Growth is the dark horse for predictions
With just two weeks to go to the budget, at least four big uncertainties could derail the numbers, even in the very short term.
Growth is one. Economists have been revising their growth forecasts upwards since Cyril Ramaphosa’s win at the ANC’s elective conference, and where the disastrous October budget assumed growth of 1.1% in 2018, rising to 1.5% in 2019 and 1.9% in 2020, most forecasts are now meaningfully higher.
It’s hardly shoot-the-lightsout stuff, but the Reserve Bank has upped its forecast for 2018 to 1.4%, as has the Bureau for Economic Research, which has won awards for the accuracy of its forecasting and now sees the growth rate rising to 1.9% in 2019.
The range among economists is quite wide and the Treasury will need to pick numbers for the next three years that are realistic and credible in the eyes of the market and the rating agencies. But what is realistic now? The Treasury has had to pin down the budget numbers in an almost binary context in which confidence and growth could go either way, depending on the politics of the ANC and the presidency of the country. The budget documents will surely already be on their way to the printer by now, but amid high political drama the growth outlook could shift markedly between now and budget day, making the Treasury’s forecasts look less credible whether on the upside or the downside.
The growth rate is crucial for the budget ratios in two ways: it drives revenue growth, and the deficit and the public debt are seen as ratios of GDP, so the absolute level of GDP is key. In theory, the budget deficit and the debt ratio would look better, even if nothing was done to cut spending or hike taxes, if the denominator, GDP, over which the ratio is measured were larger.
However, it is nominal GDP growth, not the inflationadjusted real GDP growth we all look at, that is the relevant figure, so we will have to see how the Treasury plays with those numbers for the next three years of the mediumterm budget framework.
Chances are that it will have come up with quite a decent budget, under the circumstances, certainly much more decent than Finance Minister Malusi Gigaba’s medium-term budget in October, which downgraded growth and simply let the budget deficit and debt ratios blow out of control with no action taken to tackle this.
This time, there have been decisions taken, led by the presidency and presidential fiscal committee, to cut spending — with cuts to budgets that have never been cut before, apparently, to find savings of more than R20bn that have been pencilled in. This clearly will be an austerity budget of spending cuts and tax increases, even if revised growth forecasts help to flatter the ratios.
But will it be austere enough? Two more uncertainties on the spending side of the budget could derail the ratios, perhaps even before the minister makes his budget speech. One is the public sector wage round. The Treasury has budgeted for average increases of 7.3% a year and reports indicate that the government has offered public servants an average increase of consumer price index inflation plus 1.5 percentage points. That’s about 6.5%, assuming a benign inflation average of about 5%, but to that must be added notch increases and other improvements in conditions, which add another 1.5 percentage points to the total, bringing it to at least 8%.
That would already blow the budget out of the water, with each percentage point of extra pay hike adding R5bn-R6bn to spending, but the public sector unions are asking for even more. Whether Ramaphosa, who won his ANC post with the unions’ support, can broker a deal in the next few weeks is a big fiscal question.
So too is the other big spending item — higher education. No one really knows yet what President Jacob Zuma’s free fees announcement will cost, especially over the next three years as it is rolled out to all qualifying students. For the current year, with only new students entitled to the full package, the cost is R12bnR15bn , but that’s estimated to rise to R40bn a year over the next few years and the figure could be higher. Higher education was already the fastest-growing item of noninterest spending in the budget; it will be rising even faster now, and more unpredictably.
For now, firm action on Eskom’s governance has shelved the scariest uncertainty on the spending side — the potential for the state-owned enterprises, specifically Eskom, to implode and need rescuing by the public purse. But the risk is still there.
Also still there is the risk to revenue, and while Eskom’s leadership has been replaced, that of the South African Revenue Service has not. The October budget projected a revenue shortfall of almost R51bn for the current fiscal year, and it is quite possible the outcome will be worse. So far, the estimate looks about right, but the most recent Treasury figures are for the period to November, and a better idea of revenue trends will only emerge once figures are published for December, which is a big tax month.
Meanwhile, Treasury officials can try to manage the stress while they anticipate a fun-filled day on February 21.
NO ONE REALLY KNOWS YET WHAT PRESIDENT JACOB ZUMA’S FREE-FEES ANNOUNCEMENT WILL COST, ESPECIALLY OVER THE NEXT THREE YEARS