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South Africa’s growing reliance on debt as a means of filling government coffers is unsustainable and may lead us to the brink of an impending debt trap, according to Mazars’ South African tax team, responding to the finance minister’s medium-term , Tito Mboweni. budget policy statement on Wednesday (Oct 28).
Tertius Troost, Mazars tax manager in South Africa said: “We talk a lot about flattening the Covid-19 curve, but the government should also focus on flattening the debt curve. Debt is spiraling out of control – it started at a reasonable 30% in 2010 and is now expected to top 80% in 2020.
“We are headed straight for a debt trap, it’s like paying for your house with a credit card.”
Bernard Sacks, Mazars fiscal partner in South Africa, said: “In 2009, every rand the government spent bought us R1.60 in GDP. Now Mboweni is saying that each rand of public spending yields less than R1 in GDP. In other words, we are getting poorer and more and more in debt. “
The government, he said, needs to find a creative way to increase revenue to facilitate higher spending. “Clearly, the government cannot spend just to get out of the crisis.”
Growth has collapsed, said Reza Hendrickse, portfolio manager at PPS Investments. He said that in the context of South Africa’s public finances, the big question remains the growing debt burden.
South Africa’s debt-to-GDP ratio is now expected to peak at 95.3% in 2025/6, compared to 87.4% in 2023/4 prior, which is in line with the progressive shift of these targets over the years, Hendrickse said.
“The National Treasury is focused on trying to reduce the costs of debt service, which with current yields crowds out most of the investments and makes it difficult for the government to prioritize anything else,” he said.
Mike van der Westhuizen, Citadel’s portfolio manager, said June’s supplemental budget had already made it clear that South Africa was in dire financial straits. So, from that perspective, the medium-term budget offered very few surprises.
More worrying is the fact that the alarming trajectory of South Africa’s national debt, which is expected to reach 95.3% of GDP in 2025/26, is based on a number of very optimistic assumptions, ”he said.
He said that South Africa’s economic growth must exceed 3% for the country to escape its current debt spiral.
“But unfortunately, based on the Mboweni budget update, achieving this 3% does not seem realistic at all, given that the government is essentially diverting funds from productive spending on education and healthcare to shore up financially insolvent state-owned enterprises (SOEs). .
“While this will ensure that the additional appropriations for state-owned companies are deficit neutral, it is essentially stealing from Peter to give to Paul, or rearranging the loungers to hide the cracks that appear in the floor.”
Focus on growth instead of spending
Mike Teuchert, Mazars fiscal partner in South Africa, said the government should be geared towards growing the economy.
“We need to see a mindset shift from the government that it will focus less on social spending and bailing out bankrupt state-owned companies that are not contributing to growth, and more on the ways it can foster economic growth.”
Clearly demonstrating the precarious financial situation that South Africa finds itself in, where emerging and developing economies are expected to contract 3.3% this year before recovering to grow by 6% in 2021, the South African economy is expected to decline 7.8% in 2020 before recovering from a low. basis for achieving 3.3% growth in 2021, Van der Westhuizen said.
“In other words, the local economy is expected to fall twice that of our peers and to recover only in half.
“However, Mboweni’s speech lacked a sense of urgency as it did not address the concerns of local and foreign investors or provide any details on how the government intends to stabilize the growing budget deficit.
“Even more alarming, just four months after the supplemental budget, the expenditure figures were already higher than the June estimates, while the revenue figures were lower, facts that do not bode well for the government’s own forecasts” , said.
With only four months left until the February 2021 budget speech, if this same trend continues, the government will need to raise taxes, despite Mboweni’s note that the government will not rely on taxes to do the heavy lifting in terms of ease the burden of government debt, he said. Van der Westhuizen.
“The most controversial of these increases would be the rumored Solidarity Tax, which would simply put a positive spin on the estate tax in an attempt to foster goodwill,” he said.
David French, Mazars head of tax consulting in South Africa, said it was good for the minister to publicly express his view that tax increases are not the most effective means of generating revenue and that they can be detrimental to GDP.
“It sounds counterintuitive that you want to cut taxes, but the reality is, over time, this is what will stimulate much-needed growth,” Mazar’s Sacks said.
Read: South Africa Mid-Term Budget Summary 2020
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