South Africa’s mountain of debt – and increased tax revenue

Thalia Petousis, portfolio manager at Allan Gray, said South Africa could move slightly closer to a balanced primary budget thanks to tax revenue increases.

A balanced primary budget would mean that government revenue would be enough to cover non-interest expenditures. This has not happened in South Africa since 2008.

In 2021, the budget deficit stood at 5.7% of GDP. For this year, Absa forecasted a main budget deficit of R310 billion – 4.6% of GDP. 

In his medium-term budget last year, finance minister Enoch Godongwana said that by the end of 2023/24, revenue would exceed non-interest spending for the first time in 15 years.

He said that achieving this will rebuild “fiscal space and renew real spending growth in key policy areas that support the economy.”

The government’s debt burden is substantial, said Godongwana. The debt burden increased from R577 billion in 2007/08 to over R4 trillion in 2021/22.

GDP has not grown as fast as the country’s debt burden. The debt-to-GDP ratio has increased from 27.8% in 2008 to 69.9% in 2021.

This means that South Africa’s total debt is equal to 69.9% of our latest GDP figure.

In last year’s budget, debt servicing costs cost the state over R300 billion, more than the government budget for economic development and general public services combined. 

Tax revenue increase

A tax revenue increase might be able to offset the high levels of spending in government.

SARS commissioner Edward Kieswetter said that the South African Revenue Service (SARS) would leave no stone unturned to meet their tax revenue target of R1.68 trillion.

In an interview on the PSG Big Think video series, Kieswetter acknowledged that it would be harder to meet the revenue collection goal, given the impact that Eskom is having on growth.

“Eskom will have a material impact on SARS’s ability to collect revenue,” he said.

The greatest revenue growth opportunity for SARS is in what Kieswetter calls the “compliance dividend”.

This compliance dividend refers to the extra revenue that SARS can collect through a focused effort to enforce tax rules. Kieswetter said that low levels of tax compliance create low-hanging fruit to increase this ‘compliance dividend’.

“We understand that every additional rand we collect is another rand that the minister of finance does not have to borrow from an expensive market.”