The projected increase in the debt-to-GDP ratio is set to occur notwithstanding plans to cut the projected increase in government’s salary bill. If government does not overcome labour union resistance to cuts, the debt burden will increase even more. The mounting public debt and government’s apparent inability to reign it in, raises the question whether South Africa finds itself in a debt trap, and if not, what can be done to escape such a trap.
The debt burden of the national government has steadily increased from 27% in 2007. It is heading towards 70% in 2022/3 if this trajectory is not turned around. Further growth in the debt-to-GDP ratio must at least be halted. Different scenarios show this would require a cut in government expenditure of 2% to 3% of GDP (roughly R100 to R150 billion), phased in over the medium term. This means there is no room for a stimulating fiscal policy.
It is estimated that less than half of the present main budget deficit of 5.7% is explained by cyclical factors. The remainder reflects a non-cyclical, structural component of the deficit. The increase in the structural budget deficit since 2008 may constrain the ability of government to sustain its present revenue and expenditure policies. An in-depth understanding of the structural component of the fiscal position as opposed to its cyclical element is important for sustainable long-term government financing and planning.
Many economists have argued that the government’s fiscal stance in the recent budget is verging on the risky. This article argues that the fiscal stance is both correct and prudent. In addition, the article puts the budget in a broader developmental context, highlighting its contribution to long-term growth and development and to tackling poverty and inequality.