If society’s stakeholder groups were asked to mark the recent medium-term budget, the markets and business would probably give it an A, economists a B and civil society groups an F for fail. Each would be justified in its own way.
Business and the markets liked the medium-term budget policy statement (MTBPS) because the National Treasury was not swayed from its tight fiscal consolidation path by the noisy pushback from politicians and civil society.
The fact that it doubled down on expenditure cuts on the eve of a general election took real courage, but really it had little choice given the country’s unsustainable debt dynamics.
With gross debt set to exceed the R6-trillion mark by 2025/26, up from R4.8-trillion now, the cost of government borrowing having doubled over the past decade, and debt service costs set to consume 22c of every rand the government collects, the Treasury had to act.
It had four options: get growth going, cut spending, hike taxes or borrow billions more at usurious interest rates. The MTBPS does a bit of each, but in the absence of growth and with limitations on additional borrowing or on how much more tax can be wrung from a struggling economy, the main burden of adjustment falls on the spending side, with a net R85bn set to be cut over the next two years.
So far so good, but the reason many economists would give the budget only a B is that few are convinced that this government, which will soon face a tough election, will be able to effect such aggressive spending cuts. It is doubtful whether the cabinet realises that the MTBPS implies significant retrenchments and the closure of some programmes, and may even mean letting some state-owned enterprises (SOEs) go to the wall.
Given past experience, the likelihood is that when push comes to shove any government that is dominated by the ANC will baulk, sending the Treasury back to the bond market. SA has deep domestic capital markets but they are not bottomless, and this strategy is running out of rope.
As the Treasury is forced to sharpen its funding strategy, expect it to tap the World Bank more frequently for concessional loans. There are already hints that this is what it has in mind for saving Transnet. This would keep the SOE’s inevitable bailout off the sovereign balance sheet, making the national debt stabilisation target of 77.7% of GDP by 2025/26 seem a little less out of reach.
When it comes to using the budget to accelerate growth, all the Treasury can really do is tilt the balance of spending towards growth-enhancing capital expenditure. But the real action will happen off-budget because the Treasury realises it will have to rope in private sector financing and technical expertise on an unprecedented scale to accelerate investment in infrastructure.
It will, of course, continue to support Operation Vulindlela’s efforts to remove other impediments to growth. But judging from the Treasury’s growth forecast, which fails to pierce the 2% ceiling by 2026, progress with tackling structural reform will remain far too slow. So there will likely be no upside revenue surprises over the medium term, making spending cuts that much more essential, tax hikes more likely and even further borrowing inevitable.
This is why many fear the debt ratio will shoot through 80% of GDP in the next few years, inviting a funding crisis. Civil society NGOs are appalled by the proposed spending cuts and are demanding the extension of the social grant system. What they should really be worried about is that the existing social protection system is unsustainable as it is.
This message is just not getting through — and who can blame the public when even the president cannot bring himself to say the word “austerity”? Yet this is exactly what the future holds for SA, whether we are prepared to admit it or not.
• Bisseker is a Financial Mail assistant editor.
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