Finance minister Enoch Godongwana wasn’t as enthusiastic as one might have expected when he briefed journalists ahead of a medium-term budget that contained the best set of fiscal numbers SA has seen in many years.
One reason, perhaps, is that while the minister made the most of the opportunity he was provided to try to tackle long-standing issues at the most troublesome of state-owned entities (SOEs), he did so well aware of the enormous risks to his budget framework. And as the list of fiscal risks at the back of the budget document makes clear, those are as much about the dysfunctional state of the state itself as they are about the macro environment out there.
First, the numbers. The minister now estimates revenue will come in R106bn ahead of his February projections, which is at the top end of market expectations. More than half of that is from higher-than-expected mining taxes. And though the Treasury doesn’t see the commodities bonanza continuing much beyond 2022, it still expects sizeable revenue overruns over the medium term.
The ratio to remark on is the primary budget balance — the gap between revenue and non-interest expenditure — which is now expected to be in surplus by the end of 2023/2024 for the first time in 15 years, and to stay in surplus over the medium term. That’s thanks to the revenue overrun and the fact that the minister has budgeted to save, rather than spend, two-thirds of it. A primary surplus means the government will no longer be borrowing to pay the interest on its debt. It means the government’s debt-to-GDP ratio starts to flatten and stabilise — two years earlier than expected in February, and at a lower level.
If the ratios are remarkable, so too is the way the minister is budgeting to use the space they provide. And here a shift in his approach to SOEs is one to watch. The market was eagerly awaiting details of the Eskom debt relief package and will no doubt be somewhat disappointed, with details promised only in February. What it probably hadn’t expected was the minister’s SA National Roads Agency (Sanral) debt package, and the potential end to the e-toll debacle it signalled.
Godongwana’s narrative on SOEs now emphasises that bailing them out is important to support economic growth and infrastructure investment — but it comes with “conditions precedent” that have to be met before the Treasury will hand over cash. That’s meant to be a contrast to the old approach, where there were conditions but no lever to enforce them.
Whether this will prove a dangerous move back in the direction of putting ailing Eskom, Transnet or Denel back at the centre of a statist economic policy is yet to be seen.
Meanwhile, Godongwana has used part of the temporary commodity price windfall for one-off spending to try to address the most urgent issues at key SOEs and has largely resisted pressure to commit to more permanent spending increases. In 2019 the government committed R230bn to Eskom, of which it has so far disbursed R140bn — and will continue disbursing R22bn a year until the debt relief package is in place. That money was earmarked to help Eskom meet interest payments and redemptions on its debt.
Now Sanral will get similar treatment, receiving R23.7bn to help pay down its R47bn of guaranteed debt and cancel the guarantees. However, Godongwana has gone further with a deal that takes 70% of that debt onto the government’s balance sheet and the other 30% onto the Gauteng government, which now has to decide about E-tolls on the controversial freeways. It may be a small price for national government to pay to get rid of the problem. By contrast, at Transnet the risk is that the more than R5bn Godongwana will hand over to the dysfunctional port, rail and pipeline utility could be just the beginning of Eskom-style endless bailouts.
On Wednesday Treasury officials described this week’s medium-term budget policy statement (MTBPS) as a baseline, with downside risks. The SOEs are up there as one of those expenditure risks that could materialise in a major way to upend fiscal discipline.
So too is “subnational” government, with the dysfunction in provincial and local government carefully detailed in the budget document: almost R25bn of unpaid bills in provincial governments, which also face huge losses on medico-legal claims, not to mention the 98 municipalities that adopted unfunded budgets this year or the almost R90bn municipalities owe their creditors, including Eskom and the water boards.
“There is a tendency to look at the macro stuff for miracles,” said Godongwana, referring to himself and Reserve Bank governor Lesetja Kganyago, who joined the panel at Wednesday’s budget briefing. Like the Bank, the Treasury has no power to fix the rest of government and only very limited power to enable higher rates of growth. For that, the government has to speed up on structural reforms. And while progress was duly pointed to on Wednesday, the Treasury’s projection of 1.6% annual economic growth over the medium term suggested it isn’t banking on it.
Godongwana is powerless in the face of a global economic outlook that is the bleakest for many years, and the prospect of instability in financial markets that could make long-term government debt even more expensive than it already is, and potentially hard to raise or roll over. That’s a big risk on the list too, because though the benign fiscal picture will see the government’s annual borrowing requirement fall back to pre-Covid levels, it has large redemptions coming up, averaging R193bn a year for the rest of this decade, which is more than four times the level of the past five years.
But then there are the two really thorny risks on the fiscal list: grants and wages. Godongwana has kicked the basic income grant and public sector payroll cans down the proverbial road, given that the policy decisions are not his to make. He extended the social relief of distress grant (SRD) for another year. But he sounded warnings on Wednesday about trade-offs, with the document flagging the risk that the cost of a permanent SRD grant or similar new grant would threaten the sustainability of the public finances by the end of this decade. And his fiscal framework relies for its continued spending restraint on keeping the cap on public sector wage increases.
On the spending side, the minister has started allocating more to public infrastructure and front-line services, as well as to boosting law enforcement. But his disciplined budget depends on a sizeable contraction in 2023 as the SOE and SRD one-offs supposedly exit the system. He has also assumed no wage increase in the next fiscal year, so as not to pre-empt the outcome of the public sector wage talks. And he has budgeted for a 3% increase this year, in line with what was agreed at the recent public sector summit.
As always, even the best of budget numbers are subject to the rude test of reality, these perhaps more than most. If the minister has succeeded in driving home the message that this is a time to build fiscal space, not squander it, that’s a win in an unpredictable world.
• Joffe is editor at large.
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