Micawber’s principles apply to national as well as household budgets. Expenditure less than revenue means happiness. Expenditure that consistently exceeds income brings misery in the form of ever-rising and more expensive levels of debt, the service of which takes an ever-larger share of revenue collected, and of all expenditure. Paying interest and repaying capital maintains your credit rating — more or less — even if it doesn't buy votes.
SA has been on this spendthrift path, without pause, ever since the global financial crisis. From fiscal 2008/2009 to date, real government expenditure has grown by an average of 3.2% per annum. Government revenues have lagged, growing by an average of 2% per annum after inflation. Those extra 1.2 points of spending make a big difference to debt levels over time. Real GDP has grown by an immiserating average of 1.2% per annum since 2009.
Government debt net of cash was a manageable R483.2bn in 2007/2008, equivalent to 20% of GDP. The net debt this past financial year is nearly 10 times higher at R4.483-trillion, equivalent to 67% of GDP. Servicing this debt took 8.8% of all government revenue in 2008/2009.
This share of revenue grew consistently to 18.8% in Covid year 2021 as revenues collapsed with the lockdowns, then fell back to 17.1% in 2021/2022 as the inflationary comeback from Covid brought in hundreds of billions of rand in unexpected taxes from SA mining companies. That’s a mixed blessing as these companies remained reluctant to invest more in SA and so paid more tax.
Not only did the volume of debt incurred rise, but interest rates paid by both government and private borrowers rose well ahead of inflation to compensate investors in SA government and private debt for the dangerous trajectory of the national debt. Such trends could easily be extrapolated into a debt crisis.
If not corrected it could eventually lead to a desperate resort to the central bank and its money-printing press as a lender of last resort. That is, to default by inflating away the real value of the debt incurred. It is a not uncommon event in the monetary history of the world.
The 2023/2004 budget has made an essential, praiseworthy attempt to reverse the direction of spending and revenue. Over the next three years all government spending is planned to grow 8.5%. That’s more slowly than government revenue, which is expected to increase 10.4%.
The extra borrowing — the fiscal deficit — would then decline from the current 4.2% of GDP to 3.2% by 2025/2026, despite modest expected GDP growth. If the plans materialise, the debt to GDP ratio will stabilise in the low 70% range and the debt service ratio will be contained below 20% of all revenues.
A path to fiscal sustainability has been opened. The issue of how well or badly the government spends money collected or borrowed and then allocated across the spending departments and state-sponsored enterprises, and how onerous the tax regime, clearly influence economic growth.
Fiscal responsibility of the kind hopefully to be demonstrated, almost balancing the books, is vitally necessary for economic stability but is not sufficient for the purpose of faster economic growth. It is the larger task for the government to get value for taxpayer income it extracts.
The economic dust seldom settles in SA. The budget was soon overtaken by André De Ruyter’s last stand. Yet judged by the muted reaction in the financial markets the budget did little to change what we pay to raise capital, public and private. RSA five-year bonds still yield well over 9%, an expensive real 4% after expected inflation of 5.5%.
Judged by the difference between SA and US bonds the rand is still expected to weaken — by a punishing 6.8% per annum over the next five years. SA’s dollar-denominated five-year debt now yields 6.56%, representing a default risk premium of 2.4 points, more than double investors in Mexican debt pay for the same insurance.
Clearly the market and the economy need more convincing that we have permanently changed our ways.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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