National Treasury officials are rubbing their hands with glee at the prospect of me being forced to eat my hat. I promised on a live Financial Mail webinar with finance minister Enoch Godongwana after the 2022 budget that I would eat my hat if he succeeds in achieving a primary surplus in 2023/2024 as promised, a year ahead of target.
Running a primary surplus (when revenue exceeds non-interest expenditure) is necessary to stop debt from rising inexorably in SA. As such, it is a crucial milestone on the Treasury’s path to stabilise the debt ratio at 75% of GDP by 2024/2025.
In offering to eat my hat I was saying I don’t believe this administration has the wherewithal to accelerate the economic reforms required to accelerate the growth rate or exercise the expenditure restraint needed to bring debt under control.
My confidence stems from the fact that SA has run a primary deficit since the 2009 global financial crisis, reflecting a deeply entrenched imbalance between revenue and expenditure. In addition, the political leadership is failing to confront a broad range of spending pressures or move fast enough to reform the economy.
As a result, SA’s medium-term growth outlook remains too low relative to the high interest rate the government pays on borrowing — a sure recipe for ever-rising debt.
Over the past decade the Treasury has promised at every budget that it would stabilise the debt ratio over the medium-term. In fact, in 2015 the then head of the budget office, Michael Sachs, promised the IMF that he would eat his hat if debt didn’t stabilise at 45.7% of GDP. It is now just under 70% and rising — and Sachs is never seen anywhere in a hat.
Godongwana, on the other hand, has a whole room full of felt fedoras with smart little feathers. But last week, after the Constitutional Court wage ruling and a sharp spike in commodity prices, the Treasury was feeling confident that the one eating a hat would be this upstart journalist!
The court’s decision that the Treasury does not have to honour the final leg of the previous multiyear wage agreement is significant for the fiscus. Had it gone the other way the Treasury would have had to find R75bn in back pay, knocking its medium-run wage growth target of 1.8% a year clean out of the water.
Also significant has been the spike in the prices of gold, coal and platinum group metals in response to the war in the Ukraine. For as long as the commodity rally lasts, SA can expect to reap windfall tax revenues. If we have another bumper year in 2022/2023 SA could even achieve a primary surplus two years ahead of schedule. Then I might have to eat two hats.
But commodity windfalls can mask SA’s fiscal fault lines for a year or two; they cannot be relied upon to return SA to fiscal sustainability. To achieve that will require that the rest of the government adhere to the harsh spending constraints being proposed by the Treasury. At the same time there would need to be a confidence surge to spur a fresh wave of private sector fixed investment, lifting SA’s overall growth rate sustainably higher.
Call me an eternal pessimist but I just don’t see the conditions being present for a strong revival in private sector investment, other than in renewable energy; nor do I see President Cyril Ramaphosa letting some state-owned enterprises go to the wall, or risking a public sector strike over wages, or backtracking on basic income support, given the torrid electoral cycle he faces.
In short, until there is proof of stronger growth leading to sustainably stronger revenues (while expenditure is held in check) the promise of debt stabilisation will remain a mirage hovering over the outer year of the medium-term framework, forever longed for but never reached.
I really hope I’m wrong, but I wouldn’t bet my hat on it.
• Bisseker is a Financial Mail assistant editor.
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