When ratings agencies and international investors point to how important the strength of SA’s institutions is to keeping the country investible, the Treasury is right up there on that list of institutions.
It’s important to see the medium-term budget in that context. The transparency and predictability of SA’s national budget process has been an important part of building the Treasury’s credibility as an institution since 1994.
There’s certainly trouble now. That makes the credibility of the medium-term budget that finance minister Enoch Godongwana will present this week more important than ever. It also will have made it an extremely difficult budget to craft. The market will be watching it closely. So will the politicians, in government and in the opposition, ahead of next year’s elections.
SA had already run up the national debt to unsustainable levels before the Covid pandemic. The Covid crisis drove debt levels up even further, but then SA was saved by the commodities boom and the revenue windfalls generated for more than two years.
Now the windfalls are over, economic growth is stagnating at 1% or less, and the pressure to spend on big-ticket items is mounting. Godongwana has warned that the medium-term budget will not be a happy one. He has to walk a fine line between being realistic about the outlook for government revenue and government spending, while reassuring investors that the government has a plan to get out of its debt spiral.
With the main budget coming up in February, chances are that many key decisions will be delayed until then. But the minister still has to present a credible framework for the next three years.
Fortunately, the shortfall in government revenue is not looking quite as bad as it was earlier this year, thanks to stronger-than-expected personal income tax collections and the benefits of a turnaround at the SA Revenue Service. Economists’ estimates are that revenue will fall R25bn-R33bn short of February’s budget estimates. That’s not far off the R28bn that Godongwana told parliament was underspent by all spheres of government in 2022/23.
Assuming similar levels of underspending in the current year suggests the deficit and debt ratios that the Treasury pencilled in for February may not be that far off — and that, as the minister indicated, the spending cuts that have to be made will be moderate.
But that’s this year. What about next year and the years to come? The government is already spending almost one-fifth of all the revenue it collects just to service the national debt, and its borrowing costs have climbed steeply as investors have become more concerned about the long-term outlook for SA’s public finances. The government can’t afford to spend more — indeed, Godongwana has urged departments to spend less, and the Treasury recently presented the cabinet with a series of possible cuts, large and small.
Yet the pressure to spend in future fiscal years is mounting, and the items on the list are not small. There’s the R350-a-month social relief of distress grant, at a cost of about R40bn annually, which has not been budgeted for beyond March next year. Not only will it be near impossible to terminate in an election year, but the pressure is on to increase it, or to make it a basic income grant. Then there are public sector wages, where the modest two-year settlement reached this year will surely face steeper trade union demands later. There are also uncosted but potentially enormous items such as the National Health Insurance.
And then there are the state-owned enterprises. February was the budget that gave a huge bailout to Eskom; now the pressure is on for a massive R100bn bailout for Transnet. And that’s not counting the smaller begging bowls from other SOEs.
SA cannot carry on down this road of endlessly handing over huge chunks of taxpayer cash to address SOE failures caused by bad management, bad governance and political interference. Godongwana needs to stand firm on the SOE issue. He agreed the Eskom debt relief plan but must demand evidence that the power utility is complying with the conditions and account clearly this week.
He must insist too that Transnet fix its management and speed ahead with private participation before any taxpayer money is thrown at the problem. If he doesn’t stand firm, the incentive for SOEs to remain inefficient and wasteful just grows. Likewise with the government itself: demanding blanket cuts across departments could weigh on growth and service delivery and doesn’t solve the problem. He needs to demand the “reconfiguration” of the government that’s long been promised and to insist grand plans are costed and funded.
Whether he will succeed is another question. But a credible budget will need him to be honest about the likely longer-term outcomes.
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