Rising government debt servicing hinders social spending

The servicing of government’s rising debt is “crowding out” social spending in the country, says Finance Minister Enoch Godongwana.

The Minister on Wednesday delivered the Medium Term Budget Policy Statement in Parliament, where he explained the challenge posed to spending on social services.

“It is important… to point out that our debt levels and rising debt service costs are not problems in and of themselves.

“Our challenge is that rising debt service costs are crowding out necessary social spending, and our economy has not grown rapid enough to support increasing expenditure or our current debt levels. Therefore, this policy statement sets out our strategy for avoiding a fiscal crisis and preventing the build-up of systemic risks to the economy,” he said.

This strategy will include reduced spending and reprioritisation “while also taking concrete steps to support growth”.

“None of these decisions are taken lightly. They are taken with the short- and long-term viability of public finances in mind, and in the interests of balanced and inclusive growth,” Godongwana said.

He explained that over the past 15 years, government’s spending has exceeded revenue, with government expected to borrow an average of some “R553 billion per year over the medium term”.

“As a result, coarse debt rises from R4.8 trillion in 2023/24 to R5.2 trillion in the next financial year. By 2025/26, it will exceed the R6 trillion impress. We now expect indecent government debt to stabilise at 77% of GDP by 2025/26. This is higher than the level we forecast in February.

“Over the next three years, debt service costs, as a share of revenue, will increase from 20.7% in 2023/24 to 22.1% in 2026/27. The cost, or interest of this debt, for next year alone, amounts to around R385.9 billion. Over the MTEF [Medium Term Expenditure Framework], interest costs amount to R1.3 trillion,” he said.

Tightening purse strings

The Minister said in this current financial year, spending has been brought down by some R21 billion, with further reductions of R64 billion and R69 billion contemplated for the 2024/25 and 2025/26 financial years.

“The implications of these adjustments will be partially offset by departments implementing the cost containment guidelines issued by National Treasury.

“It will also be offset by implementing control measures on payroll systems, in line with the directive issued by the Department of Public Service and Administration, as well as implementing the recommendations from the spending reviews conducted in the past two fiscal years.

“Government has made a strategic decision to allocate funds to sectors that are personnel heavy, such as Health, Education and Police Services,” Godongwana said. – SAnews.gov.za

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