Government warns on rising debt: Budget 2021 spending goes to learning, grants and health

R144bn reduction in public sector wage bill identified over the next three years

Caiphus Kgosana Executive editor: opinions and analysis
Social development – which encompasses the payment of various grants – is allocated R335.3bn, and health spending increases to R248.8bn. File photo
Social development – which encompasses the payment of various grants – is allocated R335.3bn, and health spending increases to R248.8bn. File photo
Image: South African Gov‏ via Twitter.

The government has sounded another debt warning as costs to service its debt soar to just under R1-trillion over the next three years, eclipsing all items except social spending.

With combined debt rising to over R5-trillion in the financial year 2023/24, SA will pay R269bn in interest to bondholders and other lenders this financial year, rising to R338.6bn in the 2023/24 financial year.

The economy contracted by 7.2% in 2020, lower than the 7.8% projected by the National Treasury in the 2020 medium-term budget. It is expected to rebound in 2021 to record 3.3% growth.

While tax revenue is still R213bn below target, revenue service Sars was able to collect R99bn more than anticipated as the economy gradually reopened. This increase in revenue spells good news for workers, with the Treasury opting to scrap proposed tax increases of R40bn.

The Treasury warned in its Budget Review document that urgent steps were required to avoid the country entering into a debt spiral and possibly defaulting on repayments.

Government debt will stabilise at 88.9% of GDP by 2025/26 before declining and a surplus is recorded.

“Funds that could be spent on economic and social priorities are being redirected to pay local and overseas bondholders. Over the next three years, annual debt service payments exceed government spending on most functions including health, economic services, and peace and security.”

Government has identified R307bn in savings over the next three years, including a R144bn reduction in the wage bill.

The state will enter into this year’s wage negotiations with public sector unions having been buoyed by victories in the labour court affirming its refusal to honour the last leg of a costly three-year wage agreement.

A reduction in spending will help narrow the budget deficit from 14% to 6.3% in 2023/24.

The state needs to borrow R500bn this year to meet to make up for the revenue shortfall, but its borrowing requirements will decrease to R377bn by 2023/24.

Grim figures from Stats SA showing the unemployment rate 30.8%, with the number of unemployed people increasing from 4.3 million to 6.5 million, overshadowed this year’s budget.

Where budget expenditure will go

The state will spend R2-trillion each financial year for the next three years, the bulk of which goes towards social spending.

Learning and culture receives the lion’s share this year at R402.9bn. Social development — which encompasses the payment of various grants — is allocated R335.3bn, and health spending increases to R248.8bn.

Modest increases in the social grants system.
Modest increases in the social grants system.
Image: Nolo Moima

National departments receive R763.3bn of total allocations this year; provinces will share R639.5bn, while municipalities are allocated R138.5bn.

The government is setting aside R10bn for the vaccine rollout programme over the next two years, and another R8bn to provincial health departments towards fighting Covid-19 as part of economic-recovery efforts.

“As an immediate priority, the government will roll out a mass Covid-19 vaccination campaign to the public free of charge. This will save many lives and support a full reopening of the economy. Over time as global lockdowns are phased out in response to vaccination efforts, SA will benefit from the resumption of international goods trade and a resurgence in tourism.”

An amount of R18bn has been allocated to the Infrastructure Fund over the next three years to support the state’s huge infrastructure investment initiatives, expected to drive economic growth.

Work has begun on student accommodation, water and digital infrastructure projects.

Eskom's affect on economic growth

The Treasury expressed concern over slow structural reforms required to reverse economic decline, most specifically insufficient electricity supply to businesses and households.

“Unreliable electricity supply continues to throttle economic activity.”

The Independent Power Producer Office is expected to announce successful bids for an extra 2,000MW of emergency power in the next few weeks. These projects will start generating power from July 2022.

The government is also planning a new procurement process for 11,000MW from independent power producers, while regulations allowing municipalities to purchase directly from IPPs are now in place.

Other urgent reforms include speeding up digital migration to allow for the release of additional spectrum, speeding up the visa electronic system, reviewing regulations and processes that make it difficult to import scarce skills, and finalising a White Paper on national rail policy which could finally legislate in favour of private rail concessions.

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