KHAYA SITHOLE: Lack of blueprint for economy caused public funding crisis

On Friday, while the country waits impatiently for a budget, one of the primary drivers of the budget crisis will come into focus. The National Treasury, which has been responsible for implementing a borrowing spree premised on the demands made by government departments and political principals over the past 15 years, will honour its next series of interest obligations for the various bonds it has in issue. The amount — R46bn — is part of an annual interest bill estimated to top R382bn this budget cycle and then expected to escalate to R414bn in the next cycle. 

The scale of the interest commitment illustrates just how deeply in debt SA finds itself. The current debt-to-GDP ratio of 75% is a significant acceleration from the 23.6% of the immediate post-crisis period which, coincidentally, coincided with the aftermath of the tectonic political shifts of the ANC’s Polokwane conference. Since then, as the ANC maintained its political hegemony while balancing its commitments to social development and presiding over a stagnant economy that could not absorb a meaningful number of disaffected citizens into the workforce, it tried to solve every crisis by borrowing more.

The traditional playbook of public financial management — disciplined spending, taxes growing due to a robust economy and borrowing only to invest in the future capacity of the economy — has eluded the ANC. Repeatedly its inability to develop a blueprint for an economy that responds to the socioeconomic conditions we live through, has condemned us to an inevitable public funding crisis. 

Answering the borrowing question requires an acute understanding of the difference between the quantum and quality of spending. In its 2014 working paper, “Safe Debt and Uncertainty in Emerging Markets: An Application to SA”, the IMF suggested the rate at which the country’s debt might need to be contained to avoid the risk of facing distress — the debt ceiling — was 60%.

The same paper recommended a target of 40% as the rate at which SA would be safe enough to absorb adverse shocks or fiscal risks and still remain within the ceiling. The debate over a debt ceiling is as polarising as any other economic concept, especially since the question of the utility of ceilings remains elusive.

What we do know is that countries with no reference point for when their borrowings might become problematic are prone to borrowing recklessly. In that case, the question of the quality of spending becomes important. If the country borrows to invest in greater economic capacity through infrastructure, for example, the question of quantum and debt service costs is contrasted against greater benefits in future.

SA’s unique case is that it has borrowed beyond the 60% recommendation — not that the 60% is meant to be an immovable stone — but has not exactly translated its spending spree to long-term future benefits that are greater than the pain of the borrowing. Instead, debt and interest have ballooned, and now crowd out spending on other social priorities.

The inability to invest in the expansion of the economy means proxies for success — increased employment and higher tax revenues from a wider tax base — are nowhere to be seen and the burden therefore falls squarely on the few.

The recent move to raise VAT is an acknowledgment that whether one calls it a ceiling or not, the debt has created a public resource crisis that has to be fixed in other ways. The easiest way — the windfalls of a growing and inclusive economy — is unavailable to countries that have continuously failed to invest and have instead gambled on borrowing with the hope that some miracle might materialise. That is the SA crisis. 

• Sithole is an accountant, academic and activist.