Briefing journalists ahead of his medium-term budget speech on Wednesday, finance minister Enoch Godongwana reminded us that this budget is intended as a statement to give guidance for what will happen in February’s main budget.
His director-general, Duncan Pieterse, reminded us of the difficulties the Treasury had brought on itself in the past by making spending decisions based on growth and revenue forecasts that turned out to be over-optimistic, saying the Treasury had tried to strike the right balance and ensure credibility.
The two comments provide important context to assess the medium-term budget policy statement (MTBPS) which, as its full name suggests, is the medium not the main and is a policy statement rather than a budget as such. There is no upside for Team Finance in being anything other than cautious and conservative now. The main budget, pencilled in for February 19 next year, is not far away.
By then the Treasury will have updated growth data as well as December’s important tax collection data. It is still struggling to rebuild the fiscal credibility lost in the years in which it over-promised and under-delivered. All it needs to do at this stage is show it can keep delivering on its promises. While Wednesday’s budget numbers are a bit worse than February’s budget estimates, they are still broadly on track. If they turn out better than that in February it will be a bonus.
The October budget statement was always intended to have a strong policy focus, and Wednesday’s budget had that. The documents set out a lengthy “to do” list of reforms to the management of the public finances and public spending, as well as measures to make it easy for the private sector to invest in the infrastructure SA urgently needs to boost economic growth. More details will come in February.
Wednesday’s numbers will be a disappointment to those in the market who expected the Treasury to outperform its revenue, deficit and deficit projections. It has cut its growth forecast for this year, while raising it for the outer years of the three year budget framework.
But while SA’s improving growth prospects are in the narrative, the Treasury has resisted the temptation to include too much of this in the numbers, with a medium-term average growth projection which at 1.8% is lower than the heady 2% plus numbers some in the market now expect.
Revenue projections continue the caution, with a R49bn cumulative shortfall projected for the medium term. Ironically, where growth projections reflect the upside of SA keeping the lights on, this year’s revenue shortfall reflects some of the downside. VAT on imports has fallen short because of a decline in imports related to renewable energy installations. Fuel levies have fallen short owing to Eskom using less diesel.
At the same time, Wednesday’s budget has added to spending over the medium term, in a way that Pieterse says will translate into better and more capacitated state institutions as well as support a pivot towards infrastructure. An early retirement programme for up to 30,000 public servants aims to provide mechanisms for government departments to do the organisational shake-ups they need to do while holding onto critical skills.
The revenue shortfall means slightly higher deficit and debt ratios in the near term. But the government is on track to stabilise the public debt at 75% in fiscal 2025/26. Pieterse makes it clear the credibility of the fiscal framework is key and the Treasury took account of the various risks to this. He also recognises that there is potential for some upside surprises.
Key too is running increasing primary budget surpluses that will stabilise and eventually reduce the public debt ratio. In February the Treasury said it would propose a binding fiscal anchor to ensure long-term sustainability of the public finances. This week’s statement walks back from that a bit, making it clear that the Treasury is still looking at the options and will release a document only at the end of March.
It suggests the proposed anchor will more likely be a general commitment than the debt rule some in the market hoped for — and that this is one for the longer term. In the short to medium term the budget is anchored on increasing the debt-stabilising primary surplus.
Devising an anchor, and the budgetary processes to support it, is just one of the set of budget reforms on the Treasury’s to-do list. It is also working on a review of the medium-term budgeting process to ensure it is in line with economic realities and fit for purpose, Wednesday’s statement says, and it plans a more comprehensive statement of fiscal risks.
It is also taking a proper look at the government’s multiplicity of public employment schemes, linking this to ways to reform the social grant system and make better use of the skills development funding system. Under Pieterse’s relatively new leadership, there clearly are changes under way.
It’s the changes on infrastructure that would be most material for economic growth. There’s no shortage of private sector finance wanting to go into public infrastructure, be it energy, water or transport, municipal or national. The problem has long been the lack of bankable projects, indeed of projects at all on any scale. High on the Treasury’s to-do list is an “infrastructure reform agenda” that will transform the way the public sector prepares and delivers infrastructure projects.
Equally high is a series of new schemes and legislative changes it is working on to put a more agile public-private partnership framework in place and make it attractive for the private sector to finance and build infrastructure. The renewable energy independent power producer programme required huge government guarantees to bring in private finance: this time the plan is a credit guarantee scheme that will derisk private investments without putting guarantee liabilities on an over-stretched public balance sheet.
Repairing that balance sheet has never been more important, in a context in which investors still attach a large — albeit improving — risk premium to SA because it has a public debt level its economy simply cannot sustain.
The IMF’s latest reviews have flagged low growth and high public debt as risks across the globe. But SA’s are worse than those of most emerging market peers with which it is competing for investment. To improve its competitive edge it must fix its ailing economic infrastructure and get its debt under control.
• Joffe is editor-at-large.
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