When former finance minister Malusi Gigaba presented the medium-term budget a year ago it was more a train smash than a budget. Growth was way short of projections, tax collections over the next three years were expected to fall almost R200bn short, the national debt was going to keep climbing - but the minister offered no solutions. The response from rating agencies and the rand was swift and devastating. It was only in the February budget that the government began to undo the damage, taking advantage of Ramaphoria to revise up growth forecasts and implement tough tax and spending measures to get back on track towards stabilising debt, as it had long promised to do.
As SA goes into this year's medium-term budget the political environment looks better, with a more growth- and investment-friendly president and market-friendly finance minister. Yet the economic environment is in many ways worse and the fiscal space far more constrained. Growth is much weaker - the economy sank into recession in the first half of this year. Moody's last week revised its growth forecast down to 0.5% for this year and 1.3% for next, and though the Treasury is unlikely to go that low, it will have to slash its estimates of 1.5% and 1.8%, rising to 2.1% in 2020, on which it based its February budget projections.
The political environment is better but the economy is worse ahead of midterm budget
President Cyril Ramaphosa has promised an economic stimulus package reprioritising up to R50bn of government spending on high- impact, job-creating projects. But there was already a huge reallocation of spending in the previous budget for the R67bn cost of previous president Jacob Zuma's commitment to free higher education. The Treasury will also need an extra R30bn or so to pay for the public sector wage deal that was above budget. Added to that is pressure to bail out state-owned enterprises which have new, credible boards but remain in crisis. And on top of spending pressures are rising interest costs for servicing the national debt. The government has promised to stick to its expenditure ceiling and rating agencies and investors are watching.
A key question is whether the Treasury has managed to slice and dice spending this time in ways that don't damage service delivery and are positive for growth. Another big question is on revenue. Unexpectedly, tax collections have been in line with budget projections for the first five months of this fiscal year - but will it last? The economy is one big factor; the state of Sars another. Moody's expects another shortfall this year. Absa Capital economists Peter Worthington and Miyelani Maluleke estimate it could be anything from a slight overshoot to a R21bn undershoot.
It's also the three-year outlook that is crucial to the bottom line and how finance minister Tito Mboweni's first medium- term budget will play in the markets. The trick for the Treasury is to be realistic enough to convince, but not so realistic that it repels investors and makes it even more expensive to raise funds. Crucially, markets want to be convinced that the government has a plan to stay on the path of fiscal prudence and that efforts to deliver higher growth will yield benefits. Moody's more pessimistic growth and deficit predictions may be the more realistic but they are at the bottom end of expectations. The Treasury will not want to be pessimistic at a time when the president is going for growth and investment.
Most economists expect relatively unchanged numbers but spending pressure will ramp up going into elections and February's budget could be an even tougher one to craft. And while Ramaphosa's promised reforms - such as in telecoms and mining policy - could well start to boost growth and ultimately tax revenues over the next 18 to 36 months, they are not going to be any short-term fix for the fiscal folk. Some combination of realism and optimism may be the best Mboweni can do for now.
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