20% of your tax is used to pay government debt

Of all the tax collected in South Africa, 20% goes to just servicing the government’s massive R5.2 trillion debt pile. As debt-servicing costs surge, it threatens to crowd out expenditure on crucial sectors such as education and healthcare. 

South Africa’s financial health has declined rapidly in the past decade, with big increases in government spending not translating into meaningful economic growth. 

The national government has run a budget deficit for the past 16 years, with the last surplus seen in the 2007/2008 financial year when Trevor Manual was Finance Minister. 

Effectively, the government has been spending more money than it collects through taxes and has been funding this expenditure by raising debt. 

While a deficit is not a bad thing, running consistent deficits can result in a country entering a debt spiral where new debt is issued to service existing debt. 

Old Mutual investment strategist Izak Odendaal told Daily Investor that the depth of destruction under President Zuma was far worse than many people realised at the time. 

After coming to power in 2008, Zuma swiftly placed Pravin Gordhan in charge of the nation’s finances, after which spending spiked and the economy stagnated. 

This was coupled with weak revenue collection as SARS was gutted through state capture, and state-owned enterprises were saddled with unsustainable debt burdens. 

Odendaal said cleaning up the mess will take time, with fiscal consolidation being the trickiest problem for the new government to tackle. 

“South Africa cannot afford not to stabilise a debt-to-GDP ratio that has almost doubled in the past decade and tackle a debt burden that has reached R5.2 trillion.” 

“It is relatively easy for the various coalition partners to agree on feel-good economic reforms that lead to private investment and photo opportunities for hard hat-wearing politicians.” 

“It is much more difficult to commit to being disciplined with state money when each party has its own spending priorities.”

To illustrate the dire financial health of the country, Odendaal said 20 cents of every rand collected by SARS goes towards servicing the country’s debt. 

The Treasury said in its February budget that debt-servicing costs now absorb a larger share of the budget than basic education, social protection, or health.

This does not mean that 20% of the country’s tax is used to pay off the government’s debt. It is merely being used to make the interest payments on that debt. 

However, there are signs that things might be improving, with the National Treasury committing to fiscal consolidation. 

The government posted its first primary budget surplus in 15 years for the 2022/23 financial year, hailed as a positive step towards tackling its massive debt burden. 

A primary budget surplus means that the government’s revenue exceeded non-interest expenditure for the financial year. 

When interest payments on the government’s debt are factored in, this will swing into a deficit, but it does mean the government will not add to its debt pile. 

Odendaal said the government’s reform program is also set to limit any increases to its debt-to-GDP ratio by boosting economic growth. 

The 2024 New Dawn is different from the false Dawn South Africa experienced in 2019, as key reforms are already underway.

“The new government just needs to keep its foot on the accelerator and not hit the brakes. But no one should be unrealistic. If everything had been easy, it would have been done by now.” 

A larger-than-expected cabinet has already dealt a blow to hopes for a slimmed down government and may be a sign that expenditure will be pushed upwards. 

For similar reasons, the bloated state bureaucracy might not shrink, warned Odendaal. 

“But, there needn’t be too much reinvention of the wheel as fiscal consolidation is something that has been underway for some time and should continue, though the exact contours could shift somewhat under the new coalition.”