Debt shadow: How government spends every rand you earn

The state is now paying 21 cents of every rand of our tax money to interest on government debt. Another 60 cents goes to the public service payroll and the remaining 19 cents to social grants.  Everything else is spent with borrowed money.

After Wednesday’s medium-term budget policy statement (MTBPS), it looks like the hippopotamus is now eating its tail as the government has failed to close its mouth.

“Our children and grandchildren will still pay off this debt,” says professor Jannie Rossouw, interim head of the Wits Business School. Most of the interest on South Africa’s loans goes to the pension funds that buy government bonds as investments.

“We cannot continue like this. It is crazy to keep giving money to SAA that contributes nothing to economic growth,” Rossouw said.

Johan Troskie, an independent tax lawyer, says the country is already in a debt crisis because it is unable to pay its sovereign debts. “The next step is that we become a bankrupt country with no higher ground left where we can say we will implement measures for economic growth and curtail spending.

“All these plans then become pie in the sky and we become a country where we struggle to survive – a country in which nobody will want to invest. The only way out then will be to raise taxes, but then tax morality kicks in, when higher taxes can simply not be collected.”

He is also disappointed with the R10 billion going to SAA, which could have been put back into the economy.

“If Minister Pravin Gordhan says we are financially illiterate because we fail to understand why he wants SAA to continue, I am putting up my hand to say I am financially illiterate, please educate me. Play open cards with us and show us how it would cost more to liquidate SAA than save it.”

Paul Marais, MD of NFB Asset Management, says the country’s escalating debt simply means that a greater and enlarging portion of revenue collected by the state will go to interest payments, which will make it more difficult to actually pay off the capital amount owing.

“This means it will remain outstanding for longer, ultimately requiring refinancing when the debt’s maturity date eventually arrives. Throughout this period new debt will also be required to either finance new projects, such as infrastructure or current consumption such as the National Health Insurance (NHI).”

All this indicates one thing for Marais – deterioration in the quality and sustainability of the state’s finances.

“As with any borrower whose financial position deteriorates over time, lenders will demand higher and higher rates of compensation for the greater and greater degree of risk they’re taking on.

“This means higher interest rates, which again means a larger and larger portion of revenue gets paid in the form of interest. This is the debt trap – more debt leads to more debt which leads to more debt, until default happens.”

Marais explains  the state is typically indebted in one of three ways:

• Outright loans to the state, such as government bonds and credit lines from supranational entities,
• Government guaranteed debt, typically for state owned enterprises such as the Land Bank and Eskom debt, and
• Conditional liabilities, such as shortfalls in the NHI when it is implemented.

These debts could be owned by anyone, but is typically held by other supranational organisations such as the World Bank and the African Development Bank, or institutional investors and, sometimes, corporates, Marais says.

For institutional investors, such as the Government Employees Pension Fund and more traditional pension funds and unit trust funds, the ultimate holders of government debt are South African citizens.

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