How Government Debt Affects the People

During his budget speech in March, Minister of Finance Enoch Godongwana highlighted a significant concern: South Africa spends over 22 cents of every rand collected in taxes solely on interest payments for government debt.

The debt-to-GDP ratio indicates the country’s debt as a proportion of its gross domestic product (GDP), representing the total value of goods and services produced in South Africa within a year. Currently, this ratio exceeds 76%.

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The magnitude of the national debt is not merely a theoretical number. The funds allocated for repaying creditors, both local and international, detract from essential government programs, like social welfare initiatives.

This year, debt service expenses — the interest costs incurred by the government on borrowed money — are expected to reach nearly R390 billion, surpassing the expenditures for both education and health services.

What constitutes government debt?

Governments globally borrow money to balance their budgets, primarily by issuing short-term loans known as Treasury Bills and long-term loans termed bonds. These are ‘IOUs’ backed by the government and are generally purchased by large financial institutions such as banks, retirement funds, and insurance companies. Approximately 25% of South Africa’s debt is held by foreign entities.

How did we arrive at this point?

Upon its inception in 1994, the democratic government faced a debt ratio of 43%.

The ratio began to decline in the late 1990s and saw a more rapid decrease during the economic boom in the 2000s, reaching about 24% by 2007.

However, the global financial crisis caused a downturn, leading the government to spend beyond its tax revenues. Additional challenges arose due to corruption and mismanagement.

Since 2011, fiscal policy has focused on stabilizing the national debt.

Efforts to stabilize debt

To stabilize the national debt, the government must close the gap between its revenues and expenditures. Year after year, when spending outpaces revenue, borrowing increases. Currently, the budget deficit — the difference between spending and revenue — stands at approximately 5% of GDP.

Reducing the budget deficit to around 3% of GDP is essential to stabilize the debt-to-GDP ratio, which would lead to a ‘primary surplus’ — meaning revenues exceed non-interest expenditures.

By maintaining a primary surplus, Godongwana informed Parliament, the government can gradually lower debt service costs as a percentage of its revenue. This will allow for increased investments in services and establish reserves against future economic shocks like the Covid pandemic.

How will this be achieved?

During periods of economic growth, tax revenue tends to rise, even without changes to tax rates. Increased corporate profits and higher employment levels lead to greater tax contributions. Conversely, in times of slow or stagnant economic growth, surpluses can only be achieved by increasing taxes or cutting government spending.

This explains the anticipated increase in the value-added tax (VAT) rate, should Parliament approve the budget, as well as the absence of tax relief for employees whose wages have risen due to inflation, pushing them into higher tax brackets.

The National Treasury acknowledges that achieving sustainable government finances often requires making tough decisions. However, the alternative is much worse: escalating inflation and interest rates, diminished investment, slower economic growth, and an increasing likelihood of crises that will disproportionately affect the most vulnerable populations.

Godongwana refrained from implementing higher corporate taxes or a wealth tax, despite calls from some commentators for such measures.

Proposed new guidelines

Treasury is currently contemplating the introduction of a ‘fiscal anchor’ — a system designed to prevent the recurrence of significant budget deficits.

Numerous countries have adopted such mechanisms, which can involve either general budgeting guidelines or specific numerical targets set by the minister or Parliament regarding fiscal deficits, debt levels, or government spending growth rates.

© 2025 GroundUp. This article was originally published here.

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