Continued focus on debt sustainability
By Kay Walsh, Economist, Strategy and Innovation
Deloitte Budget 2012 Expectations
Johannesburg, 23 January 2012 - In the 2011 Medium Term Budget Policy Statement (MTBS), Finance Minister Pravin Gordhan noted, that despite having adopted a counter-cyclical fiscal policy stance in the preceding three years to lessen the short-term impact of the global economic recession, principles of debt sustainability and intergenerational equity needed to be applied. The 2012 Budget is thus expected to contain supplementary discussion on this topic.
Despite the fall in tax revenue in the period following the onset of the global economic recession, government spending increased and according to a statement in the October 2011 MTBPS now constitutes a greater proportion of GDP than at any time since 1994... This has brought with it a burgeoning government borrowing requirement and a rapid increase in the total stock of debt. From a recent low of 24 per cent in 2008, the net government debt-to-GDP ratio is expected by National Treasury, to peak at government’s self-imposed limit of 40 per cent in 2015. While this is still well below the staggering debt-to-GDP ratios that governments in much of Europe and the rest of the developed world currently face (eg. 82% in France, 93% in Portugal, 76% in the U.K. and 95% in Ireland) there is a risk that lower than expected economic growth rates in South Africa will lead to disappointing tax revenue collections and that debt levels will mount more rapidly than anticipated.
With every budget, the government plays a balancing act between the needs of the present and the needs of the future. In order that future spending on social and economic services is not crowded out by the need to service increasing debt obligations, the government needs to manage these future commitments in a sustainable manner. Over the 2011/2012 fiscal year, the cost of servicing government debt (interest payments on debt) rose faster than any other category of spending. We can therefore expect Minister Gordhan to comment on this growing line item of the budget and possibly lay out a timeline for fiscal consolidation to stabilise the growth of government debt in the near term.
On a somewhat more positive note, the recent auction of South African 12 year government bonds in foreign markets by the Treasury saw the sale being oversubscribed by 100 per cent of the bonds’ $1.5 billion value. Furthermore, the bonds were bought at an interest rate of 4.66% - a promising indication that investors still hold South African government debt in high regard in terms of its sustainability. Nevertheless, action will need to be taken to ensure that sustainable debt levels are maintained.