EDITORIAL: Steady budget marks return to stability but hard work lies ahead

To get a sense of how best to assess finance minister Enoch Godongwana’s first budget, it is perhaps instructive to look at the market’s response. And movements in the bond and currency market may indicate that investors barely noticed.

The rand, one of the most volatile currencies in the emerging market universe, barely moved and was little changed at just above R15/$. Currency traders can go back to concentrating on the implications of the Russian aggression in Ukraine.

Given the good news on reducing the budget deficit and the debt-to-GDP ratio set to stabilise at a lower level, the reaction from the bond market might have been expected to be more enthusiastic.

But overall, it was benign and Godongwana will be satisfied with that. One could argue that the calm in markets was a sign that traders were left rather underwhelmed. Equally, the minister could celebrate it as a sign of a return to stability after the turmoil of the last couple of years.

As the saying goes, the best policymaking is usually of the boring type, though that is usually said in reference to central bankers. Ratings agencies will probably also look at it the same way. It’s not exciting but it marks a steady improvement, though there may be questions about its sustainability.

As expected, Godongwana was able to announce a revenue outperformance of close to R200bn, mainly on the back of a surge in commodity prices when the global economy started to open up after the Covid-19 crisis. The question was always what he was going to do with it.

There had been warnings about using this temporary boost as an excuse to yield to political pressure for a permanent increase in spending on social grants. To be fair to Godongwana, this is not something he ever advocated, and he has been consistent in his messaging, dating back to even before taking office.

But that doesn’t mean that debate has been settled. The fiscal cushion means the temporary Covid-19 social relief grant can be extended for a year without fiscal pain. The question that’s delayed is what happens this time in 2023, when fiscal conditions might have changed, but the political pressure not eased.

On state-owned enterprises, the concept of tough love was maintained, though it comes with many caveats. The government “will outline the criteria for government funding of state-owned enterprises during the upcoming financial year”, the minister said, before then making the giant leap of declaring “this is what we mean by tough love”.

The problem is that the first part of the statement isn’t saying anything at all, and analysts will rightly be sceptical that the government will really stand tough when the begging bowl comes. Denel, the SA Post Office, Land Bank and the biggest one of them all, Eskom, are all suffering some sort of financial  distress, and it would be a brave person to bet that there’ll be no slippage in the targets set for the next few years.

The government has also set itself a target of keeping expenditure growth at an average 3.2%, well below the midpoint of the Reserve Bank’s 3%-6%, and this seems rather ambitious. Another risk to this is public sector wages, with the government still budgeting for a freeze. 

A new round of talks is set to start in March and the government’s decision to renege on the increase for 2018 that was contained in the previous multiyear agreement is the subject of a court challenge. The Treasury is working on the assumptions that all these will go its way. There are external risks too, not least a war in Europe that damages the global economy’s prospects and hits SA’s export potential, that may render revenue assumptions too optimistic.

Godongwana said all the right things. The cut in corporate tax sends a positive message on the government’s understanding that it needs to create an enabling environment for business to create jobs, while the tax relief for individuals will support growth. 

Questions remain on whether he sufficiently considered the downward risks.