How South Africa stumbled into a fiscal trap
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GUEST – Roy Havemann is Principal: Financial Sector Policy and Public Economics at Krutham (previously Intellidex).
Over the past decade, the interest rate that South Africa pays on its debt has consistently been above the economic growth rate. Mathematically, this means that debt grows as a percentage
of GDP. It becomes a “vicious circle”. Higher debt makes investors and ratings agencies nervous, meaning the interest rate they are prepared to pay for our debt rises. This increases borrowing costs and hurts investment spending, making fiscal consolidation
(and counter-cyclical fiscal policy) more and more difficult, making the fiscal position worse and raising the sovereign risk premium.
The interest rate rises again and the cycle continues. The National Treasury is keenly aware of this — and of the trade-off between services and fiscal consolidation. The Budget Review
put it plainly: “The 2024 Budget balances development and sustainable public finances. In the context of persistently low economic growth, the government will protect critical services, support economic growth through reforms and public investment, and stabilise
public debt… Rapid growth in debt-service costs chokes the economy and the public finances. The government is staying the course to narrow the budget deficit and stabilise debt. This year, for the first time since 2008/09, the government will achieve a primary
budget surplus. Debt will stabilise in 2025/26.”
Over the past decade, the interest rate that South Africa pays on its debt has consistently been above the economic growth rate. Mathematically, this means that debt grows as a percentage
of GDP. It becomes a “vicious circle”. Higher debt makes investors and ratings agencies nervous, meaning the interest rate they are prepared to pay for our debt rises. This increases borrowing costs and hurts investment spending, making fiscal consolidation
(and counter-cyclical fiscal policy) more and more difficult, making the fiscal position worse and raising the sovereign risk premium.
The interest rate rises again and the cycle continues. The National Treasury is keenly aware of this — and of the trade-off between services and fiscal consolidation. The Budget Review
put it plainly: “The 2024 Budget balances development and sustainable public finances. In the context of persistently low economic growth, the government will protect critical services, support economic growth through reforms and public investment, and stabilise
public debt… Rapid growth in debt-service costs chokes the economy and the public finances. The government is staying the course to narrow the budget deficit and stabilise debt. This year, for the first time since 2008/09, the government will achieve a primary
budget surplus. Debt will stabilise in 2025/26.”
