Fiscal policy is once again in the spotlight as the economic debate shifts from monetary policy to the poor state of public finances, with economists looking at options available to the government to ensure fiscal sustainability.
RMB bank, Africa’s leading corporate and investment bank, says the government has three options available to ensure fiscal sustainability including cutting spending, raising taxes, or a combination of the two.
“Given that it is an election year, either choice is undesirable politically, but the cost of not doing any to a desirable extent will be even more costly in the future,” RMB chief economist Isaah Mhlanga said.
“It is a choice between the popular vote in the 2024 national elections versus fiscal sustainability.”
SA’s fiscal situation is captured in the latest budget numbers that show a rapid deterioration in the fiscal position as revenue falls due to unfavourable global conditions and the harsh domestic environment.
According to Futuregrowth, the fiscal year-to-date data shows mounting evidence of fiscal slippage. Relative to the R275bn main budget deficit that National Treasury tabled for 2023/24, their year-to-date fiscal tracker suggests it is already R30bn behind target, equivalent to an estimated 0.5% of GDP.
Against this backdrop of constrained electricity production and fragile domestic growth, the combination of upside expenditure pressure and a smaller nominal GDP base are likely to contribute to deteriorated estimates when Treasury tables its medium-term budget policy statement in November, relative to the estimates tabled at the main budget in 2023.
Mhlanga said SA’s monetary policymakers have largely won the war on inflation, thanks to their commitment to the Reserve Bank’s constitutional mandate of maintaining price stability in the interest of balanced and sustainable growth. The debate has now shifted from monetary policy to fiscal policy, “and it is highly ideological and polarised”.
“There is a need for a credible growth story, which at this point can only be hoped for from the private sector — provided the government eases the business operating environment,” Mhlanga said.
“Without this credible growth strategy, any fiscal consolidation that will be shown will remain conditional on the actual implementation of economic reforms.”
He said reducing spending and increasing taxes is not likely to be sufficient to ensure fiscal sustainability, which points to the consequence that economic underperformance has on taxes.
“Economic growth remains constrained by load-shedding, logistics, low external demand and tighter monetary policy. Consequently, tax revenue collections, especially corporate income tax, are underperforming relative to budget expectations.”
Mhlanga said for the first five months of this fiscal year tax revenue collections were about R22bn behind budget, which implies a R53bn shortfall for the current fiscal year.
He said overspending in the first five months of financial year 2023/24 amounted to R15.3bn (or R184bn when annualised), primarily due to higher-than-budgeted salaries and wages.
“Combined, this implies nearly R240bn worth of fiscal slippage in the current fiscal year.”
Another glaring issue, and a major concern to the fiscus, is the significant problems facing Eskom.
Futuregrowth head of credit Olga Constantatos said following the February 2023 budget and the long-awaited debt relief plan for Eskom, “we said government has since 2008/09 provided the utility with R263.4bn in bailouts”.
These allocations failed to stem the collapse of Eskom’s balance sheet and operations, she said.
“This seems to indicate a recognition from the shareholder that a different approach to that undertaken since 2008 is needed, which is a positive step if the political will to deliver on this intention is found.”
The real test will come in the execution of this debt relief plan, which is where the shareholder has previously stumbled, she said.
Constantatos said Futuregrowth has outlined some of the outstanding conditions that would require monitoring and follow-up, especially regarding the outcome of the international consortium’s review of the coal-fleet and the implementation of its recommendations. Other areas that require monitoring are the municipal debt problem, implementation of the plan to address this, as well as the R70bn “direct take over” of Eskom’s debt.
“The questions we raised in February still stand. We would like to understand specifically what the recommendations are, how they will be funded, the timelines for implementation and whether indeed it is a realistic plan that Eskom’s aged coal fleet can be resuscitated to original equipment manufacturer’s standards.”
Constantatos said Futuregrowth also has questions about the plan to concession the power stations, and specifically how this fits in with the government’s Integrated Resource Plan which anticipates the decommissioning of Eskom’s coal fleet over time.
“More than lip service needs to be paid to the significant problems facing Eskom.”
She said while the pace of addressing Eskom’s many problems is picking up, the debt relief plan, a cornerstone of Eskom’s return to sustainability, is at risk of failing if urgent implementation of some decisions that may require political fortitude and involve some difficult trade-offs does not happen.
“We deserve better,” she said.
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