Briefing journalists ahead of his budget speech, finance minister Enoch Godongwana responded with vehemence, eloquence — and a bit of history — to a question about the controversy surrounding SA’s recent World Bank loan.
Historically there was criticism of the structural adjustment conditions attached to IMF and World Bank loans, but the ANC engaged with this issue right at the start of democracy — and decided it would interact with those institutions even though it would jealously guard SA’s sovereignty.
Its approach never changed. However, the IMF and World Bank have changed in response to demands for institutional reforms. They no longer attach the conditionality to loans that they used to. What’s more, said the minister, the National Treasury team that dealt with the government’s borrowing on the capital markets were professional civil servants, not ideologues. They simply went out to get the cheapest money on the most reasonable terms.
Godongwana’s deputy, David Masondo, chimed in to say the best way for SA to avoid having to go to the IMF and World Bank to “kneel” for money was to do exactly what the budget was suggesting — avoid increasing the debt and grow the economy.
The vehemence was not surprising given that the EFF was protesting outside parliament at the time over SA’s borrowing from international “loan sharks” such as the IMF and World Bank. Perhaps the EFF hasn’t looked lately at the shark-like interest rates the BlackRocks or Pimcos of the world are charging SA because they perceive the country as so risky, or perused the Budget Review’s detail on the lower rates charged by the IMF and World Bank.
But the response by the minister and his deputy to the debt question also provided a crucial frame for Wednesday’s budget, which at its core was about how to use the enormous windfall bestowed upon us by global good fortune to ensure we never have to come close to “kneeling” — as SA seemed at risk of doing not so long ago.
Government revenue, including taxes as well as mining royalties, is now projected to come in R197bn higher than last February’s budget estimates, thanks mainly to the global commodity boom. The cumulative overshoot over the four years to 2025 totals well over R500bn, on a revenue base that last year was just R1.3-trillion.
What Godongwana has done is commit some of the money to the main pressure areas, especially those involving poor and young people — extending the social relief of distress grant and the presidential youth employment programme, adding to the free higher education grants, as well as providing more equity to state-owned insurer Sasria to help it with the cost of the July 2021 riots. He has also taken advantage of the windfall to provide some tax concessions.
Crucially, however, he has taken 45% of the medium-term revenue overshoot and used it to reduce the public debt. SA has been in a vicious debt spiral in which higher debt levels led to higher interest rates and higher debt costs, which in turn caused the debt to go even higher, so that interest costs are the fastest rising item of government expenditure, consuming 15% of total spending and crowding out both other government spending and private sector investment.
Instead, this budget is the first for many years to start halting that spiral and put SA back on the path to stabilising its debt, which is now seen peaking at 75% in three years’ time — still high, but three percentage points lower and a year earlier than projected even in November’s midterm budget.
In effect Godongwana and his deputy have offered two kinds of carrot to the populists and government colleagues to try to persuade them to tailor spending to what SA can afford and stick to the plan to put the public finances on a more sustainable path.
First, as they emphasised at Wednesday’s briefing, stay prudent and you stay financially sovereign; and second, use some of the windfall to reduce the debt and SA gets to what the Budget Review calls the “end of fiscal consolidation” within three years, where it starts to run the kind of surplus where it can start to reduce its debt level, putting an end to some of the spending cuts that have been budgeted for in recent years and making it possible for the overall spending envelope to increase again.
But with debt levels still high and risky, the Treasury is now suggesting a new fiscal rule that would contain that. And Godongwana emphasised the need for structural shifts in the composition of spending, first to curb the bloated public sector wage bill, and second to curb the endless bailouts to state-owned enterprises (SOEs). Over the past decade both have seen increases in spending that were paid for by cutting budgets to departments and provinces that provide many of the frontline social and economic services that are government’s core function. Godongwana wants to start reversing that.
The structure of public sector pay is to be reviewed at a summit next month between the government and public sector trade unions. And the Treasury will set detailed conditions for any money it gives to SOEs — including Eskom. (While a solution to Eskom’s debt problem has long been spoken of, this budget was the first time the finance minister openly acknowledged it was a problem the Treasury needed to do something about — emphasising, though, that it would in return demand efficiency and restructuring at Eskom, with a focus on addressing SA’s need for electricity rather than on addressing its troubles).
But if the signals on spending were clear, the budget’s signals on the tax side were as striking. With the economy scarred by the pandemic and the recovery still frail, there was clear acknowledgment that the last thing SA needs now is higher taxes. And there was a clear commitment to reduce taxes — as long as government didn’t commit to big new spending items.
Godongwana put action to the words by cutting the corporate income tax rate, as promised a year ago, and providing a bit of personal income tax relief. For the first time in three decades there was no increase in the fuel tax.
The finance minister told journalists on Wednesday he was “relaxed”. And who wouldn’t be, with that kind of windfall? But he made it clear that it won’t last forever and if SA doesn’t use it constructively its fiscal crisis will just be delayed but not dealt with. And he knows, as does the market, that while he can budget for spending discipline it doesn’t mean his government colleagues or government’s employees will stick to it.
At least he has tried to persuade them of the upside if they do. The downside could be a lot worse in years to come if they don’t.
• Joffe is editor-at-large
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