Budget 2025: Stabilisation of government debt and sustainable economic growth needed

When Minister of Finance Enoch Godongwana delivers his Budget 2025 speech in Cape Town on Wednesday afternoon, economists will listen closely to hear what he has to say about stabilising government debt and stimulating sustainable economic growth.

Professor André Roux, economist at the Stellenbosch Business School, says he expects two major objectives to dominate: firstly, the stabilisation of government debt and secondly, the pursuit of rapid, inclusive and sustainable economic growth.

However, he points out that achieving these objectives is fraught with difficulties while the two are also at odds with each other.

“The concerns about the level and use of government debt have been well-chronicled. After bottoming out at a more-than-credible 28% of gross domestic product (GDP) 17 years ago, that ratio has soared to above 70%.

“The consequences are alarming. To start with, a sizeable portion of the debt has been used to partly finance current government expenditure, notably civil servant salaries and wages, various social grants and at times interest payable on existing government debt.”

Roux warns that this kind of spending, while appealing to economically disempowered voters, fails to create real wealth and merely leaves in its wake a long-term obligation on future taxpayers to repay debt and interest.

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Budget 2025 will have to deal with debt service costs

As it is, he says, the estimated spending on debt service costs over the next three years will account for almost 17% of total government spending or some 21% of expected revenue, second only to the amount budgeted for learning and culture.

“Spending on civil servants’ pay is equal to 14% of GDP, one of the highest ratios in the world. Between them, debt service costs and civil servant remuneration account for 61% of total government spending, crowding out the allocation of resources to, for instance, education, infrastructure development, or health care.”

Although the minister could use the higher-than-expected tax revenue windfall of two years ago, thanks to the commodity price boom and last year’s part of the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to slash government spending, this year, he has no rabbit under his hat.

Roux says this year, achieving primary surpluses may prove to be particularly difficult due to a number of militating factors, such as the slightly more favourable macroeconomic environment thanks to softer inflation and interest rates, largely suspended load shedding, and increasing business confidence. However, economic growth expectations for the next year or two remain uninspiring.

“This implies that the organic growth in the tax base will be mediocre at best, and we would expect the minister to accommodate the potential impact of the “Trump offensive” in his growth forecasts. Sars [South African Revenue Service] will be called upon to improve its tax collection performance, but there is a good chance that there will still be a shortfall.”

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The thorn in the side of Budget 2025: The public sector wage bill

He also says growth in the public sector wage bill is a key ingredient in the quest for fiscal control. “However, the recent announcement of a 5.5% salary increase for public servants puts a damper on this lever. Last year, the minister announced an early retirement scheme for public servants, and he will presumably provide an update on this.”

Roux also points out that further spending pressure persists from the social relief of distress (SRD) grant that has become a permanent feature and looks set to remain intact for at least another year. “There are even talks of expanding the reach of the grant or introducing a broad-based basic income grant (BIG).”

As always, he says, we should not lose sight of the fact that the budget speech is, in essence, a three-year review of projected government expenditure and revenue. “As such, its primary purpose is not to serve as a blueprint for sustained economic recovery and transformation.

“By spelling out the intended allocation of the revenue to various government programmes, the budget speech provides an indication of the government’s priority preferences and objectives. The Budget 2025 speech cannot be all things to all people.

“There will always be a gap between various stakeholders’ hopes, expectations and the ultimate reality and the minister can only attempt to narrow this gap as much as possible within the confines of economic and political expediency.”