Tough budget balancing act
With the budget approaching you might expect boardrooms and executives of SA’s biggest companies to be filled with fear of election spending splurges and higher taxes to pay for it.
While there are certainly some fears of the risks around the medium-run path of fiscal policy (especially under certain outcomes for the elections), it seems boardrooms are calmer than some parts of the market.
Boardrooms are far more interested in the worrying foreign policy stance that SA is taking, which will — maybe a little later rather than sooner — come back to bite the country in the backside with no mythical global South export and investment alternative (of the scale required) to substitute. Few believe SA is running an actual nonaligned policy, as witnessed by the grandstanding of ANC secretary-general Fikile Mbalula in Russia this past week at the same time the leading opposition leader of the country is killed.
Anyway, back to fiscal. There seems a continual core of people in the market who want to expect a spending splurge cycle through the election when this has never happened before. Similarly, those who do lazy analysis and simply tack on last year’s final fiscal quarter spending to this year to get a mystical 6% GDP deficit number — which ignores the huge differences in state-owned enterprise (SOE) spending and underlying provincial spending allocations last year and this.
Madness seem to have a way of perpetuating in the market. There is the belief that the ANC is about to jump into bed with the EFF at first blush after the elections. Despite every indication that anyone investigating this issue seems to get, it’s a usefully lazy trope for people who want to sell downside options on the rand, or drive bearish views.
Of course, such things are not new. There has always been a maddening core in the market for years even through the Mbeki era who were happy to spout mindlessness about Zimbabwe situations afflicting SA. But the issue is that the fiscal situation is much more complex than simple tropes.
Revenue is doing pretty well (versus targets) and might even slightly outperform in the coming two years as loadshedding eases to free up more margin and tax from corporates.
Judging from the state of the nation address, the Treasury has held the line on any meaningful step forward on issues around the social wage, including National Health Insurance or the basic income grant.
The Treasury is also holding a strong line against SOE attempts to strong-arm it into providing free lunches negotiated through the press — of which Transnet is the largest example. Sensibly, the Treasury imposed conditionality for the guarantees it is providing to Transnet — causing screams, it seems, from deep inside Carlton Tower in a sign that someone finally is being the adult in the room on the issues.
The problem for the Treasury is some slippage in expected intrayear cuts being enough to keep expenditure in line. However, this is at most about 0.4 percentage points of GDP. This does raise the bar for what is credible in the next fiscal year. The point is there is a battle by the Treasury to manage things. The view that it just gives up the ghost and allows slippage is wide of the mark.
This week’s budget then is about judging how this battle is progressing. How much the line is being kept and if the broader political backing of the president for this path is still in place (as it was at the medium-term budget policy statement).
“Ah, but austerity!” comes the cry. What is always lost during each cycle of fiscal update is that we are not in an optimal place and everyone — including the Treasury — is ready to admit that.
It would obviously be far better if we had stronger growth with a deeper and wider tax base to fund a richer social wage. It would obviously be better if not just state capture but the government “status quo” of deeply enmeshed rent extraction in spending were not occurring, freeing up more resources. But neither is the case. It would be great too if there were magic money trees such as a wealth tax, or all manner of other supposedly consequence- and behavioural reaction-free options the Left likes to throw up. But there are not.
The central problem remains that the political capital for the budget remains just enough to hold the macro-fiscal line. This means debt levels that just grind higher over time but don’t explode higher, even if there is no political capital to undertake deeper prioritisation and zerobased budgeting.
The only route out then is to parcel down cuts to lower levels of government. As we’ve seen in the past week, this means cutting poorly spent metro budgets for human settlements, for instance. When there are few other options, the choice is between clawing back underspent allocations and trying to ensure they are spent correctly. This is a multiyear process that has not yet proceeded well. In some sense it is an impossible choice, of course. But it’s fixed by growing the economy — not holding your nose and hoping that everything is squared off in the end once you’ve jumped off the cliff.
With a fiscal rule coming too, the question is what you do within this line that is being held. This is the challenge that the cabinet outside the Treasury has never been willing to wrestle with and that any opposition party hoping to take over government will need to answer. Low-hanging fruit and easy wins here don’t exist when rent extraction is so tightly wound with spending.
There should be no illusions, however, that where we are now — or at the end of this week — is in any sense optimal. But it is the Treasury’s job to work within the political economy and wider capacity and institutional constraints that are dealt to it.