JOHANNESBURG – Government debt is rising rapidly and the risk of a further credit ratings downgrade is increasing.
Speaking at a post-budget event hosted by the South African Institute of Tax Practitioners (Sait), Mike Schüssler, chief economist at economists.co.za, said South Africa’s government debt is starting to climb radically and while the current account and budget deficit outlook have been revised downwards in Wednesday’s budget, it followed a period where the forecast was consistently adjusted upwards.
The gross debt to GDP is moving to 48.5% with some market commentators suggesting that gross government debt may even reach a level of 60% to GDP.
According to the Budget Review 2014, government’s net debt as a share of GDP is expected to level off at 44.3% of GDP in 2016/17.
Schüssler said the problem is that while government has always promised that it will get debt under control, it wasn’t able to deliver on those promises.
He emphasised that it is a very difficult time for the country, with Wednesday’s budget the most difficult of Finance Minister Pravin Gordhan’s term.
The budget highlighted that if South Africa is not going to reach significantly higher growth levels, there will be a lack of revenue.
Schüssler said consequently the arguments against the privatisation of state-owned entities such as South African Airways will disappear in the coming years and in five years privatisation will be firmly back on the agenda.
While the current account deficit is forecasted to narrow to 5.8% of GDP over the medium term, the forecast was previously consistently revised upwards since the medium term budget policy statement of 2012.
Schüssler said while the decrease could be warranted, it is also meant to reassure rating agencies that are concerned about the fact that South Africa is consuming more than it is producing.
Moreover, the lack of growth in recent times means that the tax base hasn’t grown and history has shown that South Africa can’t spend its way out of trouble.
“We’ve had low interest rates and spending and it hasn’t helped us.”
While the budget deficit is now forecasted to reach 4% in the 2014/15 fiscal year, this figure too was revised upwards in the past with only a slight downward revision in Wednesday’s budget.
Schüssler said this year’s budget was somewhat of a “smoke and mirrors” exercise, like it was in the past decade.
Growth forecasts have come down significantly and while economic growth of 2.7% was expected for 2013 in last year’s budget, growth eventually came in at 1.9%.
Schüssler said this has taken away a lot of money from government and is ultimately making the whole situation very tough, since the growth in revenue will be muted unless taxes are increased.
He said personal tax relief was mainly a public relations exercise.
While tax relief of R9.3 billion was announced for individuals, the actual saving is much lower than the inflation forecast of 6.2%, he said.
Moreover, the tax base is really small.
Schüssler said the budget referred to 15 million registered taxpayers, but less than 5 million taxpayers actually pay personal income tax and 3 million pay 95% of all taxes.
“It is now getting to the point where you cannot just continue taxing these people more and more and more.”
Other initiatives have now been introduced to raise taxes, such as the carbon tax and a possible acid mine drainage tax.
Schüssler said company taxes are also likely to come under pressure in the next year or so. A few years ago the biggest corporate taxpayer was a platinum mine, but the platinum sector has just entered its sixth week of strike action.
He said it is concerning that nothing was said on the strikes in the mining industry and its damaging effect on the economy.
“We’ve got to talk about these things, if we don’t we are shooting ourselves in the foot.”
Schüssler emphasised that strong leadership is required in this regard.
He said overall Gordhan has done very well during his five years as minister of finance.