Fees spree sure to dump SA on junk heap
Tucked away in the back of October’s medium-term budget policy review, in the risk section of the document, are a few lines on policy proposals that are “currently not funded”.
Most pressing of these, the document politely says, is higher education, where the government is considering options to increase affordability for students — options that could cost between R17.7bn and R40.7bn in 2018-19.
Turns out it’s the R40.7bn President Jacob Zuma is trying to force through, hijacking the budget process to deliver a feefree plan devised on the advice of a family friend who turns out to have been a spy — and against the advice of the Heher commission on higher education as well as the Davis tax committee.
It’s a number almost as large as the entire R52bn annual budget for the Department of Higher Education — and large enough that if the Treasury were to cut spending and/or hike taxes by that amount, the government could get back on the path of fiscal consolidation it so spectacularly fell off in the medium-term budget.
Confirming this week that Treasury budget office head Michael Sachs had left, Finance Minister Malusi Gigaba assured the nation that the Treasury remained committed to a budget that focused on fiscal consolidation and was mindful of SA’s economic challenges. The events of the past week, however, suggest it may be too late for that.
One reason is that there may be no going back from the damage done to the credibility of fiscal policy and to the Treasury as an institution; another is that the damage done to the fiscal numbers may prove much beyond R40bn.
The new democratic government spent years turning around the bankrupt public purse it inherited from apartheid and building a transparent, predictable, disciplined approach to fiscal policy, which yielded huge social and economic dividends.
In the past four years or so, the credibility of SA’s fiscal policy and of the Treasury as an institution have helped SA to cling on to at least the more important of its investment grade ratings, even though its failing economic growth, deteriorating fiscal metrics and fractious politics would otherwise have already seen it downgraded some time ago.
However, Gigaba’s budget put a deep dent in that credibility not only because the numbers were so bad but because he seemed not to have the political sway even to promise to fix them. The disclosures of Zuma’s budget coup would seem to have confirmed that.
And there’s no going back from the departure of Sachs, a highly regarded professional with impeccable ANC credentials who had led the budget office through an ever more challenging decade. If Sachs has had enough, the ratings agencies will surely have had enough too. A downgrade to junk status all round was already on the cards following the medium-term budget; it is all but inevitable now when Moody’s Investors Service and S&P Global update their ratings next week.
The disturbing question is whether this might be but the first of many downgrades, given what could happen to the numbers. The budget cuts the Treasury has reportedly been instructed to find to accommodate the president’s R40bn will leave no space for other spending cuts, so any chance of consolidation will be blown out of the water.
In addition, there is the public sector wage round coming up, and it’s hard to imagine the government taking on the public sector unions at this critical juncture. Yet the Treasury has warned that pay hikes of even a single percentage point above inflation will add billions to spending over the next three years. Then there’s the interest cost on the public debt, which is already the fastest rising item on the budget.
October’s budget and the news of Zuma’s fee plans and Sachs’s resignation have led to bond yields spiking by about 60 basis points to almost 9.5% — heading towards the 9.8% at which yields peaked after Nenegate. That adds at least R1.7bn to the interest cost on the new borrowing the government needs to do in 2018 — and that’s even before a downgrade. Whether the downgrade to junk is priced into markets is a big question.
A second, related question is the effect of a downgrade on growth in 2017 and into the next three years of the budget framework. Even based on the Treasury’s middle-of-the-road scenario, growth in 2018 could be much lower than its 1% forecast — its worst-case scenario is a deep recession.
Lower growth means an even bigger revenue shortfall than Gigaba has pencilled in in his three-year framework. Even in 2017, growth could fall short of his modest 0.6% forecast and the revenue shortfall could be higher than R50bn – numbers of up to R80bn are being whispered. All of which suggests that February’s budget could look even more dire than October’s, despite the new presidential fiscal committee that is supposedly going to sort it out.
Whether the outcome of the ANC’s December elective conference will make the outlook worse or better is what everyone is watching for. But once damaged, institutions and credibility take much time and political will to repair. That will be the challenge for whoever wins in December.
THE QUESTION IS WHETHER THIS MIGHT BE BUT THE FIRST OF MANY DOWNGRADES, GIVEN WHAT COULD HAPPEN TO THE NUMBERS
Joffe is editor at large.