Who would have thought that Barbra Streisand Barbara Streisand and the National Treasury would have anything in common? After the aborted budget last week, the Treasury briefly tried to ban the 2025 Budget Review. Within minutes, the document was on WhatsApp groups. It has been one of the most read budgets in years.
This is known as the Streisand effect — if you try to ban something, it only draws attention to it. (This stems from Streisand’s attempt to ban an obscure picture of her home in 2003, which made it go viral.)
Suddenly everyone has an opinion about the merits of tax increases versus expenditure cuts. More importantly, everyone now understands what R60bn is worth in real money. It’s a two percentage point increase in VAT.
The day of high drama may have been exciting politically, but the type of investors SA wants to attract are the big pension funds that want to park their money in a dull, predictable country with decent growth prospects, not speculators who buy or sell bonds on cabinet leaks about the budget 48 hours before it is delivered.
How do we bring back the dull? During the Trevor Manuel years budgets were predictable and boring. But in recent years the budget has become more and more surprising. On average R54.3bn is added to the budget between the October medium-term budget policy statement (MTBPS) and budget day in February, just more than three months later. This time, the upward revision was R56.5bn, or two percentage points of VAT.
The problem is that unexpected spending increases need unexpected tax changes. Unexpected spending cuts require badly planned cuts to services. The consequences are distressed taxpayers, more potholes and hospitals without doctors.
What was better in Manuel’s day? Then the MTBPS was the real budget process, not a sideshow. It set out the three-year budget agenda. At each new MTBPS a new outer year was added. Since the first two years of the MTBPS are relatively predetermined, the system is predictable in the short term, which is good since neither the markets nor taxpayers like nasty surprises.
Three-year budgeting also allows the finance minister to do big things, though they need to be flagged well in advance and phased in. Many of the solutions to SA’s fiscal hole will require a few years to get through.
For instance, there are several state agencies that duplicate each other, and state-owned enterprises that have outlived their usefulness. For example, it is unclear why the SA taxpayer still subsidises arms manufacturer Denel.
There are also fledgling processes under way to blend private and public funding. The renewable energy independent power projects (IPPs) are an example of how new models of infrastructure finance can crowd-in private sector finance with multiple benefits for growth and the fiscus. Setting realistic three-year targets for other infrastructure to be shifted into an IPP-type framework would open up considerable fiscal space.
The Treasury has been conducting expenditure reviews and has excellent ideas on where savings can be achieved. What hasn’t happened is a sober, evidence-based discussion on what the country’s medium-term expenditure priorities should be, and how the cuts can be implemented while protecting front-line services. Instead, in recent years budgeting in SA has just been about borrowing more and more to match ever-higher spending demands. One canny politician described it as “pay-as-you-go budgeting”.
In the end, the Treasury had little option but to turn to the big bazooka of a VAT increase. That this option has been rejected forces us to confront the fact that SA’s growth is too low and spending too high given the size of the country’s tax base. For SA to be returned to long-term fiscal sustainability, spending must be reduced to align with the level of economic activity. If we cannot grow far faster, we will have to spend far less.
The budget crisis has brought sharply into focus that:
- SA should return to the discipline of three-year budgeting ;
- The government of national unity (GNU) must align its policy agenda to the country’s limited fiscal resources ;
- The state must review expenditure with a view to closing non-performing programmes and entities, and excising waste and inefficiency;
- Large savings may require dismantling costly bureaucratic architecture. This will take time, but SA needs to start now; and
- There is no substitute for economic growth, but this will require more ambitious and faster structural reform.
The bungled budget has dented SA’s fiscal credibility but is also an opportunity for the GNU to confront the hard policy trade-offs that are required to secure the country’s long-term fiscal sustainability. It doesn’t have to fix everything by March 12 when a new budget will be tabled, but it does have to make a credible start.
Above all, it must bring back the dull. Budgets are not supposed to be like the movies.
• Havemann is an economist and Bisseker an economic writer and researcher, at the Bureau for Economic Research. More such analysis can be found at www.ber.ac.za.
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