Higher-than-expected debt service costs will add at least R9bn to government spending this year, adding to a range of fiscal pressures that will mean less money is available for social programmes and infrastructure spending, organised business has warned.
Business Unity SA (Busa) was addressing a budget planning dialogue last week at the National Economic Development and Labour Council (Nedlac), ahead of the medium-term budget statement on October 26.
SA’s bond yields have jumped since the February budget, in an environment in which inflation and interest rates have soared globally and risk-averse international investors have sold off emerging-market assets including bonds, making government borrowing more expensive. SA’s 10-year bond yield (which is the inverse of the bond price) was trading at 10.34% on Monday, down from a recent peak of more than 11% in July but well above its February budget day level of just over 9%.
And while Treasury figures for the first three months of the current fiscal year show tax collections are still running well ahead of budget estimates, this may not continue, and the government is under pressure to spend more than it budgeted for on items such as public sector wage increases and bailouts for state-owned enterprises — as well as on a basic income grant.
CEO Cas Coovadia warned that SA’s fiscal position is tight.
“We are very concerned that government doesn’t borrow more than it should, especially to meet expenditure that cannot service the cost of that borrowing,” Coovadia said in an interview after the Nedlac meeting.
“We are very concerned that they don’t use short-term booms for long-term expenditure that will be hard-wired into the budget and which government may not be able to fund in the future. We are also very concerned that less expenditure goes to departments that reward economic growth and investment promotion.”
Spending growth beyond the country’s tax capacity has seen debt service costs grow to one-sixth of spending and one-fifth of government revenues. As global interest rates have risen and SA has become riskier, the government’s financing costs are rising, Busa told Nedlac.
“The global environment is weaker, implying room for fiscal expansion beyond one-offs that match revenue one-offs is very limited,” it said.
Where previously the Treasury used to brief Nedlac on its budget plans just days before the event, the timing of these consultations has been brought forward since Enoch Godongwana took over as finance minister just more than a year ago, to allow more time for the government to respond to input from its social partners.
Labour representatives at Nedlac urged that the government give support to Eskom, to free up money for the power utility to do more maintenance, as well as to police cable theft and vandalism.
Cosatu’s Matthew Parks said in an interview that labour has called for the government to ramp up the fight against corruption and dysfunctional municipalities. The labour federation also wants more spending on the wage bill and is encouraged that the finance minister is engaging with this.
Labour urged the government to spend to protect industrial support programmes and to invest more in labour market institutions such as the Commission for Conciliation, Mediation and Arbitration, Parks said. The social relief of distress grant is critical, and labour also wants to see the Presidential Employment Stimulus programme ramped up to 2-million job opportunities by the time of the 2023 February budget.
Parks said the best investment the government could make is to invest more in the SA Revenue Service, to boost its tax collection ability. “We don’t need new taxes; we just need to enforce the existing tax regime,” Parks said. “We agree that the rise in debt and deficit levels is alarming,” he said.
The government’s gross debt rose to more than R4-trillion, or 69.5% of GDP, in the latest fiscal year, from just R1.1-trillion a decade prior to that. The government has taken action in recent years to rein in expenditure growth, but the February budget projected the debt ratio will keep rising to a peak of 75% of GDP in 2024/2025 before stabilising.
The tightening in global financial markets has prompted capital flight from emerging markets including SA, which has seen foreign investors’ holdings of SA domestic government bonds fall to 26.5% of the total, from 29.1% in February and a peak of 42.8% in March 2018, just after Cyril Ramaphosa became president.
Nedlac heard from the Treasury that the notion that the government has been budgeting for “austerity” is not accurate, given that its non-interest expenditure has been rising 8% a year over the past 15 years.
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