Government spending to remain restrained

Thursday, November 11, 2021

With debt service costs standing at 21 cents to the rand due to a high expenditure items like the public sector wage bill, the National Treasury has announced that spending will remain restrained over the next three years.

The National Treasury said this when Finance Minister Enoch Godongwana tabled his maiden mid-term budget at the National Assembly on Thursday.

“Over the next three years, spending will remain restrained. Government will avoid permanent increases in departmental or programme baselines, or further bailouts of state-owned companies, which would compromise fiscal sustainability.

“Instead, short-term tax windfalls will be targeted to reduce the budget deficit and fund temporary priorities, such as extended support for poor households and public employment,” the National Treasury said.

Treasury said government expenditure has exceeded revenue in every year since 2008/09. In that time, the consolidated budget has grown from R712.8 billion in 2008/09 to R2.13 trillion in 2021/22 – an average increase of 8.8% per year. Higher expenditure has not always been efficient or effective.

“Much of the increase was absorbed by a rising public-service wage bill, averaging about 35% of expenditure.

“The effectiveness of several large spending programmes is questionable, and state procurement systems often fail to deliver value for money. At the same time, debt-service costs will on average consume 21 cents of every rand collected in main budget revenue over the MTEF period.

Over the Medium-Term Expenditure Framework (MTEF) period, debt servicing payments are expected to average R334.5 billion a year – higher than projected spending on health, social development and peace and security.

The Medium-Term Expenditure Framework is basically the three-year spending plans of national and provincial governments published at the time of the budget.

Higher debt-service costs crowds-out spending on essential public services such as health, social development, and peace and security. Crowding out of spending refers to a fall in private investment or consumption as a result of increased government spending.

“Elevated debt redemptions [repayment of the principal and any outstanding interest on a bond] will further reduce fiscal space over the medium term as R423.4 billion of debt borrowed in previous years matures.

“In addition, the interest rate that government pays on its debt is higher than the GDP [gross domestic product] growth rate. In these circumstances, it is not possible to reduce the ratio of debt to GDP without running a primary budget surplus, as the stock of debt is increasing more quickly than the economy is growing.

“In summary, the position of the public finances is a brake on growth. Committing to higher levels of spending in the absence of faster economic growth will further undermine macroeconomic credibility, with increasingly detrimental effects on the economy.

The National Treasury said government’s commitment to support vulnerable households, particularly

given the impact of COVID-19, additional resources for social relief will be considered if the fiscal situation improves by February 2022.

“…rising government expenditure has not been matched by higher economic growth, increased productivity, or greater efficiency. Over the medium term, government will use the results of recent spending reviews to implement zero-based budgeting.

“This will shift the budget process from an incremental approach to baseline funding towards a more stringent approach that assesses programme effectiveness and realises greater value for public money.” – SAnews.gov.za

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