How does the budget manage to look so good when the economy looks so bad? One answer to this question is it could have looked even better if not for the Eskom debt relief, which will ultimately bring the total in state bailouts to Eskom to more than R517bn over a 17-year period. But, we are now promised, this will finally get the state-owned power utility into shape and open up the power market.
Another answer is that it would have looked a great deal worse without the post-Covid commodities boom. That has helped provide the revenue overruns that have enabled the government to turn a fiscal crisis into something that starts to look more like fiscal consolidation.
Yet another is that the government has not only kept the lid on spending over the past couple of years, it has underspent what was budgeted in the latest year. And the Eskom debt relief package will itself help reduce spending over the next three years by shifting the annual burden of bailing it out from the government’s income statement to its balance sheet — though this delays the stabilisation of government debt by three years.
But the final, perhaps most critical, answer is that the fiscal framework outlined by finance minister Enoch Godongwana in this week’s budget works fine as long as the risks do not materialise. The Treasury itself outlined most of those risks in its Budget Review document. Economic growth is a big one. And the scenarios in the document capture what a sad story SA’s growth picture really is.
The budget was crafted assuming the economy will now grow at just 0.9% in 2023, after last year’s 2.5%, rising to 1.8% in 2025. The forecast for this year has been revised down from 1.4% in October, but it’s still way higher than the Reserve Bank’s 0.3%. But the Treasury has also modelled a downside scenario in which power cuts intensify this year and next, which would see growth fall to 0.2% in 2023, rising to 1.3% in 2025.
However, even in its best-case energy scenario, where all the National Energy Crisis Committee interventions promised in July actually materialise and load-shedding ends by the end of this year, SA’s growth rate still only averages 1.8% between 2023 and 2025. That’s a better trend than we’ve seen in the past decade, and we would not say no to it. But it’s still pretty weak.
Economic growth is a big [risk outlined in the Budget Review]. And the scenarios in the document capture what a sad story SA’s growth picture really is.
In that context the improvement in the fiscal ratios the Treasury has pencilled in is quite striking. The main budget deficit for the 2022/2023 fiscal year comes in at 4.5%, down from estimates of 4.9% in October and 6% in the budget of a year ago. The deficits for the next three years continue to come in lower too, declining to 3.3% by fiscal 2025/2026.
More important for the longer-term health of the public finances is that a small primary surplus has been achieved in the current year — and, despite lower growth, it is expected to be sustained and increased over the medium term, rising to 1.7% in 2025/2026. A primary surplus means revenue exceeds noninterest spending. That means the government can start to cap its borrowing and reduce its debt burden — crucial given that the interest on the debt consumes 8c of every rand of revenue the government collects, crowding out other spending.
At well more than R4-trillion, or more than 70% of GDP (up from under 50% five years ago), the debt burden is steep, even if not the worst-case 80% or even 100% predicted in the depths of Covid-19. A primary surplus would have seen it stabilise this year as a ratio of GDP before starting to decline. Instead, Godongwana has essentially used that fiscal space to do the Eskom debt relief package.
The government debt ratio now only stabilises in 2025/2026 because the government takes on extra borrowing to lend Eskom the money to repay capital and interest on its debt over the next two years, and in the third year moves a chunk of Eskom debt directly onto the sovereign balance sheet.
However, at the same time it parcels the sizeable annual cash transfers it was already handing over to Eskom into those loans, hence less government spending — the budget sees it declining 1.1% in real terms over the next three years. Eskom is the main reason. Treasury officials hastened to emphasise on Wednesday that for government departments the erosion in baseline budgets they have been subjected to in recent years has now been halted.
Spending controls across the government have helped to yield the primary surplus, but the driver on the spending side has been the government’s push to contain the public sector wage budget, which has been considerably reduced as a share of total spending. How sustainable that is, is one of the big question marks over the budget concerning risks to spending. The 3.8% average increase pencilled in for public sector wages over the next three years is not the real number, dodging the issue of what the outcome of wage negotiations will actually be.
Whether the social relief of distress (SRD) grant will morph into a far bigger basic income grant after the SRD supposedly comes to an end in March 2024 is another big risk — the Treasury raised red flags in general about “unfunded spending”.
Spending restraint has helped. But the real reason the government got its primary surplus now is the vast revenue surpluses of the past two fiscal years, thanks primarily to the commodities boom. The Treasury had expected the boom to end sooner than it did, and once again tax collections have run ahead even of October’s revised estimates for the current fiscal year, with revenue coming in R99bn ahead of last February’s budget estimates.
The budget documents report that the mining sector has accounted for nearly 30% of corporate income tax collections in the current year. Finance and manufacturing have also been strong, in part because of last year’s faster-than-expected economic growth rate.
How long?
But how long can that last? To some extent, the revenue overruns carry over into the next year. But with the global economy heading south and commodity prices subsiding, the external environment is risky. And with mining production and profitability declining and the domestic economy looking decidedly weak, the internal environment is not looking good either. And that’s not to mention uncertainty about global inflation and interest rates and what that might mean for emerging markets and the cost of debt.
The Treasury will have been conservative in its revenue forecasting, knowing all those risks. And Godongwana has grabbed the space he gained — even temporarily — to reduce the government’s debt and do something about Eskom’s debt. Whether he has done, or could have done, enough to reduce SA’s fiscal risk profile will become clear only in the next couple of years.
Meanwhile, thanks to good luck as much as good judgment, he has come up with a good-looking framework in a bad-looking neighbourhood.
• Joffe is editor at large.
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