As finance minister Enoch Godongwana readies to present budget numbers that are better than investors have seen for several years, it’s worth taking a walk back in history.
The 2007 budget was, in retrospect, the last budget of almost pure optimism. The economy had grown by almost 5% the previous year, and the National Treasury was forecasting growth would average 5.1% a year out to 2010 and was targeting 6%. The government had achieved a small budget surplus for the first time in decades and was budgeting for a surplus again in the 2008 fiscal year.
Tax revenues had been coming in well ahead of budget estimates, thanks mainly to the China-led boom in commodity prices but also to the turnaround at SA’s tax authority and an economy that appeared to be reaping a “democratic dividend”. The government was talking about putting a comprehensive social security system in place. It was investing heavily in infrastructure and public services.
Fifteen years on, SA is much poorer and its public finances and credit ratings are in far worse shape after a decade of low growth and worsening deficit and debt ratios, which have been hugely compounded by the Covid-19 pandemic. But the commodities boom of the past 18 months has provided SA with a much-needed bailout. And with the economy recovering faster than the worst case scenarios anticipated, the tax revenue has been rolling in — so much so that the most optimistic economists now estimate revenue could overshoot last February’s budget estimates by R215bn, way above the R120bn upward revision Godongwana pencilled in for November, with the overshoot continuing into next year.
If the government holds the line on spending restraint, that will see deficits this year and into the next couple of years that are well below even November’s projections, with the public debt stabilising earlier than the Treasury predicted and at a far lower level than the 70% or even 80% feared in the dark days.
“We think that there is much to look forward to in this budget,” says Morgan Stanley economist Andrea Masia, who expects a fiscal trajectory that is vastly better than investors had become accustomed to.
The upbeat market sentiment is tempered by concerns about the prospect of a basic income grant, as well as the likelihood that public servants will extract a wage hike that’s better than the zero percent the Treasury had pencilled in. Ideally the government would use the extra revenue to reduce its debt, which in turn would reduce the cost of debt and free up more resources for other more worthwhile spending, and it will do some of that. But it will be politically tough to push back on calls to spend if the fiscal position is looking as much improved as the optimists expect.
That’s why it is worth reflecting on that 2007 budget and its lessons. First is the danger of mistaking cyclical or temporary increases in tax collections for structural, permanent increases. The golden rule of prudent public finance management is that the governments that commit to permanent increases in spending (on wages or grants, say) based on temporary increases in revenue risk running up unsustainable levels of public debt — as SA has. But it is not always that easy to tell the difference. And it goes to the more fundamental issue of how much government spending, and government debt, the economy can afford to sustain over the long term, which in turn goes to the relationship between economic growth and fiscal policy.
There’s been a robust debate over the past couple of years about why SA’s economic growth rate and its public finances deteriorated so steeply in the decade after the global financial crisis — and whether it was because of state capture (which many in the ANC and government now like to blame), or because the commodity supercycle ended in 2011, yet the government kept spending in the belief higher growth was just around the corner. Recent research by economist Ricardo Hausmann and colleagues has instead highlighted the collapse in productivity that resulted from electricity shortages and political uncertainty. The lesson, though, is about the need for the government to tailor its fiscal policy to the growth trend the economy can sustain, not the temporary windfalls.
Those windfalls may come not just from commodities but also from financial market conditions, which is a second lesson of the past 15 years. SA had used friendly market conditions in the pre-financial crisis era to cut its debt and slash its debt costs. And when global markets were awash with liquidity after the crisis it took maximum advantage of friendly markets to run up its debt levels, relying on the foreign bond market investors whose money flowed in to buy the bonds it was issuing, so that by early 2018 foreigners owned more than 40% of the rand-denominated debt SA had in issue, not counting the hard currency debt.
Now, foreign investors’ share has fallen below 30% — their appetite dwindled as SA’s sovereign credit rating was being downgraded, and they fled during the early Covid-19 market mayhem, leaving domestic institutions such as banks to pick up the slack. It’s not that SA can’t borrow on local and international markets, and it does, but markets punish those that are fiscally imprudent or politically risky by charging high interest rates — and in a world that is waiting to see whether the US Fed’s intentions will suddenly turn friendly markets hostile, investors’ response to this week’s budget trajectory will be particularly important.
That’s also because 15 years on, after an unprecedented pandemic, a third lesson SA has learnt is just how hard it is when the government finds itself with little or no fiscal space to support lives and livelihoods in a crisis. Unless the government can start building buffers again, it won’t have the space to combat SA’s post Covid-19 rise in inequality and joblessness, much less to help SA through any further crises.
Much as they are often targets for populist attack, SA’s big mines and big banks have enabled SA to avoid worse outcomes on the fiscal front, and policymakers should note that. But perhaps the biggest budgetary lesson of the past decade or two is simply about the limits of the budget itself. The finance minister can compile a good-looking set of numbers for now, but how long that will last depends on the global environment and, crucially, on whether his cabinet colleagues take action to turn around the economy at home.
• Joffe is editor-at-large.
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