Not enough realism to curtail the rising debt trajectory

The 2019 medium term budget policy statement (MTBPS) focused on four key areas, to which it committed the government to deliver in areas that would serve the SA economy well over the long term. While bringing realism to the economic assumptions underlying the 2020 budget, the government has backtracked on key aims that could have been achieved with more political will, and compromises among key stakeholders.

The overall assessment of the 2020 budget is that it is realistic, but not bold enough to curtail the rising debt trajectory. It reflects the compromises between political stability, economic transformation and the need to have private sectorled economic growth. The compromises have negative economic consequences, particularly over the short term. What is important is that the Treasury has signalled its desire to improve the quality of spending by rebalancing government spending towards productive economic sectors.

The Budget Review fails to stabilise the state’s finances as the primary fiscal deficit does not close within the medium term. The Treasury seems to have taken a position that there need not be fiscal consolidation at all costs. On the expenditure side, the wage bill is reduced by R160.2bn over the medium term, largely at national and provincial departments as well as national public entities. Out of the wage reductions, R111.1bn is reallocated to other spending, largely to deal with debt problems at Eskom and SAA.

The result is that in effect this budget does not achieve stability of public finances. More so since there is a significant implementation risk, since the proposals assume that the Treasury will be able to renegotiate the public service wage deal. Surprisingly, no new tax revenue-raising measures were announced due to the weak economy and the tax burden already on the consumer these past five years.

Infrastructure investment is one way, if achieved, to drive economic growth. The government’s commitment to it is clear and well communicated through various initiatives. In addition to continued reform in the energy sector and in telecommunications, the budget signals a potential reduction in corporate income tax in the future, but the timing remains unclear. This is a step in the right direction, though, since it could help attract foreign direct investment to the country.

The Treasury committed itself to develop a sustainable plan to reduce future transfers, in part through the disposal of noncore assets and bringing private sector equity partners into some of the state-owned enterprises (SOEs).

That said, no announcement was made on any SOE disposal. A lasting solution remains elusive for Eskom and SAA, which will remain a source of risk for the fiscus, although the funding provided to Eskom and SAA will hopefully ensure energy stability and reduce the risks to the economy.

The government has committed itself to merge and consolidate entities and regulatory agencies, and to salary controls at public entities. It also undertook to review public procurement processes. The budget largely follows through on this, but the rather big assumption that the wage agreement renegotiation will be successful introduces risks.

Fiscal credibility has shortterm costs that pay out a lot more over the long term. Over the past decade SA’s fiscal credibility has been significantly eroded due to unrealistic economic assumptions, which resulted in the failure of the government to stick to budget commitments. To regain fiscal credibility requires producing realistic economic assumptions and budgets, and outlining politically feasible and measurable initiatives to make sure the budget targets are achieved. While the 2020 budget reduces the government wage bill, the savings envisaged are simply reallocated to support struggling SOEs.

As a result, there is no fiscal consolidation as the primary budget balance remains in deficit and the debt-to-GDP ratio continues to rise. This is therefore yet another year in which the Treasury fails to meet its targets.

Fiscal credibility is an economic decision-making and commitment problem, which requires political will to steer the state out of the potential debt trap into an environment where it can deliver prosperity. This requires a demonstration of the willingness to take shortterm pain that is shared by society, especially those who derive the lion’s share of economic progress. All of this for SA’s long-term gain. The Treasury has proposed how the wage bill can be dealt with, but whether this will succeed depends on labour unions appreciating the precarious state of our finances. I’m not confident they will yield on the wage cut issue.