Towards debt sustainability – improving the composition of government spending
By Kay Walsh, Economist, Strategy and Innovation, Deloitte
Deloitte Budget 2012 Expectations
Johannesburg, 25 January 2012 - Persistent budget deficits and unsustainable levels of government debt are currently a focal issue in the global economy. Issues of debt sustainability are likely to dominate the headlines over the course of 2012 – especially in Europe and the United States. As it stands South Africa’s debt-to-GDP ratio is well below the self-imposed 40 percent limit on net debt, which compares favourably with much of Europe and the developed world (Italy for example has a debt-to-GDP ratio of almost 120 percent).
This does not mean however, that the South African government can afford to become complacent. Earlier this month (January 2012), global rating agency Fitch, revised the outlook on South Africa’s long-term debt from stable to negative. This is a possible precursor to South Africa’s overall credit rating being downgraded. In doing so, Fitch noted that the country’s failure to create jobs and foster economic growth were among their greatest concerns. The inability of the country to nurture growth, combined impact of the recent recession, had contributed to a widening government budget deficit and rising overall debt levels.
In the October 2011, medium term budget policy statement, the Minister of Finance, Pravin Gordhan reaffirmed that South Africa had commenced a process of fiscal consolidation. In striving to achieve a gradual reduction in the overall budget deficit, both the rate and composition of government spending will need to be considered. It is generally accepted that the level of savings and investment in an economy is key to determining a country’s long-term growth potential and that countries that rely too heavily on credit fuelled consumption spending do so at the expense of future growth.
In recent years, the ratio of government consumption expenditure to public investment spending in South Africa has increased. The deterioration is due in part to an increase in the contribution of the public sector wage bill to non-interest expenditure, which in the last three years has risen from 35 to 40 per cent. This is due to a combination of above-inflation average wage increases and accelerated hiring by the government sector in the wake of the recent recession. Over the same period many municipalities and provincial government departments failed to spend the budgets allocated to them for infrastructure.
In the 2011 Medium Term Budget Policy Statement, Pravin Gordhan affirmed that South Africa is committed to improving the composition of expenditure by moderating the government wage bill and at the same time accelerating investment. We expect that measures to address the imbalances in the current composition of government spending, which could include a moderation in the cost-of-living adjustments to wages for government employees, will be announced in the upcoming National Budget.
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