Mounting debt-service costs crowd out social and economic spending

2017-10-25 15:51 - Jaco Leuvennink

Cape Town - With state revenue under pressure and expenditure needs rising, an increasing share of tax collection will be diverted to settle interest payments on state debt.

The medium term budget policy statement (MTBPS) states that as gross debt expands due to increasing revenue shortfalls, debt service will remain the fastest-growing category of spending over the next three years.

Relative to the 2017 Budget projections, debt-service costs will be R1bn higher in 2017/18, R2.4bn higher in 2018/19 and R6bn higher in 2019/20. By 2020/21, government projects that nearly 15% of main budget revenue will go toward servicing debt. This crowds out the space to fund social and economic priorities.

The mini budget states nevertheless that over the next two years, the impact of higher borrowing will be partially offset by two factors. Lower interest rates have reduced short-term debt-service costs following the SA Reserve Bank’s decision to cut the repo rate. And the stronger than anticipated exchange rate has eased interest payments on debt denominated in foreign currency.

According to the budget statement gross loan debt is expected to increase from R2.5trn or 54.2% of GDP in 2017/18 to R3.4trn or 59.7% of GDP in 2020/21.

If higher economic growth or additional steps to narrow the budget deficit do not realise, the debt-to-GDP ratio is unlikely to stabilise over the medium term, the statement says.

* Visit our Mini Budget Special Issue for all the news, views and analysis.

SUBSCRIBE FOR FREE UPDATE: Get Fin24's top morning business news and opinions in your inbox.

Read Fin24's top stories trending on Twitter: