The recent adjustment budget highlighted the widening of the ‘’jaws’’ between the country’s expected expenditure and expected revenue. Two scenarios were tabled. One in which South Africa takes a passive stance and allow things to deteriorate further and an alternative scenario in which the jaws are steadily shut. In the more dire passive scenario, the country’s debt to GDP is expected to rise to 140.7%.
To place this into perspective; imagine your annual salary is R1 million but you also owe R1.41 million to the bank and they charge 10% on that debt. This is what the country faces.
In such a scenario it becomes exceedingly difficult to pay the interest on the debt and to simultaneously decrease the debt amount. Either you have to be more productive and increase your salary to make it easier to pay down the debt, or you have to find additional income sources, or you have to lower your expenses. In the case of South Africa, the country either has to:
– become more productive (increase GDP – which will increase the amount of taxes)
– raise taxes through higher tax rates or finding new avenues to tax (which in turn can negatively affect GDP)
– decrease expenses
Increasing GDP is the more sustainable option, but the most difficult. Raising taxes is more immediate but less sustainable. Decreasing expenditure is, therefore, probably the most realistic solution. Stopping wasteful expenditure, and decreasing the public sector wage bill will go a long way to address the widening debt burden.
If not properly addressed, South Africa’s debt to GDP level risks on being on par with that of Italy (expected 2020 debt to GDP of 155%) – the problem child of Europe. Fortunately for Italy, interest rates on Euro debt are quite low and they have the additional benefit of strong European neighbours willing and able to bail them out. Unfortunately for South Africa, we’ll have to help ourselves. Whilst the saying goes that it’s not over until the fat lady sings, it appears that she is in the throes of warming up. The widening jaws between the country’s expenditure and revenue can still be shut, it is just a question of whether long-postponed structural reforms will finally be implemented.