Budget credibility is brought into question by government inability to stabilise debt largely because of policy disarray widening the divergence between budget plans and execution, says former National Treasury budget head Michael Sachs.
Speaking at the inaugural National Treasury’s Public Economics Conference on Wednesday, Sachs warned that if this continues it will lead to weak credibility, which lowers the state’s ability to redistribute resources and access long-term capital at low interest rates.
“[We] must align government policy agenda with its fiscus agenda. This response to policy incoherence has eroded the credibility, performance and quality of the medium-term fiscal framework,” said Sachs.
After years of “painful efforts” to stabilise the public finances, the weakening of macro fiscal conditions has made the goal of debt stabilisation even more distant.
Despite intensifying austerity, SA appears no closer to consolidating its fiscal position.
Sach’s statements come as finance minister Enoch Godongwana prepares to present his medium-term budget policy statement next month as SA confronts several major challenges in its public finances, including a rising debt burden, difficult spending choices, transformation of the electricity sector, and the need to support growth and employment creation.
Godongwana, who gave an opening address at the conference but focused only on unemployment, will give an overview of fiscal policy challenges and the spending choices at the medium-term budget statement presentation, which parliament has scheduled for October 25.
Deteriorated sharply
This is a difficult task for the minister after the Treasury’s recent guidance to all national and provincial departments to implement cost containment measures to close the fiscal gap for the 2023/24 fiscal year and the medium term.
Government finances deteriorated sharply in 2023 as tax receipts have fallen further behind the pace of spending.
Sakeliga executive director and economist Russell Lamberti said government borrowing has now swollen to about R100bn a quarter, from an already-imprudent R50bn a quarter just a year ago — with interest payments to service its overall debt spiralling up to nearly R100bn a quarter.
Absa said it revised its revenue forecast shortfall from R25bn to R39bn due mainly to prospects of slow growth and sharply weaker commodity prices.
“Counting [in] Eskom’s debt relief, we now expect a main budget deficit of 6.6% of GDP in 2023/24, up slightly from our previous forecast of 6.3%,” said Absa senior economist Miyelani Maluleke.
He said upward spending pressures continue to rise faster than inflation despite a subinflation pay settlement.
Spending pressures include spend on the social relief of distress grant.
Maluleke said government also appears determined to save the SA Post Office, now in business rescue, with the cabinet reportedly having approved further funding from the fiscus additional to the latest, R2.4bn bailout in the 2023 budget. It has asked for an additional R3.8bn.
Bailout demands
Transnet asked for R40bn in last year’s medium-term budget, but received only R5.8bn in the February budget. In June, Transnet told the parliament that its loan redemptions over the next five years would be R65bn, while its capex programme for the next five years would be about R100bn.
“This leaves it with a sizeable funding requirement, after operational cash flows are deducted. Overall, the above suggests that further bailout demands are likely unless the government embarks on a major effort to attract private capital into the rail and ports businesses,” said Maluleke.
RMB chief economist Isaah Mhlanga said the biggest constraint in ensuring that Treasury’s spending recommendations are fulfilled is the political cycle. During elections, political leaders find it hard to cut spending, especially current spending, and the country is heading for the 2024 general election.
“A senior political leader recently said to me that there is no way he can win the choice to cut spending ahead of an election,” Mhlanga said. “This suggests that the National Treasury is likely to experience political resistance to its spending cut proposals.”
Lamberti said the country’s fiscal deterioration amplifies policy desperation. He said government liabilities soared in the past 15 years while infrastructure investment was either neglected or wasteful, and economic value added stagnated.
“The result is that SA government bonds are less trustworthy than they once were,” Lamberti said. “Lenders require higher interest rates as compensation for taking the rising risk of lending to the SA government.”
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