Too much tax and too much debt in budget

As was the case with his predecessor, Pravin Gordhan, Finance Minister Nhlanhla Nene's medium-term budget policy statement tabled in Parliament today is still based on an unsustainable model of a "developmental state" with budget deficits, mounting government debt and onerous taxation. This is according to trade union Solidarity. According to Nene, almost 10,5% of next year's tax revenue would be spent on debt service costs.

According to Paul Joubert, senior economics researcher at the Solidarity Research Institute (SRI), it brings no real tax relief for punch drunk taxpayers; in fact talk concerning higher taxes now abounds. The budget policy statement falls short of sufficiently curbing the growth of the South African welfare state. A disturbing accumulation of government debt can still be observed.

The cost of government debt expressed as a percentage of tax revenue has increased steadily since 2008. At the moment, the increase is occurring in an environment of low interest rates, continued inflation and rand weakness. Should an upswing in interest rates occur, increasingly more government spending would be spent on interest on government loans, and this at a time during which it has become increasingly hard for the National Treasury to collect taxes.

Joubert emphasised the precarious state of South Africa's national debt. "Government debt has been rising over the past decade, particularly over the past five years. Currently, it amounts to R1,8 trillion, not including direct government debt guarantees for financially unsound organisations such as Sanral, Transnet, SAA and Eskom."

"While the current environment of unusually low interest rates means that government debt service costs as a percentage of government revenue is currently only 10,5%, there is in fact a significant risk should there be any normalisation of interest rates. While the cost of government bonds is fixed in the short term, an increase in interest rates will make it more expensive for government to incur new debt. The recent downgrading by major credit rating agencies in 2014 underlines this concern."

"Should interest rates return to the levels of a decade ago, national debt servicing costs expressed as a percentage of government revenue could rise to around 18,5%. Such a debt service burden will be tough to bear and will further haunt the economy in the form of higher taxation or higher inflation," Joubert added.

Statement issued by Paul Joubert, Senior economic researcher: Solidarity, October 22 2014

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