London-based economics consultancy Capital Economics responded to the ANC’s election drubbing by warning that this will be reflected in this week’s mini budget in a likely weakening of the National Treasury’s fiscal resolve, causing bond yields to grind higher.
I completely disagree. Having covered almost 20 consecutive SA national budgets I can almost guarantee that the Treasury will present a conservative medium-term budget policy statement (MTBPS) that holds the line on debt stabilisation and rejects a big ramp-up in social spending.
I say this with a high degree of conviction for several reasons. First, SA does not have a history of the electoral cycle influencing the budget. The process of determining the medium-term fiscal framework starts months before the event and traverses a gamut of committees, so is not amenable to wholesale revision at the last minute, though some tweaking is certainly possible.
Yes, political pressure is mounting on the government to expand the social safety net, but despite irresponsible wage increases it has never embarked on wholesale populist expenditure. In any event, the government isn’t capable of making big decisions involving difficult economic trade-offs in haste. It just isn’t that decisive.
The debate over whether to institute a basic income grant (BIG) is still in its infancy in the government and is likely to play out only in the February 2022 and subsequent budgets after rounds of consultation, technical analysis and political horse-trading.
And contrary to what the Londoners may think, Treasury officials are not leaning heavily towards providing more fiscal support. On the contrary, many are horrified by the rapidity with which calls for a R100bn-R200bn BIG have gained purchase, despite SA’s very real fiscal constraints.
For though the MTBPS will doubtless show a significant improvement in SA’s fiscal metrics, the Treasury understands better than anyone that this is mostly thanks to an unanticipated commodity boom — something that cannot last.
They know the r>g problem has not gone away. Put simply, this means that as long as the interest rate on national borrowing (r) exceeds the country’s rate of growth (g), debt will continue to rise unless SA turns its sticky primary budget deficits into sustained surpluses. This means (in the absence of much faster growth) that the Treasury cannot relax its hold on spending if it wants to chart a trajectory towards debt stability.
This is the holy grail on which SA’s return to an investment-grade credit rating depends. It is also necessary to reduce fiscal risk, lower bond yields, and so allow the ANC government to keep funding the existing social wage on which SA’s social stability and its own political survival depends.
Economists are in two minds as to what happens next: either the election outcome will cause the government to significantly expand social spending over the coming years to shore up its popularity, or it will realise that it simply cannot go on as before — it must get serious about eliminating corruption and accelerating economic reform to spur growth and job creation.
My guess is that the MTBPS will reflect the latter choice: the government may use some of the fiscal space created by the commodity boom to expand pro-poor expenditure, and it should, but it will do so without undermining debt stability. At the same time, new finance minister Enoch Godongwana will talk a strong reform game.
At the onset I said I held this view with a high degree of conviction. The only thing that gives me pause is the fact that the MTBPS was delayed by a week to give the National Treasury breathing space after the election. Only, Treasury officials don’t need breathing space; politicians do.
Also, Godongwana is not the fiercely independent, experienced finance minister Tito Mboweni was. It is his maiden budget outing, and he has yet to prove himself in this new role. I believe he will pass with flying colours. For all of our sakes, I hope I’m right.
• Bisseker is a Financial Mail assistant editor.
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