The country’s national debt, as measured by gross government debt as a percentage of GDP, is estimated to reach levels last seen in the early days of our democracy when the Mandela administration dealt with the hangover from apartheid.
Years of economic sanctions in opposition to the old regime had ravaged the economy and led to the country’s debt being downgraded to junk status. This saw the ratio of debt-to-GDP peaking at 48% under finance minister Chris Liebenberg (see graph below) in President Mandela’s second year in office.
It then fell sharply under the tenure of Trevor Manuel as finance minister, eventually bottoming at just 22% in 2008 and 2009, just as the global financial crisis hit. When finance minister Malusi Gigaba stands up to deliver the budget speech in February next year, National Treasury estimates debt-to-GDP would have reached 47%.
*You have to have given a budget speech to qualify.
But what does it matter? Many other countries have debt-to-GDP ratios far in excess of our own? And why, in the context of a developmental state like South Africa’s with so many pressing issues are we concerned about a ratio of this nature?
Perhaps this next graph can explain things further.
The blue line represents debt service costs – or interest – as a percentage of the country’s total tax revenues. (The database accessed from National Treasury only went as far back as the 2001/02 financial year that ended in March 2002).
By this stage, Manuel had been in the hotseat for approximately five years already, and had lowered debt-to-GDP from 48% to 33%. But look at that number! Virtually one in every five tax rands collected (19%) went just to servicing the national debt.
Unlike Trevor Manuel, who had a boss that understood the importance of managing the fiscus prudently to run down the cost of borrowing and lower the quantum of money paid to service the debt, Malusi Gigaba, in my opinion, does not have the same luxury.
In his first press conference as finance minister, Gigaba reiterated government’s commitment to fiscal consolidation – in other words, managing the country’s affairs in such a way that debt does not spiral out of control. His problem is that he has a boss that doesn’t understand or believe in the importance of being fiscally prudent such that, in the Zuma years, debt service costs have risen from R57 billion in 2010 (Zuma’s first year in charge), to a projected R162 billion by the end of March next year, equivalent to 13% of all tax revenue collected.
What is prudent? Maximising debt while keeping the cost of it at its lowest sounds like the logical conclusion. But the real magic is being able to allocate the money in such a way that the marginal returns – whether they be social or economic outcomes – exceed the cost of the money that has been borrowed. And that is an extremely hard argument to make given the current leakages in the system.