Public Debt :This is how it affects your bank balance

Public Debt :This is how it affects your bank balance

South Africa spends more than R300- billion every year paying off public debt. While it might seem that this expenditure has little impact on the day-to-day life of ordinary South Africans, public debt can have far-reaching consequences.

THE GROWING CONCERN OF DEBT

Public or national debt is money borrowed by a government to bridge the gap between the money it generates and its spending. It’s the same principle as taking out a personal loan, but to supply the funds needed to cover the country’s budget deficits.

According to Finance Minister Enoch Godongwana, the government will spend R302-billion in 2022/2023 on debt service costs. This as government debt reached R4.3-trillion and was projected to rise to R5.4-trillion over the medium term.

“This huge sum is owed to lenders domestically and around the world! It incurs large debt-service costs … These costs are larger than spending on each of health, policing or basic education. For this reason and to support the economic recovery, in this budget we are reducing the fiscal deficit and stabilising debt,” Minister Godongwana says.

This is the first time since 2015 that we are reducing the borrowing requirement, using some of the extra revenue we have collected. The borrowing requirement decreases by R135.8-billion this year and a total of R131.5-billion over the next two years

According to estimates by the National Treasury, the projected increase could see the government’s expenditure on servicing debt top as much as R1- trillion over the next three years. Even at the current repayment, for every R5 that the government raises, R1 is spent on servicing the debt.

This debt featured heavily in Minister Godongwana’s Budget Speech and has been the topic of discussion in Parliament, primarily because high and unsustainable debt hurts both the economy and South African citizens.

During his speech, Minister Godongwana said South Africa’s “debt burden remains a matter of serious concern”, and the National Treasury has used the windfall from tax collections to cut some of the country’s debt.

“This is the first time since 2015 that we are reducing the borrowing requirement, using some of the extra revenue we have collected. The borrowing requirement decreases by R135.8-billion this year and a total of R131.5-billion over the next two years,” said Minister Godongwana.

He explains that the country consistently spends more than it receives in tax revenues.

“This, together with the composition of spending, did not meaningfully increase growth. Instead of getting higher growth from fiscal expansion, our debt continued to rise,” -Honourable Godongwana.

FEWER RANDS FOR THE AVERAGE SOUTH AFRICAN

While the public debt may seem like large sums far removed from your monthly budget, it can affect your pocket.

For a start, the funds used to pay off the national debt come out of the national budget, meaning they could ideally be put to better purposes, such as service delivery or improving public infrastructure.

The higher the amount the country needs to pay to service its debts, the less tax revenue is available to spend on other governmental services. This impacts citizens’ standard of living, especially those living in poverty who rely on government services and social assistance.

For example, if an additional R300-billion was added to the health department’s budget of R15.6-billion, the government could build more hospitals and improve service delivery. This would reduce the need for private healthcare and the need for you to subscribe to medical aid – effectively putting more money in your pocket.

Similarly, if an additional R300-billion was added to the R24.6-billion allocated to provincial education departments, school fees could be reduced for all learners – offering parents some financial relief.

But South Africa’s large national debt, and its ability to repay it, comes at an even higher cost – it can be used as a factor in determining the country’s credit rating.

South Africa has weathered several credit rating downgrades in the last few years. Each one increases the costs of borrowing and servicing public debt and lowers investor confidence. It can also lead to deteriorating asset values (such as retirement, other savings and property) and a reduction in disposable income for many.

The low investment confidence can also lead to a lack of funding for businesses, and those companies forced to shut down due to financial strain will end up laying off workers.

It could cause more depreciation of the Rand, which increases the price of imported goods and makes travelling overseas more costly. It could also lead to raised inflation, which would see the contents of your grocery trolley increasing.

While public debt may seem like a complicated economic concept, it has a direct effect on every household. Reducing national debt can help free up funds to boost essential services and keep costs such as inflation low – ultimately saving citizens money. •

Sources:

www.ewn.co.zawww.dailymaverick.co.zawww.investopedia.comwww.businesstech.co.zawww.treasury.gov.zawww.reuters.com