22% of your tax is spent on the government’s debt

22 cents of every R1 collected in tax is spent on servicing the government’s R5.46 trillion debt pile, which has been built up by the state running budget deficits for the past 15 years. 

Running a budget deficit is not a bad thing in itself. However, if a government runs consistent deficits, then it may result in a debt spiral where new debt is issued to cover existing debt. 

That is exactly what the South African government has done since the 2007/08 financial year, when it last managed to balance the budget. 

Things changed quickly after Jacob Zuma dethroned Thabo Mbeki as ANC President. Pravin Gordhan took over from Trevor Manuel as Finance Minister, after which government spending spiked.

Crucially, South Africa’s strong GDP growth during the Mbeki era stopped, meaning the country’s debt-to-GDP ratio skyrocketed.

In its Macroeconomic Policy Review earlier this year, the National Treasury said the rapid rise in public debt is the most significant trend besides South Africa’s poor economic growth. 

In 2008/09, gross loan debt amounted to R627 billion, or 26% of GDP, and net loan debt was R526 billion, or 21.8% of GDP. 

By this year’s Medium-Term Budget Policy Statement (MTBPS), the government’s gross loan debt had reached R5.46 trillion, or 72.6% of GDP.

The government’s rising debt pile has resulted in the cost of servicing this debt growing significantly. 

In October’s MTBPS, Finance Minister Enoch Godongwana said that debt-servicing costs will reach R388.9 billion in the current financial year – over R1 billion per day. 

“Put differently, this means for every one rand of revenue that the government raises this year, 22 cents of this is paid in debt-service costs,” Godongwana said. 

The minister said South Africa’s debt pile is unsustainable. Debt-servicing costs have become the largest component of government spending and are rising faster than economic growth.

“To deal with this problem, we have taken difficult steps to reduce the budget deficit,” Godongwana explained. 

Since becoming Finance Minister in 2021, Godongwana has been charged with limiting the government’s spending while increasing tax revenue without imposing significant tax hikes. 

So far, he and his team appear to be pulling this off, with the government achieving its first primary budget surplus in 15 years in the previous financial year. 

“The primary surplus is not a pot of money. Rather, it is the difference between what the government spends, excluding debt-service costs and what the government collects in revenue,” Godongwana said. 

A primary budget surplus is vital to reduce the government’s need to borrow money to fund expenditures, thus limiting the issuance of new debt and the growth of the existing debt pile. 

This will result in the main budget deficit declining from 4.7% of GDP in 2024/25 to 3.4% in 2027/28, and the primary surplus will continue to grow. 

The primary surplus will be sufficient for debt to stabilise at 75.5% in 2025/26.

Debt will then decline over the rest of this decade. The key impact of this is that debt-service costs will also stabilise and begin to decline over the next few years.

This should free up billions for the government to spend in other areas that may promote economic growth or protect individuals through the ‘social wage’. 

However, there are significant threats to this outlook as the country’s economic growth remains lacklustre, and public servants continue to demand above-inflation wage increases. 

Low economic growth, coupled with high interest rates, has resulted in the government paying around 10% in interest on its debt, while its income has only grown by 6% as tax revenue correlates closely with economic growth. 

Old Mutual Wealth investment strategist Izak Odendaal said this gap started widening about a decade ago as the county’s economic growth slowed.  

Before then, the nominal economic growth rate was higher than the government’s borrowing costs, and debt levels were sustainable. 

As growth slowed, the market was increasingly concerned about South Africa’s fiscal sustainability, pushing up bond yields.

Higher borrowing costs, in turn, put downward pressure on economic activity as more money was required to pay the interest on the government’s debt burden.  

This created a vicious cycle that has played out over the last decade and has finally shown signs of reversing.