-service costs will increase from only 8.8% in 2008/9 to 20.7% in 2023/24 and 22.1% in 2025/26.
Treasury said that South Africa’s deep and long- standing fiscal challenges are rooted in a long-term pattern of low economic growth since the 2008 Global Financial Contraction, which resulted in persistent large budget deficits.
Although moderate budget deficits or less than 3% of GDP are not cause for concern, the problem arises when deficits are too large for too long.
Treasury noted that as a percentage of GDP, gross loan debt increased by 47.2 percentage points between 2008/09 and 2022/23 s debt grew faster than the economy, and newly issued debt has become more expensive to service.
Rising debt-service costs push up the cost of borrowing across the economy, so that impacts private sector investment as well. In addition, the rising cost of servicing government debt reduces the amount of money available for meeting national development objectives.
This “crowding out” effect means that debt-service costs consume a greater share of the budget than social development, health, community development, economic development or peace and security.
A crucial part of government’s fiscal objective is to change from consumption spending to financing investments that support faster, job- creating growth.
The emphasis in the MTBPS is to promote economic growth and support the most vulnerable members of society, while stabilising the public finances and reducing fiscal and economic risks. That in turn will promote higher levels of private-sector investment and employment. Over the next three years, the fiscal framework supports strong control of the public-service wage bill, protecting crucial frontline services and implementing efficiency measures.
The government’s commitment to restoring the health of the public finances means that the debt-to-GDP ratio is still forecast to stabilise in 2025/26 – although at a higher level than projected in the 2023 Budget.
The projection is that it will reach some 78% rather than 73% forecast in the February 2023 Budget, but substantially better than the gross debt to Gross Domestic Product (GDP) ratio of 95% expected in the 2020 MTBPS.