The chunky budget review that goes with the finance minister’s budget speech is always a more useful guide to fiscal realities than the speech itself. And the review tabled in parliament yesterday goes in hard from the start. The government will over the next three years pay more for the interest on its debt than it will spend on health, social development or peace and security, finance minister Enoch Godongwana wrote in his foreword. Stabilising the debt burden is therefore essential, he says.
The review goes on to set out just how fragile SA’s public finances are, despite what it calls the “flatter to deceive” numbers resulting from this year’s revenue windfall. With a debt burden heading towards R5-trillion, and debt service costs now consuming 21c of every rand of revenue the government collects — about 5% of GDP — SA has used up its resources dealing with the crises it has already faced. It has no space to deal with further crises, nor room to tackle social and economic ills. Which is why it has to stabilise its debt and rebuild that space.
The new finance minister has risen to that challenge with a medium-term budget that doesn’t do very much of substance, but tries to say a lot. What it says is encouraging. The question, in the months and years to come, is whether it will prove believable.
It is encouraging, first, because it gave a concrete answer to the question posed by investors and ratings agencies: would the government spend its extra revenue or use it to cut debt? The answer yesterday was that the government would use R78bn of the R120bn of extra revenue it expects in 2021 to pay back debt and reduce its borrowing requirement.
It is an answer that will be a strong signal of intent, underpinning the credibility of the second encouraging sign — that the budget reaffirms that the government is still committed to fiscal sustainability, and to enabling long-term growth by narrowing the budget deficit and stabilising the debt. “Unflinching”, is the word Godongwana used in his speech; “hard”, was the word he used to describe the fiscal framework when he briefed journalists.
We must be prepared to consolidate some of our state-owned entities and let go of those that are no longer considered strategically relevant.
— Finance minister Enoch Godongwana
Government spending had drifted way off budget targets over the past year of Covid-19 crisis and July unrest, and political pressure to spend on basic income support and wages has been growing. It was not clear whether there was still any sort of ceiling to anchor spending, as there supposedly has been since 2012. Thursday’s budget affirmed the expenditure ceiling is still in place, breaches and pressures notwithstanding. At least for now.
It also set a high bar for new spending programmes, with the budget review making it clear these will not happen unless appropriate financing arrangements are in place — and they have been weighed up against other spending priorities. The budget made it clear too that the government will wait to see how revenue comes out in February before deciding on big new spending items — a basic income grant, for example.
Godongwana also talked tough on SA’s endlessly troublesome state-owned entities, which have consumed more than R290bn in bailouts since 2013 — at the expense, the minister pointed out, of important social expenditure. “We must be prepared to consolidate some of our state-owned entities and let go of those that are no longer considered strategically relevant,” he said.
And again, the budget numbers themselves were concrete evidence of the “restrained” approach of which the review speaks, with non-interest expenditure actually set to decline 0.4% on average over the next three years. And no new bailouts.
Investors and ratings agencies are likely to be encouraged by the realism of some of the assumptions regarding both revenue and spending. The budget pencils in overruns that are less than the more optimistic market estimates, with the review cautioning that revenue is still below prepandemic budget targets. Godongwana is not pretending that the R20.5bn “allowance” public servants managed to win as part of the effective 6% increase they settled on with the government is temporary, and has pencilled it into the medium-term numbers as well.
On growth, too, the Treasury’s forecasts are reasonably modest, seen falling from this year’s 5.1% bounce to an average 1.7% over the medium term, despite the growth and reform rhetoric of the budget speech. That still enables deficits to come down and the public debt ratio to stabilise shy of 80% by 2024/2025 — not a happy or a cheap prospect, but one at least better than SA would have had without the revenue windfall and a continued commitment to the restraint of which the budget review speaks.
But how believable is that commitment? Key spending decisions have been put off until February’s main budget, or beyond. And while Godongwana may have the ear of the ANC and an ability to engage with the social partners in a way his predecessor did not, it is still hard to imagine how long he can get away with a fiscal framework that cuts spending not just in real terms but even in nominal terms.
Interest bill
Apart from some money on the presidential employment stimulus and a couple of other things, just about the only item of spending really growing is the interest bill — and the rapid rate at which it is growing is, as the budget emphasises, a reflection of how fragile SA’s fiscal state is.
SA’s government may have — as one economist puts it — the spending habits of an advanced country despite not having the ultralow interest rates or even the robust growth rates of its more advanced peers. But weaning itself off that path is a tough political ask, not to mention one that could weigh on its anaemic economic recovery.
The political pressure for the basic income grant is probably where the contest over fiscal policy will really bite as the government looks at the options, as it has promised, in coming months.
The state-owned entities have been and surely will continue to be another site of contestation. Investors know the spending pressure is there — and the high interest rates the government is paying on its ever-more-enormous debt burden are a reflection of just how sceptical they are about government’s ability to exercise budgetary restraint. The test of whether Godongwana’s first budget will be seen by the market as encouraging or simply unbelievable will be in what happens to the pricing of SA’s debt.
• Joffe is editor at large.
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