BRIAN KANTOR: Will the budget promise be fulfilled?

In my pre-budget comments for Business Day, I argued that for SA to escape its debt and the slow growth trap, it would have to ensure that government spending and revenues grew no faster than the real economy. I wondered whether the next SA government would be able to grasp this nettle.

The short post-budget answer is that this government has delivered a budget that takes fiscal policy on a quite different and very necessary path, for all the good reasons that were made clear in the Budget Review.

It is almost at the point where the Treasury has presented itself as an alternative and highly critical government agency. It is a top-down plan that deserves full support and for which governments to come should be held fully accountable.

Between 2024/5 and 2027/28, GDP in current prices is predicted to grow 25% — or at an average rate of 5.9% per annum. All government spending is planned to increase by 21% by 2027/28 or an average of 5% per annum, while taxes will grow faster — by 24% or an average of 5.2% a year over the same period.

Government spending excluding interest payments is more heavily constrained to grow at well below the growth in GDP, at a demanding mere 4.2% a year. The payroll for the 216,000 government officials employed by central government at an average R470,000 a year is expected to increase at 4.2% a year until 2027/28, well below expected inflation, with minimal increases in the number employed.

All this genuine austerity would mean reducing the real burden of government spending (exp/GDP) and to a lesser degree the real burden on taxpayers (rev/GDP) and allow the debt-to-GDP ratio to stabilise and decline.

This will be especially so should these quite different long-term trends impress investors in SA enough to have them supply extra capital to reduce the risk premium and interest they demand of SA bonds, and to factor in less persistent weakness of the rand versus the major currencies. This is very much the Treasury's intention.

The thoughts that have moved the Treasury are well illustrated by the following extract from the Budget Review, which are enough to warm the cockles of a heart sympathetic to a market-led economy:

What is the impact of government spending on economic growth?

Fiscal multipliers — a measure of the impact of government’s spending and tax decisions on GDP — offer important insights into the performance of fiscal policy. In SA, the impact of these multipliers has declined over time.

The Treasury’s internal estimates confirm that the fiscal multiplier is below one, meaning higher government spending has not been contributing to higher economic growth.

This is mainly due to how the accumulation of debt by government crowds out private investment by raising interest rates. It also points to the importance of the composition of government spending. Higher spending on capital investment leads to higher growth in the longer term, while consumption spending entrenches deficits and debt without stronger long-term growth.

Relevant papers published through “Southern Africa — Towards Inclusive Economic Development” reveal interesting dynamics. Four explanations emerge for low fiscal multipliers. First, unsustainable spending increases do not boost economic growth because higher debt service costs crowd out important economic and social expenditure. Second, the efficiency of government spending is weak due in particular to poor governance in municipalities and state-owned companies.

Third, structural constraints such as the lack of reliable electricity and logistics challenges, mean that government spending fails to promote and facilitate private sector participation and investment. Fourth, tax increases to fund higher government spending can harm economic growth.

These findings support government’s focus on the implementation of structural reforms to address the binding constraints to growth and reforms to increase infrastructure investment.

Lower inflation target?

One could perhaps argue and judge that these austere budget plans are too ambitious and hence not credible. The budget proposals have hardly registered in the bond and currency markets. The rand has weakened marginally against the emerging-market currency basket since the budget. A degree of extra SA-specific risk rather than the strong dollar is surely responsible.

Perhaps the post-budget suggestion by the Treasury that it would welcome a reduction in the inflation target has muddied the waters. How would lower inflation be realised without a stronger rand? A rand that could, with a more favourable view of fiscal policy, be expected to depreciate at less than the current 5.5% per annum rate, which clearly adds to prices charged and inflation expected.

Absent a stronger rand, a lower target for inflation would imply even more restrictive — and growth and tax revenue defeating — monetary policy settings than they are currently. That is not something that would be welcomed by investors.

The Treasury would be well advised to wait for the approval of its policy intentions as registered in the bond and money markets — in the form of lower interest rates and a stronger rand — before it explicitly aims at lower inflation. The Treasury may well be getting ahead of itself.

• Kantor is head of the research institute at Investec Wealth and Investment. He writes in his personal capacity.