There’s a saying that when something seems too good to be true it usually is. Unfortunately, that applies to the 2023 national budget, which has received plaudits but on closer inspection provides a misleading picture of SA’s fiscal health.
On the face of it the budget accelerates the pace of fiscal consolidation while also saving Eskom, avoiding tax increases, protecting pro-poor spending, and channelling more funds towards infrastructure and front-line services.
The standout feature, after Eskom’s R254bn debt relief package, is that the finance minister has achieved a main budget primary surplus (revenue minus non-interest expenditure) for the first time since the global financial crisis — a full year ahead of schedule. This is a milestone on SA’s journey towards fiscal sustainability and a prerequisite to get the debt-to-GDP ratio to stabilise, or it used to be.
Having promised to eat my hat if SA achieved a main budget primary surplus by 2023/2024, I was quick to congratulate the National Treasury on budget day. I even gave the head of the budget office, Edgar Sishi, a little muffin in lieu of some humble pie.
But having had time to study the budget in more depth I now understand that the main reason the Treasury can show a rising primary surplus for the next three years is because it has stripped out the previous three-year Eskom bailout of R66bn (granted in the 2022 budget) from the main budget expenditure line.
Eskom’s new R254bn debt relief package — made up of cash transfers in the form of interest-free subordinated loans of R78bn, R66bn and R40bn over the coming three years, followed by a R70bn debt swap — falls below the line. If it had been reported above the line SA wouldn’t be able to show a primary surplus again until 2025/2026 — perhaps the more accurate picture.
The Treasury says the accounting shift is needed because Eskom is no longer dealt with on a cash-flow basis but on a balance sheet basis. However, this has led to some muttering among economists as it has created the oddity whereby the country now appears to be showing greater spending restraint, resulting in consecutive primary surpluses, while the stock of debt is rising faster than before.
The upshot of the Eskom relief package is that the gross borrowing requirement will leap from R387bn this year to R555bn by 2025/2026. This means the debt ratio is no longer going to stabilise at 71% this year as promised but keep rising to 73% over the medium term. Over this period debt service costs will amount to more than R1-trillion, increasing from 18% to almost 20% of total revenue by 2025/2026.
This is the full picture, and it is not what successful fiscal consolidation looks like. Meanwhile expenditure risks abound. These include the likelihood that other weak state-owned entities will need further bailouts; that public service wage agreements will exceed the tight budget envelope; and that new unfunded programmes will be introduced, such as a basic income grant, or that the social relief of distress grant will be extended in perpetuity.
But the biggest risk to the fiscal framework is weaker-than-expected growth. If load-shedding averages stage 3 the economy should grow at about 0.9% this year, in line with Treasury and consensus forecasts. But if SA is subject to sustained stage 6 load-shedding, whole-year growth could be negative.
Fortunately, near-term fiscal risk is contained by SA’s deep domestic capital markets, the favourable currency composition and term structure of government debt, SA’s big cash balances and sizeable budget reserves, as well as the Treasury’s fiscal intent is clearly in the right direction.
But these advantages are beginning to fray at the edges. If the US Federal Reserve keeps raising interest rates while SA’s growth continues to falter, the fiscal picture a year from now will not be pretty — and that’s not something any budgetary sleight-of-hand will be able to mask.
• Bisseker is a Financial Mail assistant editor.
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