With the 2021 national budget looming on February 24, the key considerations are what finance minister Tito Mboweni can do to restore SA’s fiscal credibility, what he must avoid doing at all costs, and what more he can do to bolster the flagging economy.
Since last year’s October medium-term budget there has been more bad news than good on the economy. First the good news. Most noteworthy was the Labour Appeal Court’s ruling vindicating the Treasury’s refusal to pay public sector wage increases in 2020 on unaffordability grounds. This should strengthen its hand as it squares up to trade unions over its proposed three-year wage freeze, the linchpin of SA’s R300bn fiscal consolidation plan.
Though it’s realistic to expect some slippage on this score (nobody believes labour will settle for below-inflation increases without the mother of all battles), it’s vital that the government bends only a fraction to retain maximum fiscal credibility.
Other great news is that tax collection finished the year well ahead of October’s estimates, given rising commodity prices. SA is now likely to beat its 2020/2021 fiscal deficit target by some margin.
However, the headline-grabbing bad news since October is that the Treasury forgot to budget for a vaccine programme. This will cost at least R20bn, which must be funded through expenditure cuts, higher borrowing or tax increases — all deeply unpalatable options.
Also painful were the credit rating downgrades by Moody’s Investors Service and Fitch Ratings in November, taking SA deeper into junk territory. The fact that both agencies retained SA on a “negative” outlook signalled their lack of faith in the country’s plan to restore growth to get the debt ratio to stabilise inside 100%. Any further slippage on SA’s fiscal or growth prospects could result in fresh downgrades this year.
Of course, it’s not SA’s fault that the 2021 growth outlook has been shaken by the devastating second wave of the pandemic. But the government made things worse with blanket booze and beach bans, which have killed the summer season and brought the wine and hospitality sectors to their knees. The resumption of load-shedding, challenges to the spectrum auction and lack of visible progress on economic reforms have all had a further chilling effect.
So, what must Mboweni do to shore up fiscal risk and business confidence? It is imperative that the Treasury sticks to its debt stabilisation plan, not only by holding the line on the wage freeze but also by keeping state-owned enterprises (SOEs) in check. In October Mboweni ignored fresh demands from SOEs. He needs to hang on to that resolve. It’s possible that SA’s lack of resources, coupled with the backlash over the SAA bailout and vaccine bungle, will finally force it to allow the worst serial offenders to go to the wall.
It would be far better if Mboweni funded the vaccine programme through expenditure cuts and by refusing SOEs fresh bailouts, than by raising taxes. While a case could be made for introducing a solidarity tax on the superwealthy to help pay for the ravages of the pandemic, Mboweni should avoid increasing the main tax categories — VAT, personal and corporate income tax — because that would only harm the poor and/or hurt growth further.
The country is long past the point where it can tax its way out of trouble: SA’s small tax base of just 5-million individuals is already overburdened and shrinking. For every tax increase in recent years the payload in terms of additional revenue has been dropping. Mboweni knows this so is unlikely to do anything draconian on the tax front.
Lastly, Mboweni should use the platform of the budget to make the case for business. He needs to side loudly with business against any further extension of the alcohol and beach bans or any more stringent lockdowns this year. With business’s trust in the government stretched to breaking point, it’s the least he could do.
• Bisseker is a Financial Mail assistant editor.
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