Economy / 31 October 2019, 09:00am / Siphelele Dludla
JOHANNESBURG – Finance Minister Tito Mboweni on Wednesday slashed the country’s growth prospects by more than 70 percent from his estimates in February, warning that the debt-to-gross domestic product (GDP) ratio had reached unsustainable levels and that it needed to be contained for the government to free some cash for spending.
Mboweni said South Africa was now expected to grow 0.5 percent this year, from the 1.5 percent he projected in February. He said the national debt had exceeded R3 trillion and was expected to rise to R4.5trln in the next three years.
Government spending would total R6.3trln over the next three years, with almost half (48 percent) going towards social grants, education and health.
“As things stand, without any policy adjustments, debt will most likely exceed 70 percent of GDP by 2022/23. This is a serious position to be in.
“The consequence of not acting now would be gravely negative for South Africa. Over time, the country would likely face mounting debt service costs and higher interest rates, and may enter a debt trap.”
Mboweni painted a bleak picture of South Africa’s stagnant economic growth, showing a country with fiscal imprudence, a leaking tax collections bucket, and a debt-to-GDP widening at a frightening pace.
He said debt and debt-service costs were expected to continue to increase, with the debt-to-GDP ratio now estimated at 71.3 percent in 2022/23.
Mboweni said the consolidated budget deficit was now projected to be 5.9 percent of GDP in the current year, averaging 6.2 percent over the next three years.
“The persistent gap between revenue and expenditure now puts the government debt on an upward trajectory over the next 10 years,” he said.
“An estimated 18.4 percent of main budget revenue will be used to service debt in 2022/23, compared with 15 percent in 2019/20.”
Mboweni said interest payments had begun crowding out social and economic spending programmes, and that could not be sustained.
“On our current trajectory, by the end of the three-year framework, debt service costs will be bigger than spending on health and economic development.
“The most desirable sweet spot is where we reduce expenditure by R250 billion. That would take us into a position whereby in 2021/22 the debt-to-GDP ratio would be around 64 percent. But that sweet spot would mean we take very prudent and decisive action.”
The government’s non-interest spending has increased by R23bn in the current year, mainly due to a Special Appropriation Bill that allocated R26bn to Eskom.
Mboweni said additional measures, particularly on the pubic sector wage bill, would be required to stabilise the debt outlook and improve the composition of spending, while tax measures were also being considered.
“Our problem is that we spend more than we earn. It is as simple as that,” Mboweni said.
Growth is projected to slowly rise to 1.7 percent in 2022, supported by household consumption and private-sector investment. Gross tax revenue was also projected to fall short of the February Budget estimates by R52.5bn in 2019/20 and R84bn in 2020/21, reflecting the weaker economic environment.
Mboweni said this was threatening the government’s ability to maintain existing levels of service provision and infrastructure investment.
“We now expect to collect R1.37trln this year. This is R53bn, or 4 percent, less than we expected,” Mboweni said.
“To meet our fiscal needs, growth is not enough. We also need a well-functioning and efficient revenue collection agency.”
Mboweni said the government’s economic reform agenda would boost confidence and investment, but these reforms were expected to begin yielding results only over the next several years.