It is just more than seven weeks to go to the medium-term budget on November 12, which comes in a year in which SA’s monetary and fiscal policy have attracted an unusual amount of national attention.
At least two themes will be closely watched. One is the inflation target and how and whether it might feature in the budget speech and budget numbers. Another is the aftermath of the fiercely contested main budget process earlier this year, and how it has affected the medium-term numbers. Both will shape whether the Treasury can deliver on its promises and regain the fiscal credibility it lost in the years when it constantly fell short.
Some in the market are still hoping finance minister Enoch Godongwana will announce a new inflation target on November 12, despite the August 1 statement in which he rebuked the Reserve Bank for unilaterally declaring its 3% “preference”, saying he had no plans to announce a 3% target at the medium-term budget. And though the cracks between minister and Bank have been papered over in a subsequent statement, the minister still seems more likely to make an announcement in February than in November.
More to the point are the implications for the budget numbers if we assume inflation starts to drop towards the lower target over the next few years. Economic growth is crucial, and the GDP growth number that matters for budget purposes is not the real, inflation-adjusted one, but the nominal, constant currency one. Real output growth is already falling short of Treasury’s May forecast, but a lower inflation rate over the medium term means nominal growth is likely to be lower than the Treasury’s 6% average forecast.
That affects the deficit and debt as ratios of GDP, but crucially, it also affects revenues, which are pegged to GDP growth. The Treasury has promised to stabilise the debt-to-GDP ratio in the current 2025/26 fiscal year and to run increasing primary budget surpluses (in which revenue exceeds noninterest spending) into the medium term that will keep reducing that ratio.
— The issue is in part one of timing.
Lower revenues could make those surpluses harder to achieve. That’s particularly so because big chunks of the spending side of the budget are inflation linked — to the 4.5% that Treasury forecast and slotted into its recent medium-term guidelines for departments, not to 3%. Public sector wages will be especially sticky — the wage settlement reached earlier this year is for 5.5% in the first year, then inflation-linked increases in the next two years of the medium term, but with a floor of 4%.
The issue is in part one of timing. A lower inflation target will help cut the cost of government debt over time, as well as allowing for lower interest rates that will help raise economic growth, all of which will make it easier to increase the primary budget surplus and cut public debt. Meanwhile though, the inconsistencies between the medium-term fiscal framework and a lower inflation target could put the credibility of both at risk.
What could help counter that is the potential upside of this year’s budget ructions. Politicians’ rejection of the proposed two percentage point VAT increase prompted the minister to give the SA Revenue Service (Sars) more money so it could collect more tax and modernise its systems. Sars estimated it could raise an additional R20bn-R50bn. Monthly figures from Treasury show the tax authority is so far underdelivering on its estimates, but this should improve over time.
Politicians also pushed for more efficient government spending, something the Treasury had long sought, and here there is even more to be gained. Its spending reviews over the past decade have identified at least R37bn in savings. It has launched a probe of so-called ghost workers that has identified more billions, and a joint presidency-Treasury team is working with key departments on a thorough review to identify deeper savings over time.
But achieving those depends on political will. This year has taken us into a new world of budgeting that involves more consultation and political negotiation. November’s budget could signal whether that will make it easier or more complicated to deliver fiscal credibility.
• Joffe is editor-at-large.
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