HILARY JOFFE: Budget risks from outside SA are potentially greater than risks from inside

What’s the deficit, and how are they going to fund it? That was what his bosses at home wanted to know about SA’s national budget this week, said one Western diplomat.

It’s the obvious question for this or any budget, though not always of great foreign policy significance.

But finance minister Enoch Godongwana tables his budget this year in a context in which the risks from outside SA are potentially greater, and certainly more unpredictable, than the risks from inside. It is a sad irony that he does so at a time when the government’s debt costs have had the benefit of the boost to investor confidence provided by the government of national unity (GNU).

Yet SA’s high public debt and continued deficits leave it vulnerable in the unprecedented world of US President Donald Trump, where market sentiment towards SA could sour in an instant — and the concern is that the Trump administration’s recent aggressive approach to SA could prompt exactly that, making it more difficult and more costly to tap the market to fund the government’s borrowing requirements.

The new US administration’s hostility to multilateral institutions also raises concerns that the multilateral lenders SA has turned to for funding in recent years could also come under pressure.

It is no surprise then that SA’s Group of 20 peers are watching our public finances closely as they try to puzzle out just how vulnerable these could leave us, and whether that poses any risk to SA’s alignments in a fractious world. They are closely watching the GNU itself too, and whether Godongwana can somehow juggle supporting the growth and jobs needed to underpin the coalition with the need to cut the deficit and get government’s debt under control.

SA is fortunate in that the government does not rely heavily on hard foreign currency borrowing, which accounts for only about 11% of its total borrowing. But it has tended to rely on foreigners to buy a chunk of its locally issued bonds. When they flee the local market — as they were doing before the GNU — the rand and borrowing costs take strain. And if they perceive SA to be too risky flee is what they do, with the costs of longer-term borrowing taking particular strain because it’s seen as even more risky. In Trump’s new world there’s no saying what risk rating investors could attach to SA. But sound public finances and a more sustainable debt burden would at least make it less vulnerable.

The National Treasury is focused on regaining the credibility it lost in all the years when it kept missing its targets and failing to deliver on its promises to stabilise the public debt. A boring budget is usually a good budget, and if this one sounds just like the last one, with few surprises, it should go down well in the market.

The messaging will surely again be that the government is staying the course on fiscal consolidation, despite challenges, and is on track to stabilise the public debt. In a weaker-than- expected economy, the numbers could be a bit worse than October’s medium-term budget, which revised down revenue estimates and revised up the level at which debt is expected to stabilise in 2026. But the Treasury is not expected to pencil in huge changes.

As always though, the question is whether the Treasury can deliver on its projections over the three years of the medium-term budget. And there are some warning lights flashing. Much of the attention has been on the risks to spending, with pressure to spend on everything from social grants to defence to healthcare to Transnet and Eskom. But the underlying trends on the revenue side are as concerning as those on the spending side.

On both sides of the budget there’s a failure to face the tough trade-offs needed to ensure the public finances are put on a sustainable path, in an economy whose growth rate remains sluggish, at best increasing only gradually. That failure is a political problem, not a technocratic one. But it should be up to the Treasury to pose the choices clearly.

Treasury data for the first nine months of the fiscal year show disappointingly weak revenue collections. Corporate income and import value-added tax collections were down. That’s about poor profitability, particularly in the resource sector, and a pullback in the investment in generators and solar panels that was one of the few investment bright spots in the economy.

Personal income tax collections looked good. But the underlying picture was not so good. Personal income tax was boosted by two big once-offs — the absence of any relief for inflation and “bracket creep” in last year’s budget, and tax on the two-pot pension fund withdrawals. Strip those out and the personal income tax base isn’t growing — which is a problem given that it is the mainstay, making up the largest and most stable portion of the tax take. VAT is also hit if disposable incomes aren’t growing.

All this doesn’t bode well for the medium term. It highlights the urgency of lifting economic growth and employment. But it also talks to the dysfunction in SA’s tax system, which is becoming ever more maxed out. It relies heavily on direct (income) taxes, but is well below developing country norms on indirect taxes such as VAT, which would have a less distorting effect on growth and investment. Raising the VAT rate has reportedly been discussed in the cabinet. But while it would make sense as tax policy, it’s such a political battleground that the Treasury will surely keep it in reserve for emergencies.

If tax policy debates tend to be avoided, so too are spending policy debates. The government is set on implementing big spending cuts to reduce the deficit over the medium term so that it can borrow less and stabilise the debt. But it tends to rely on what Wits professor Michael Sachs calls the “lawnmower” approach — imposing across-the-board cuts regardless. The Treasury should be pushing for the government to review and shut down entire programmes or state entities that do not justify the taxpayer money spent on them. But while that has been promised it has yet to materialise.

The GNU may not prove any better at facing tough fiscal trade-offs than its predecessors. There is at least commitment all round to stabilising the debt. If economic growth edges up as expected, and spending pressures are fended off, the Treasury may pull it off over the medium term. It has to hope the economy and politicians support it — and that Trump doesn’t do too much damage.

• Joffe is editor-at-large.