HILARY JOFFE: A delicate balance between rhetoric and realism

When then finance minister Trevor Manuel presented the 10th budget of a free and democratic SA in 2003, he could point to a turnaround in economic growth and public finances since the ANC government’s first budget in 1994. And as it turned out, the best was yet to come.

By contrast, when finance minister Enoch Godongwana presents the 30th democratic budget this week, this could well be as good as it gets, as RMB Morgan Stanley economist Andrea Masia puts it.

The numbers for the current fiscal year are looking better than expected a year ago, and the government is on track to stabilise the public debt earlier than expected. But that’s the end of the positive surprises. With the outlook for the next three years bleak and spending pressure likely to grow as SA heads into next year’s elections, this budget will be a delicate balance between rhetoric and realism.

Back in 2003 the government had started to turn on the social spending and infrastructure taps as it reaped the benefits of the fiscal consolidation of the late 1990s. Revenues were already ahead of budget each year thanks to tax reforms and an economic upturn that began in 1999 and ended up being the longest continuous period of growth on record.

From 2003, as the global commodities boom took off, growth accelerated to average 5% for the next four years, enabling the government to keep expanding spending while running a fiscal surplus. By the time the global financial crisis put paid to the boom in 2008-2009, Manuel had halved the national debt ratio and slashed public debt costs.

Then came the crisis and post-crisis recovery ... and the state capture years. The 20th budget of freedom and democracy tabled by Pravin Gordhan was one of a series that was hugely overconfident about SA’s growth rate, which sank from over 3% in 2013 to average little more than 1% in the next few years. As the government continued to overestimate growth and revenues and its ability to spend, it ramped up public debt to the point where SA was already on the brink of fiscal crisis on the eve of the Covid-19 pandemic in 2020.

In the wake of Covid-19 a new global commodities boom came along to save SA yet again. The boom, and a faster-than-expected recovery from Covid-19, has seen tax collections overshoot budget estimates by hundreds of billions of rand over the past two fiscal years.

Together with efforts to rein in spending, particularly on public sector wages, that has meant deficit and debt ratios have come in lower than expected. SA seemed at last to be back on the path to fiscal sustainability, even if it continued to dodge calls for spending on items such as the basic income grant. By late 2022 the ratings agencies had started upgrading SA’s outlook, raising the possibility they might upgrade the ratings themselves. But nobody seemed to have factored in the likelihood that load-shedding would get worse, not better.

The Treasury’s latest monthly figures show that tax collections held up well in December, a big month for corporate income tax collections, and revenues for the current year are expected to come in at least in line with October’s revised revenue estimate, which was about R100bn higher than last February’s budget estimates. The figures also show continued underspending, and the upshot is that deficit and debt ratios for this year could be better than October’s projections — though the Treasury may want to be conservative. The question is what happens over the next three years. 

Power cuts

Load-shedding is the one big reason the outlook for growth and government revenue is so hard to call. The global commodities cycle is the other. Few economists have forecasts as bleak as the Reserve Bank’s 0.3% for this year, but few are more optimistic than about 1.3%. This year’s load-shedding will be worse than 2022’s and few expect things to get better much before 2024/2025. But the more optimistic economists believe there’s a lot more private power on the grid than officially registered — possibly as much as 2GW — which suggests larger companies have adapted to load-shedding and the hit to GDP and government revenues may not be as hard as the lost power hours suggest.

That doesn’t take into account the hit to confidence and investment. But equally, there’s the question of whether and when the government’s electricity reforms will start to deliver benefits to growth. Politically, Godongwana will have to show optimism about the government’s promised energy plan, so he surely can’t go as bearish as the Reserve Bank — yet he can’t credibly be too bullish about growth and revenue either.

The relationship between growth and revenue is also unclear. Commodity-related company profits have been the big swing factor for government revenue in the past couple of years; commodity prices have come off and mining company profitability is under pressure, so that could have even more of an effect on revenue than the growth outlook. But the commodity bulls would argue the up cycle hasn’t ended yet, so Godongwana will have to make a call on that too.

It will be an electricity budget in more than one way. Details of his plans to restructure Eskom’s debt will be the most closely watched issue in the budget. How he will do it, and over what period, has implications for the government debt ratio and spending.

He will surely have to offer something by way of rooftop solar panel incentives too, after the president promised this in the state of the nation address, and he may well have to respond to calls for diesel rebates for private generators. Those would likely be small spending items.

The big ones to come are the public sector wage deal beyond this year, and the basic income grant beyond next year. He will likely leave those for the next budget, so while the numbers will look good, they will again be an exercise in kicking the can down the road.

If growth and revenues slide while spending pressure climbs, the public finances may not look good for long. And while Godongwana may be able to keep the lid on spending, at least for a while, he has little if any control over the factors that drive growth — or the lack of it.

In a global economic environment that is not going to come to SA’s rescue, the only thing that could lift domestic growth is rapid implementation of the energy, transport and other reforms government has promised. But the finance minister depends on his government colleagues to implement these.

One striking thing about that 2003 budget speech was how much it was about economic policy, not just fiscal policy. Manuel led government economic policy in a way Godongwana does not. And he had growth levers at his disposal in those early days, such as tax, exchange control and monetary policy reforms, as well as spending capacity, that Godongwana no longer has. That makes the budget a more limited instrument than it once was — even if just as important.

• Joffe is editor at large.