An ambitious budget, but with an uncomfortably high execution risk

After years of talk, there is broad understanding of what is needed for growth and to stabilise SA’s finances

Finance minister Tito Mboweni may be accused of many things, but no-one can suggest he is not bold. In the face of persistently weak growth and revenue declines, the 2020 budget sets out an ambitious plan to cut expenditure by reining in public-sector wages. No-one in SA believes they receive good service from the public sector. The frequency of service-delivery protests continues to rise in the townships, while everyone who can afford to privately contracts in security, healthcare, education and even electricity supply.

At the same time, SA has a relatively high tax take as a proportion of GDP at 26.3%. This is the same level as Australia and higher than Ireland. If we account for all the privately provided “public goods”, SA taxpayers receive very little value for their tax rand from the public sector.

Given the perilous position of state finances, Mboweni’s budget provides an excellent plan to address the situation. It revolves around cutting growth in the public-sector wage bill, but please note that the wage bill is still projected to grow an average of 3.5% a year over the next three years — allowing for an average increase over the period of the change in the consumer price index (CPI) less one percentage point.

In a discussion with officials, the Treasury was at pains to highlight that it is not prescribing the outcome of the wage negotiations. Rather, it is outlining the wage growth that is sustainable for SA. Moreover, even with the proposed wage curtailment the debt to GDP ratio continues to rise over the three year period.

That persistent increase in SA’s debt burden means a weaker wage agreement than that will result in government having to borrow more — and ultimately that will also mean higher interest charges. Interest charges already account for 13% of main budget expenditure and 4.2% of GDP, of the coming year’s projected 6.8% of GDP budget deficit. This has risen from 2.2% of GDP in 2009/2010. It will surely continue to rise in the coming years if wages are not reined in now.

The economics are clear: state employee wage growth must slow. If the SA government were a company, it would long ago have been in business rescue. If the SA government were a company, wage growth would have been frozen several years ago.

This is where economics meets the reality of SA’s political economy. The governing ANC has a national general council meeting scheduled for mid-2020. Public-sector unions form a major bloc of support for President Cyril Ramaphosa. In a divided party, its support is critical for the president. In that context, can this agreement be reached?

The good news is that in recent weeks, the main union federation and governing party ally Cosatu has been demonstrating a strong desire to help SA achieve long-term solutions to its key challenges, notably Eskom and the public-sector wage bill. The concern is that communication between the government and unions appears to have been very limited to date. Ideally, the government would have begun negotiating a solution to the inflated wage bill in the days and weeks after the October 2019 medium-term budget policy statement (MTBPS). Instead, there seem to have been a few ad hoc meetings and no cohesive policy from the government.

At best, the wage numbers in the budget are a negotiating tactic. It would be a good outcome if this tactic is used to achieve either lower wage growth in the current year or to conclude a further three-year wage agreement (that will run from April 1 2021 to March 31 2024) by end-March 2020, which will provide for R150bn in wage cuts in 2021/2022 and 2022/2023.

In the second option, unions would retain a largely untouched wage agreement in the coming year. In return they would allow for a virtual wage freeze the following year.

The government would have a contractual agreement for the R150bn in cuts within the three-year medium-term expenditure horizon. It would be a less-than-ideal solution — not as good as cuts in the year starting April 1 2020 — but it may be a compromise all can live with.

That may be enough to keep Moody’s Investors Service’s rating of SA on hold in March and satisfy the local bond market for now. Tangible, concrete progress is required, not just promises for a sensible deal in 2021.

In addition to the wage agreement, Mboweni has produced a sensible budget. He has allocated no further money for SAA than that needed to satisfy government-guaranteed debt. A solution to the airline’s acute problems is needed that is financially sustainable — or it should be shut down.

Nominal growth forecasts have been downgraded, though perhaps not by enough in the outer years. And he has not raised taxes, which have provided much less than expected revenue in recent years. This should support what little growth exists at this point. Overall, it is a good budget under the circumstances: a good budget with an uncomfortably high execution risk.

The helter-skelter manner in which this dramatic change to wage policy has been dealt with is symptomatic of the broader policy disorder in Ramaphosa’s government. After years of discussions there is a broad understanding of the policies that need to be implemented to stabilise SA’s finances and support growth. A few of these measures include opening up electricity generation to the public sector, dramatically slowing the growth in the public-sector wage bill, improving data access and cutting data costs, and making it easier for both tourists and foreign skilled workers to enter the country.

At various times in the past two years, ministers have positively supported these measures. It is execution we now need — on bid window five in the renewable energy programme, streamlining tourist visas, and curtailing the public-sector wage bill. Let us hope that early 2020 sees actual delivery on all of these measures — not just talk.