The South African government is spending nearly R50 billion a month more than what it collects in taxes, and the situation is getting worse.
This is the warning from economist Mike Schussler, who said rapidly-increasing government debt is creating a “very, very deep hole”.
Speaking to eNCA, Schussler said the government’s budget reveals that the country is heading to a deficit of between R60 billion and R65 billion per month.
“This means we are spending R2 billion per day more than what we get in income from taxes,” he said.
Schussler said that while COVID-19 and the lockdown has aggravated the situation, the country was already running at a big deficit before the pandemic hit.
The projected deficit for this year was expected to be around R325 billion, but the pandemic has pushed this up to between R710 billion and R800 billion.
The higher deficit is a result of lower tax collection – which is expected to be down by around R313 billion – and higher spending on grants, hospitals, and other COVID-19 related matters.
Schussler said the lower tax collections are also partly a result of the cigarette and alcohol ban, people driving less, people losing their jobs, and lower consumer spending.
Filling the hole
The combination of lower tax collections and higher government spending is resulting in a big debt burden for South Africa.
To fill this hole, the government has to borrow money – which comes at a higher cost because of the country’s recent credit rating downgrades.
“Because of the downgrades our debt is becoming more and more expensive,” said Schussler.
An IMF loan of around R70 billion covers 10% of the expected deficit, which comes at a low interest rate.
This gives the country some breathing room, but big spending cuts and tax increases are still required to make up this deficit.
Even with the loans from the New Development Bank and African Development Bank, the country will still have to raise a lot more money to cover the growing deficit.
“We will have to go back to the IMF, we will have to look at our pension funds, and we most likely have to enter the international markets again,” said Schussler.
“We are in very, very deep financial trouble in the next few years. It is a very difficult hole to get out of.”
The chart below, published by Schussler, shows the government’s monthly budget deficit in recent years.
Interview with economist Mike Schussler
Mike Schussler Twitter post
SA government is spending nearly R50 billion a month more than it collects in taxes. This is a very very deep hole. It will NOT be over soon and probably get deeper. Closing the hole will hurt make no mistake. pic.twitter.com/7naedcbxKp
— mike schussler (@mikeschussler) August 9, 2020