How Does Government Debt Affect You in Person?

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The government accumulates debt by acquiring loans either from local or international lenders. A certain fraction of government debt is Rand dominated while the other is foreign currency dominated. The fraction which is Rand dominated is affected by the inflation rate while that which is foreign currency dominated is affected by both the inflation rate and exchange rate. When the South African Rand gets weaker against the United States (US) Dollar, government debt automatically increases whereas when the South African Rand gets stronger against the US Dollar, government debt automatically decreases. Unfortunately, the South African Rand has, for the longest time, been weak against the US Dollar. This implies that the exchange rate has not benefited government debt.

Here’s a simplified example of how government debt affects you in person: Thabo (28) works at Capital Holdings and walks away with a net salary of R15 000.00 every month. He spends R5000 towards rent, R800 towards transport, R500 towards electricity, R2000 on medical aid, R1200 on clothing, R1000 on entertainment, R2500 on grocery and sends R2000 home to his grandparents. Two years later Thabo meets the love of his life and decides to marry her. Since he doesn’t have money to pay Lobola, he decides to take up a loan of R30 000 at an interest rate of 15%p.a. over 24 months. His monthly loan instalment amounts to R1 625.00.

In order for Thabo to pay the monthly loan instalment, he needs to reduce spending on specific items. He decides to send R1700 home (instead of R2000), downgrade his medical aid to lower class which costs R1500, spend R2100 on grocery (instead of R2500), R1000 on clothing (instead of R1200) and R775 on entertainment (instead of R1000). By reducing these items, Thabo is able to collect R1625.00 necessary to settle his monthly loan instalment. In other words, Thabo’s quality of life has declined in the sense that he no longer spends the same amount of money on entertainment, health care, clothing and grocery. In addition, his grandparents suffer financially since their monthly stipend is reduced.

The same applies to government. The government receives about 97.7% of its revenue from taxes. When the economy is doing well the government collects more tax revenue and when the economy is not doing well the government collects less tax revenue. For the longest time, the South African economy has been characterised by economic contractions, meaning the economy has not been doing well at all. As a result, the government has been collecting less tax revenue. Meanwhile, the government has been acquiring loans from international lenders such as the International Monetary Fund (IMF). In 2011, as government debt increased due to 2008 financial crisis, the government, like Thabo, decided to cut spending on several items (e.g. health care, education, transport, infrastructure etc.) to settle its annual loan instalments. On average, the government’s annual loan instalment amounts to R203 billion while total government debt currently sits at R3.6 trillion. This is money that could have been used to create jobs for society and maintain government property.

For the average person on the street, this would translate into poor service delivery, a lack of job creation by government and consequently, a decline in the standard of living. To put this into context, when the government reduces spending on a particular item or programme (e.g. health care, education, social security) to settle its debt, government departments are affected in two ways; several government employees will be retrenched while office equipment and property will not be adequately maintained due to limited funding from government. This reduces the department’s  ability to provide public services and can easily be observed in several government departments that are under-staffed and characterised by obsolete office equipment and poorly maintained buildings. Also, for the taxpayer (working class), the accumulation of government debt today translates into future tax rate increases.