“Never let a good crisis go to waste”. Winston Churchill

Have you ever stood on a cliff and felt the way your mind and body respond to the threat of being one step away from sure death?  It is a hypnotic experience as fear and excitement draws you closer and closer to the edge and into the moment until sanity prevails and you reluctantly step back from the inevitable.

The opening paragraph epitomises SA Inc’s current financial situation as we stand on the edge of a proverbial fiscal cliff while out government appears to be in a hypnotic state of denial.   The question is will sanity prevail or is already too late to step back and escape the inevitable debt spiral.

You are likely to hear a lot more about this in the next few weeks as we approach the medium term budget speech when our Minister of Finance is expected to announce plans to stabilize our current unsustainable debt trajectory.  Frustratingly it is not coming up with the solution that is the problem, but governments lack of willingness to deal with the issues that has everyone so concerned.

I would like to stress the problem of excessive debt is not unique to SA with the entire world up to their necks in debt post Covid-19 stimulus.

There are 6 known strategies for dealing with excessive debt.  The most effective way to escape a debt trap is to grow the economy,  this requires difficult to implement structural reforms.    The 2nd strategy is austerity, cut your expenses, in SA this is euphemism for reduce the government wage bill.  The 3rd strategy is to increase taxes, which is likely to go down like a lead balloon given an already overtaxed populace.

The 4th strategy is not a solution for an emerging market country like ours and that is to print money i.e. QE to fund government expenses, à la Zimbabwe here we come…  The 5th strategy is the much talked about prescribed assets where the domestic retirement savings pool is forced to finance government.   And the final plan, which is more like the final straw is when a government defaults on their debt forcing investors to take a “hair-cut”.

As a country we are at fork in the road and I secretly wonder if Covid-19 and the dire economic implications thereof is actually a blessing in disguise by forcing government to deal with the fiscal crisis before it is too late.    It is now or never.

 

Mark Williams
Mcomm, CFP®, HdipTax
T. 021-205 1133
Email. service@mwwealth.co.za

 

 

Debt spiral – deal with it now or never