Budget deficits, government debt and fiscal sustainability in South Africa

Whether the federal government’s budget is fiscally sustainable or not is generally measured by the annual in the ratio of debt held by the public to GDP (Levit 2011). This is known as the debt-to-GDP ratio. Budget deficits will generally increase the level of total government debt. Temporary increases in the debt-to-GDP are not necessarily problematic. However, if the debt to GDP ratio is persistently rising, it is considered unsustainable. If GDP growth equals or exceeds the annual budget deficits as a percentage of GDP, meaning that the debt to GDP ratio would generally remain constant or fall, then the budget is considered sustainable. While there is no level of debt to GDP that is universally regarded as optimal, some budget reform proposals recommended maintaining the debt to GDP ratio at 60% or less going forward.

Net Lending (+) and net borrowing (-) (% of GDP)

South Africa’s net lending as a percentage of GDP was almost one between 2006 and 2007. It then fell sharply from 2008 to 2014. It actually became a deficit of around -6%. This shows that the deficit ballooned over the period. This sharp decline in net lending was brought about by the 2008/2009 global financial crisis. However, it continued to decline even way after the financial crisis. This is shown in the figure below:

  

Debt service on external debt

Over the period 2006 to 2016, South Africa’s debt service costs generally rose with the peak being reached between 2012 and 2013. Algeria’s servicing costs fell to almost zero between 2006 and 2007 and have remained at that level for the whole period. Nigeria and Egypt also had very low and stable debt servicing costs. This is despite the fact that Egypt was going through a revolution. Overally, South Africa’s debt servicing costs are higher than that of its counterparts. This is shown in the figure below:

GDP Growth Rate

Since GDP is the yardstick that is normally used to ascertain the economic growth trajectory of an economy, there is need to look at the GDP growth rate of South Africa and that of its counterparts. Only Algeria had a positive GDP growth rate over the period which rose from slightly below 2% to almost 4%. South Africa’s GDP growth rate fell from about 8% in 2006 to slightly above 2% in 2015. This also shows that the growing budget deficit is consistent with a falling GDP. This is shown in the figure below:

Inflation

Since economists who hold the Ricardian view insists that budget deficits are linked to a rise in inflation as the government may need to print more money to fund the deficit, there is need to also analyse inflation rates. Nigeria had the most fluctuations in inflation. The inflation rates for South Africa actually fell during the period. In this case there is no evidence to suggest a causal link between the country’s budget deficit and inflation. The findings are shown in the following table and graph:

Inflation, GDP deflator (annual %)

	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015
South Africa	6.2741538	8.8492898	8.8315689	7.5045113	6.3510265	6.532211	5.2866962	6.5876164	5.7012726	3.9568974
Nigeria	17.337782	4.7707422	10.835298	-4.3205733	103.8228	9.5100963	9.2712447	5.8732956	4.6626237	2.8636644
Algeria	10.546696	6.3953443	15.310571	-11.161609	16.119976	18.228012	7.4523735	-0.1122779	-0.4120846	-6.024195
Egypt,Arab Rep.	7.3608596	12.595542	12.208417	11.172961	10.115357	11.605866	18.228899	9.0038427	11.512876	10.940663

Debt to GDP ratio

South Africa’s debt to GDP ratio rose from 23.3% in 2007/2008 to almost 50% in 2016. The debt growth is worrisome as this may make it unsustainable for the government as it has to meet rising debt servicing costs. But since some economists argue that a debt to GDP ratio of 60% or less is regarded as optimal, there may be no need to worry if the government maintains it at a level below 60%. The data is shown in the table below:

South Africa’s real GDP growth has been falling since 2007/08 from 4.6% to 2% in 2014 whilst the debt as percentage of GDP has been increasing from 23.3% in 2007/08 to 39.7% in 2013/14 fiscal year. The trend is government debt has been increasing due to deficits whilst economic growth has been falling.

Conclusions

The running of a budget deficit by South Africa during the 2008 global financial crisis was justifiable. It is reasonable to allow a budget deficit during a temporary downturn in economic activity. During that period the South African economy was negatively affected and the government had to increase its spending in order to stimulate aggregate demand.

It can be concluded that South Africa’s persistently rising budget deficits may raise a red flag to investors of an existing or pending ‘fiscal crisis’. If South Africa continues to fund its budget deficit with debt stock which surpasses the growth in output and income, investors will then require to be paid a higher rate of interest. They will need compensation to counter the risk that they might not be paid or that the value of their securities would be eroded by inflation (which has risen from 4.82% in 2006 to 7.07% in 2016). Other countries experiences, like Zimbabwe for instance as highlighted by Makochekanwa (2008), suggest that a loss of investor confidence can arise abruptly during periods of budget deficits or uncertainty.

South African budget deficits are not going to be sustainable in the long run because of the nature of the expenditure such as social services which account for R884 billion which is almost half of the total budget. A high percentage of the budget should go towards investment such as agriculture, mining etc. and not financing state enterprises that are loss making.