New budget needed for this uncertain era
We need a new budget. Urgently. The taxman delivered his dose of bad news last week and, unsurprisingly, told us what we had all been expecting: we are going to be spending inordinately more in an environment where we collect significantly less.
“Every single tax type is going to suffer,” SA Revenue Service commissioner Edward Kieswetter said last week. Not even improved terms of trade will give us anything to smile about. It is clear that while we earn foreign exchange in selling wine abroad, our inability to collect consumption taxes on it at home makes Kieswetter’s job a lot more difficult.
The implications are rather sobering: not only a higher deficit, which some now expect to be as much as 15% of GDP, but also a significantly higher borrowing requirement. In the foreword of the Budget Review in February, the finance minister suggested the debt-toGDP ratio would reach 71.6% in the 2022/2023 financial year; Moody’s Investors Service now expects it to hit 91.3% by 2023.
In this context, the debate between Madiba Street (the National Treasury) and Helen Joseph Street (the Bank) is a welcome development. If we know we will have to borrow significantly more, how do we then think of the arsenal of policy tools at our disposal? And how do those independent institutional efforts guide their use coherently to achieve common goals?
This is not about a “turf war” or encroachment on the institutional space of different policy actors, but rather a space to place informed debates on economic policy at the centre of our national discourse. We might need to, in light of the recent Bloomberg survey that predicted an emerging-market asset sell-off in the second and third quarters, coinciding with the anticipated peak of Covid-19 infections in SA.
We are in uncharted terrain, which requires all solutions to be put on the table. To the credit of the Bank, the R11.4bn in government bond purchases in the secondary market between March and April indicates that, notwithstanding the Bank independence debate, its balance sheet can play a role in the national effort.
It is necessary (and commendable), but at this point still largely insufficient.
Former Treasury official Andrew Donaldson has suggested the Bank could buy about R20bn in bonds a week. This would yield in the monthly statement of assets and liabilities a monthly change of R80bn in government debt holdings. So while R11.4bn is significantly better than the R1bn bought in the previous period, to finance the large fiscal expenditures required, yields need to go back not only to about 8.5% or so on the 10-year government bond, but even lower in the context of what the third phase of the response may require.
This is important because of the distributional consequences associated with rising debt service costs. Money that should go to building school toilets or paying Expanded Public Works Programme salaries will be going to pay affluent bondholders who have taken on no additional risk. Moreover, as the Treasury has indicated, an increasing reliance on short-term borrowing makes SA vulnerable to sharp interest rate and exchange rate movements in key markets.
The policy response has to take into account how our policy mix will ensure that while we accept the higher borrowing requirements, servicing these debt obligations occurs in a manner that is sustainable and minimises the distributional consequences of crowding out social and other expenditure. Moreover, monetary policy can complement a fiscal policy that is aimed at augmenting and mitigating declining and lost wages (thus stabilising household demand) and investing in capital spending that improves the long-run growth potential of the economy. These are the areas that budget reprioritisation ought to consider. This is the new budget we await.
The next few months and beyond must be about flattening the curve of both infections and the costs at which we borrow.