Finance minister Enoch Godongwana presents SA’s 26th medium-term budget policy statement (MTBPS) tomorrow, and it will be watched closely for the update it will provide on the state of the economy and public finances.
But as its name suggests the MTBPS is meant to be more than that: it is meant to capture the effect of the policy decisions the government has made on taxing and spending in a fiscal framework, and to project this out for the next three years of the medium term.
This year’s tough MTBPS captures two tensions that are, increasingly, at the heart of SA’s budget process. The first is that what Godongwana says is not necessarily what will ultimately happen. Even assuming he presents a credible framework for now, it’s unlikely that those will be the numbers that will materialise over the medium to longer term.
The market knows that. Its concerns about the longer-term outlook for SA’s public finances are evident in the steep returns it is demanding to lend government long-term money. So too are concerns about whether the market can even absorb all the borrowing the government will need to do in coming years.
The second tension is that what the minister says is not necessarily what the government does. The minister has made it clear the public finances are in such trouble that the government could run out of cash next year. He has urged that tough decisions be made to cut spending.
But the government has little appetite to make difficult policy decisions or face tough trade-offs at the best of times, least of all a few months from a general election. Far from reflecting the outcomes of a coherent policy process in the government, budgets increasingly reflect a failure of policy-making.
The largest part of that is the failure to agree on policy measures that would fast-track SA’s economic growth — and so make it easier to balance the public finance books. After two fiscal years that have seen revenues beating budget targets by miles, the commodities boom is over, the economy is stagnating, and the question is not whether revenues will fall short of budget targets but by how far.
Treasury figures for the first five months of the current fiscal year show revenue increasing at less than half the pace projected in February’s budget. This would imply a R53bn shortfall if extrapolated for the full year, though most economists expect something closer to R30bn.
Spending is even more of a problem, with the 9% increase for the first five months running far ahead of February’s 1.5% projection, mainly because of higher-than-expected public sector wage and debt costs. And the pressure is growing for some big spending commitments to be made. How much of that will materialise this year is not clear, but there’s little doubt it will manifest in the medium term.
There’s the annual R40bn on the social relief of distress grant, which has not been funded beyond the end of the current fiscal year in March but surely will be extended, even expanded, in an election year. Likewise the R11bn-a-year presidential employment stimulus, which has not been budgeted for beyond March.
Then there’s the public sector wage bill. And those are small ticket items compared to the demands of the state-owned enterprises (SOEs), with Transnet putting out its hand for a R100bn bailout to add to the R250bn Eskom debt relief package to which the government has already committed, and other SOEs also asking for more.
Godongwana is expected to bounce big spending decisions out to February or beyond. Even so, economists now expect a main budget deficit of well over 5%, compared to the Treasury’s 3.9% estimate in February’s budget. The finance minister can probably still show the debt ratio stabilising somewhere in the 70% range, even if it’s a little later and a little higher than projected in February.
That would deliver on the government’s commitment to fiscal consolidation and would lend some credibility — for now. But in the absence of higher economic growth or significant spending cuts, consolidation is not what will materialise.
It’s not the deficit and debt ratios that are the ones to watch anyway. To understand why the public finances are in such trouble the real number to look at is the government’s borrowing requirement. In addition to financing a higher deficit over the medium term, it also has R516bn of local and foreign debt it has to redeem (or roll over), plus the Eskom debt relief.
HSBC economist David Faulkner estimates the government’s financing requirement at 8.6% of GDP this year — the highest in two decades — rising to 9.5% by 2025/26. Krutham estimates the government will have to borrow R1.86-trillion over the next three years, almost R290bn higher than Treasury had projected.
SA has always been different to other emerging markets because it had such deep domestic capital markets. But deep doesn’t mean bottomless. With foreign investors fleeing local bond markets in recent years, domestic banks and other financial institutions have stepped up to buy. But it is not clear how much more government debt the domestic market can absorb.
As it is, the government’s borrowing is crowding out financing for the private sector investment SA sorely needs. And with banks and unit trusts already stuffed full of government bonds, the concern is the government might eventually have to resort to forcing them to buy more, as it did during apartheid.
The government can and likely will draw down its cash reserves. It also has the option of tapping into the R459bn-plus unrealised profits on SA’s gold and foreign exchange reserves — but that comes at a cost to the economy and anyway wouldn’t be enough even to fund one year’s borrowing requirement.
All of which is why Godongwana is so concerned about the state of the public purse and has called so firmly for spending to be cut to get SA back to sustainable levels of debt. Nor can this be done with tweaks and cuts here and there. In an economy with a 1% growth rate, SA has to tailor its spending to what it can afford.
The IMF’s economists, and others, believe two to three percentage points of spending cuts are needed. That requires the government to make serious policy choices about which of its programmes, departments and public entities it needs and can afford to keep, and which it doesn’t and can’t. It requires it to face the tough political trade-offs needed to slash the opportunities for rent-seeking and clamp down on inefficiency and waste.
Ideally the budget should be an instrument to reflect such rational choices. In practice, though, it’s unlikely the government is up for any of that this year, perhaps even less so in the messy coalition politics that could follow next year’s elections. So while the Treasury can be relied on to craft a reasonably credible medium-term budget this week, those two tensions mean it may tell us little of what will happen in the end.
• Joffe is Editor at Large.
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