Hairy decisions needed for minister’s bald numbers

With few solutions offered for SA’s economic mess, new committee will have to perform serious balancing act

Finance Minister Malusi Gigaba looked unusually subdued as he briefed journalists ahead of his maiden medium-term budget policy speech on Wednesday — and no wonder. Though he claimed tough decisions had been made to maintain the fiscal framework and the expenditure ceiling, the numbers he announced made it clear the government has crashed off the fiscal consolidation path it had been following for the past few years and has breached its own selfimposed expenditure ceiling.

Nor was there much evidence, in the minister’s sometimes garbled answers to technical questions, that any decisions about SA’s fiscal trajectory had been made. Instead, the tough stuff has been flipped to a new committee of ministers that was set up at the beginning of October, reporting directly to the president, and will “develop proposals to stabilise the national debt over the medium term”, the budget document said.

The message seemed to be that this was just the curtain-raiser and taxpayers, investors and rating agencies should wait until the real budget in February, once the December elective conference is over and the new committee has applied its mind.

And while Gigaba talked of the need to end procrastination and dithering, and demonstrate decisive leadership, Wednesday’s exercise in procrastination meant the raw budget numbers were allowed to speak for themselves in a way that was unprecedented.

The result was brutal. Tax revenue for the current year is expected to have undershot February’s revised target by almost R51bn, the highest since the financial crisis, with the three years of the medium-term framework showing a cumulative shortfall of R209bn.

In the absence of political decisions on any extra tax hikes or spending cuts, that means the main budget deficit blows out to 4.7% of GDP and over the medium term will be, on average, more than 1.2 percentage points of GDP higher than February’s targets, staying up at 4.5%-4.6%.

And that, in turn, results in a spectacular blowout of the national debt. Far from stabilising, as the fiscal consolidation plan has promised, it will rise and rise and is now projected to hit 60% of GDP by 2022 – significantly higher than the 49.5% at which it peaked just after the new democratic government had taken office and found the fiscal cupboard was bare.

At least the interest cost of that debt is not yet as high as it used to be, thanks to SA’s sound monetary policy. But debt-wise it’s as if all the hard work done by former finance minister Trevor Manuel and his team to sort out the disastrous public finances bequeathed by apartheid is now undone.

Worse, 60% is a big deal for ratings agencies. Their models tell them that at that level, there is a heightened probability that a country will be unable to pay back its lenders, and even though SA is arguably less vulnerable because it has very little foreign debt, Gigaba’s numbers make a downgrade to junk status all but inevitable – and raise the probability that it will be now rather than in 2018.

As for investors, the rapid fall in the rand and bond prices even before the minister finished speaking on Wednesday reflected just how badly markets were taking the numbers.

Arguably, they might have welcomed the raw realism. SA’s growth rate has consistently disappointed in recent years; every one of the past four years has had a revenue undershoot, with former finance ministers Pravin Gordhan and Nhlanhla Nene implementing new measures each time to curb spending growth and raise extra revenue, while promising to stay on the path of fiscal consolidation.

But the Treasury’s projections about growth and revenue collections had proved consistently overoptimistic, particularly in the past couple of years, as the debt ratio kept rising.

Previous ministers would have intervened to make adjustments to taxing and spending and ensure they had a story to tell ratings agencies and investors. This time, however, Gigaba simply offered up what he called a “candid statement, which puts the facts as they are”.

Whether it will prove candid enough will start to emerge only in coming months.

In a worst-case scenario, politically and economically, the fiscal outcomes could prove even more brutal. After all, although the Treasury has revised down its growth forecasts — to 0.7% for 2017, rising to only 1.9% by 2020 – those numbers at least still have a plus sign in front of them. And a significant positive in Gigaba’s speech was the extent to which he emphasised the need for growth.

Growth is one of the lines to look at in grasping, and testing, the reality of Wednesday’s budget. But there are other key ratios to watch.

The gross debt ratio was core to the government’s promise of fiscal consolidation – it had been projected to top out at 52.9% in 2018-19 and then to start coming down.

Now, it’s forecast to go up to 57% in that year and to keep going up indefinitely. Getting it down was premised on a shift in the primary budget balance from deficit to surplus. This is the ratio of government revenue to noninterest spending; as long as it is in deficit, the government debt ratio will keep rising.

It had earlier been expected to start posting small surpluses from 2018-19; now it is just deficits all the way — so that fiscal consolidation promise is off the table too, unless the new committee comes up with more big tax hikes or spending cuts to be implemented in 2018.

The Treasury has calculated that such consolidation measures would have to amount to 0.8% of GDP over the next three years to get the debt ratio below 60%, which would mean R40bn of additional tax hikes and/or spending cuts in the main budget in February.

The risk, as Gigaba noted on Wednesday, is that such austerity measures could further undermine SA’s fragile growth.

Without such action, however, the cost of the government debt will increasingly crowd out other spending: it is by far the fastest-growing item of government spending, and by 2020-21 will be eating up 15c of every R1 the government collects from taxpayers.

Add to that the government’s wage bill, which continues to climb at well above inflation rates, and there’s not that much left.

Already, the interest bill and the compensation bill together account for about 46% of total government spending. That makes 2018’s public sector wage round particularly material for the fiscal framework.

It also makes the hard decisions required to stick with the expenditure ceiling even harder – especially in a context in which Gigaba has already raided the contingency reserves, which had been set aside for emergencies or new policy measures, to help pay the costs of bailing out South African Airways and the Post Office. This leaves no room for manoeuvre if anything else goes wrong.

The committee will have hard decisions to make. The longer they are avoided, the higher the risk that the outcome will be even more brutal than Wednesday’s numbers.