Government is committed to reducing the national debt, but South Africa must not expect overnight miracles, reports Madeleine Wackernagel
Chris Liebenberg, the Minister of Finance, has primed the markets for an overrun on the budget deficit to about 6% of gross domestic product (GDP) this year. Longer term, his aim is to trim it by half a percentage point annually to reach 4,5% by 1999. But, argue some economists, that may be too little, too late to offset an explosion in the public debt.
Given that the government is committed to reducing the national debt and to that end pursuing a cautious and fiscally responsible course, such accusations are misplaced, says Maria Ramos, the deputy director general of finance. By cutting the budget deficit, we are adding less to the overall debt levels every year, she says, so fears of a public debt trap are exaggerated.
The crux of the argument is whether the governments outlay adds to the countrys asset base or goes on current spending. Investment in education, healthcare and infrastructure adds value; bloated government bureaucracy, however, is wasteful. South Africa, says Adam Jacobs, economist at Amalgamated Banks of South Africa (Absa), must become more productive: we cannot spend more than we earn. And while the government is under increasing pressure to spend now, future generations will suffer if the national debt spirals out of control.
On international comparisons, South Africa, with public debt running at about 58% of GDP, is not the worst offender. The Maastricht conditions for European monetary and economic union set an upper limit of 60%: Belgium, Italy, Greece and Ireland all exceed that by significant margins. But Europes mavericks can take comfort in relatively low short- term interest rates, thereby reducing the roll-over effect on the cumulative debt.
South Africas debt has increased at an alarming rate: from a level of 38% in 1988 to an estimated 58% this year. Whats worse is the increase has coincided with a period of strong growth. During an upswing the total debt should decline as the rate of addition to the debt rises at a slower pace than the increase in GDP. Thats the theory at least. In reality, revenue collection is poor, so taxation receipts have not improved in line with expectations; and the transition phase has placed an additional burden on the fiscus.
Peter Hilsen-Rath, economist at Syfrets, believes that as long as expenditure is efficient, with marginal benefits outweighing the marginal costs of debt, it will add economic value.
Thus, spending on education, healthcare, housing and infrastructure all add to the public good and the rewards will be reaped in the longer term. Present government expenditure is on a downward, or even flat, trajectory, while investment is increasing, which augurs well for future productivity.
Others are not so sanguine. Edward Osborne of Edey Rogers & Company says the effect of the interest bill growing at a higher rate than GDP is exponential: more and more money must be raised to fill the gap. As South Africa suffers from a constrained tax base, with limited revenue resources, the odds are against the state running a surplus in the short term. And even if the budget deficit were reduced to 4,5% of GDP, the core surplus would not be sufficient to offset the exponential growth of the interest element. The result a public debt trap.
In the long term, the only way out is growth: greater efficiency, increased productivity, improved competitiveness. The parameters are in place, says Dennis Dykes, chief economist of Nedcor. The government is pursuing the correct policies to attract investment, local and foreign, and to broaden capacity and increase the tax base growing the pie, in other words.
Ramos concurs: The fundamentals are very positive, but our targets must reflect reality we cannot achieve everything at once. Our first priority is expanding economic capacity to ensure that growth does not peter out in the next few years. That does not mean were being complacent about the public debt quite the reverse.