MTBPS: lowering government spending and growing the economy will bring down debt

South African Finance Minister Enoch Godongwana’s projection in the Medium-Term Budget Policy Statement (MTBPS) that the debt ratio will stabilise at 77.7% of GDP before declining may be overly optimistic, according to Arthur Kamp, Chief Economist of Sanlam Investment Group. It will depend on expenditure restraint and growing the economy.

Curtailing government expenditure was one of the key features of the minister’s speech. He stressed the need for restraint in the public service wage bill, but this has proven very difficult to implement in the past few years. The MTBPS also allocated no additional financial support, beyond what has already been announced for Eskom, to state-owned entities (SOEs).

However, rising interest payments on government debt are now crowding out spending on other priorities, particularly social relief. In the medium term, government will have to make provision for the ending of the Social Relief of Distress grant after the latest one-year extension, and there are other looming needs, including funding for Transnet (if it meets certain conditions) and the National Health system.

This means the South African economy needs to grow faster to reduce the unemployment rate and generate more tax revenue.

Listen to an analysis of the details of the MTBPS below: