South Africa can avoid a debt spiral, but it will be painful  

South Africa can avoid a debt spiral if the government is willing to make difficult decisions that may prove politically unpopular, particularly by cutting its spending.

This is feedback from Citadel chief economist Maarten Ackerman, following the Medium-Term Budget Policy Statement (MTBPS). 

During his speech, Finance Minister Enoch Godongwana said government spending has exceeded revenue since the 2008 global financial crisis, which has resulted in debt growing at a faster rate than the economy. 

Godongwana said the consolidated budget deficit has risen to 4.9% of GDP in 2023/24 compared with the estimate of 4% in the 2023 Budget. 

The National Treasury reported that the deficit was R14.6 billion in September from R3.3 billion a year earlier. 

This resulted in the main budget deficit for the first six months of the government’s financial year growing to R253 billion – a year-on-year increase of 54%.

To finance this growing deficit, Godongwana said the National Treasury will increase its borrowing rate. 

These rising annual budget deficits have reached an extent where the government will borrow an average of R553 billion annually over the medium term.

This means that the state will borrow R1.5 billion per day to fill the gap between revenue and expenses.

As a result, gross debt will rise from R4.8 trillion in the current financial year to R5.2 trillion in the next financial year. By 2025/26, it will exceed R6 trillion.

However, Ackerman said this does not necessarily constitute a debt spiral as the country’s debt-to-GDP ratio currently sits at 77%. 

A ratio of 90% is considered the tipping point when an economy enters a debt spiral that is very difficult to get out of. 

Ackerman was still deeply concerned about the announcement that the government’s debt as a percentage of the size of the economy is expected to increase to 77%. 

A study by the World Bank shows that countries whose debt exceeds 77% as a percentage of GDP for prolonged periods experience significant slowdowns in economic growth.

This is something the country cannot afford, Ackerman said, given its already stagnant economy. 

“The budget has two sides, revenue and expenses, and we know that in the current situation, we are faced with a concerning budget deficit because the government is spending too much,” Ackerman said. 

“Given local structural issues and external factors like the commodities cycle and South Africa not getting the tax revenue we hoped for, the right message would have been austerity and cutting back.”

“Some of this has been mentioned, but unfortunately, the current government has not demonstrated that they can cut back on expenses – especially not ahead of the upcoming elections.” 

Ackerman said the government needed to focus more sharply on getting the economy growing faster, which would have allowed them to collect more taxes and could have provided the revenue that was needed to fix the budget shortfall.