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[Opinion] In my humble opinion (by: Leopold Scholtz)

January 2, 2014

THE year 2013 ended with the news that South Africa’s state debt was rising alarmingly high. While the debt equalled 27% of the country’s gross national product (GNP) five years ago, it has now risen to 40%.

State debt is, of course, a very common thing. Since the establishment of the Union of South Africa more than a century ago, the country has never been without debt. I would be extremely surprised of any country in the world can boast that its finances has never been in the red in modern history.

As a matter of fact, South Africa’s state debt is still rather modest. The USA’s debt is about 100% of their GDP. According to the US National Debt Clock website, it was $16 234 943 874 620,05 at 08:44 on December 30. (I have absolutely no conception of a number that high, but apparently it means that each citizen’s share is $54 310.55.)

Greece, one of the most spendthrift countries in the world, owes about 160% of its GDP. Even with draconian spending cuts, the Greeks hope to reduce it to 120% by 2020.

Germany, known as a hardworking and sober country, owes 81% of its GDP, while the equally frugal Netherlands figure is just over 71%.

Seen against this background, South Africa is not doing all that badly. According to a paper by Professor Ettienne Calitz, economist at the University of Stellenbosch, our country’s national government debt as a percentage of GDP stood at 47.2% in 1962.

It pretty much stayed in that vicinity during the 1960s and 70s, and went down in the 80s to a record low of 29.9 in 1981 and 31.5 in 1990, after which it shot up to 49.2 in 1994.

The two successive ministers of finance in the ANC government, Trevor Manuel and Pravin Gordhan, have been doing very well indeed ever since, hitting an all-time low of 23%  in 2007. The main reason was their strict financial discipline.

In 2007 and 2008 they even succeeded in producing budget surpluses, although this has obviously changed after the beginning of the global economic crisis in 2008. They deserve praise for this.

What is alarming about the newest figures (which were actually announced by Gordhan in his mini budget speech in October), is the dramatic tempo of the increase.

I know this is controversial among economists, but my common sense tells me a state cannot indefinitely go on spending more than it receives in earnings.

As any sensible housewife will tell you, spending more than you get in leaves you with three choices:
(a) To reduce your spending;
(b) To find ways to enhance your income; or
(c) To borrow in order to make up the deficit.

Governments generally go for a combination of all three. The problem with (c) is that you have to pay the money back, and with interest. And the worse state your economy is in, the more interest you usually have to pay.

The USA presently pays around $450bn a year in interest alone. That is not much less than the $673bn reserved for the military.

Nevertheless, borrowing money can be justified in certain circumstances, for instance to build a new harbour or airfield. If well planned, those kind of capital expenditures are sure to benefit the economy, in which case the money will flow back into the state coffers in the form of taxes.

What is unwise, however, is to borrow money simply in order to finance your running costs and here is where the alarm bells should be ringing in South Africa.

According to news reports, a “large part” of the loans is being used to finance state officials’ salaries. The impression one gets is that the gravy train’s pressure on the fiscus has simply become too great.

We have, for instance, a gigantic cabinet of 36 ministers and 32 deputy ministers, one of the biggest in the world.

By contrast, the Netherlands has a cabinet of 13 ministers and 7 deputy ministers.

Germany has 16 ministers and 36 deputies, while Britain gets by with 22 ministers and various other political appointees in junior positions.

This suggests that President Jacob Zuma’s need for political survival is trumping the need for a healthy financial discipline. He needs to dispense patronage in order to tie influential people to him.

After all, the resistance to his morally problematical personal life and the corruption allegations against him is building up, and he needs every ally he can lay his hands on.

Therefore, also, state spending on gifts to the poor and destitute has risen and will continue to rise. It is a method of “bribing” people to vote for the ANC, as we have seen just before the series of municipal by-elections in Potchefstroom/Tlokwe earlier this year.

Gordhan has done a sterling job thus far. He has proven himself to be one of the most capable ministers in government. But it seems as if he is losing the battle.

The coming year will show whether this is correct. One hopes not.

Leopold Scholtz is an independent political analyst who lives in Europe.

Source: Fin24

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