Zuma holds financial levers

THE medium-term budget policy statement, presented two weeks ago, has been thrown into question as a joint team from Treasury and the Office of the President comb through it, looking for R40-billion in expenditure cuts to fund free higher education.

The policy statement is intended to act as a guide to the February budget, both to government departments and the market. Its drastic revision indicates a profound loss of influence of the Treasury and will dramatically affect the pending decisions by credit ratings agencies.

It also indicates the prospects of fiscal consolidation and of returning to the pre-October debt stabilisation programme are minimal.

The move has already led to the resignation of budget office head Michael Sachs, with more Treasury officials expected to follow.

However, Treasury director-general Dondo Mogajane is adamant the change to the budget process does not amount to a coup by the Department of Monitoring and Evaluation, headed by Jeff Radebe, but is rather a constructive initiative. The department is located in the Presidency. “I’m not going to let anyone take control of the budget process.

“We have to bring Treasury and the [Department of Monitoring and Evaluation] closer. It was not done this way before, but it is necessary now. The principle is that we are helping each other jointly to determine what should be cut from the spending side,” he said speaking in an interview from Tokyo on Sunday.

Dondo said he had personally invited the director-general of the department, Mpumi Mpofu, and her officials into the process. Contacted, Mpofu said she was not responsible for the budget and could not speak on the matter.

The rush to find additional funds was initiated by President Jacob Zuma, who two weeks ago informed Mogajane that he intended to announce a new funding regime.

The regime is based on proposals by Morris Masutha, a friend of a daughter of Zuma and Nkosazana Dlamini-Zuma. It includes fee-free education for all families earning less than R350 000; full cost of study (accommodation and boarding) for all students qualifying for grants at universities and technical and vocational education colleges; and an increase in the subsidy to universities to 1% of GDP. A Treasury model costed the package at R50-billion a year.

While some Treasury officials are participating in the process alongside the department, some senior officials, including Sachs, have privately said they were unable to go along with it as it would fundamentally undermine the budget process.

In previous years, the Treasury followed a budget process that was acclaimed for its transparency and methodology. While the Treasury met departments to discuss their proposed budgets, the finance minister’s committee on the budget – made up of senior cabinet ministers – adjudicated trade-offs between them and presented the final product to Cabinet.

Zuma has jettisoned this in favour of a new presidential fiscal commission – a much smaller committee that will process the budget. The process has also been fundamentally altered by introducing a “mandate paper” drafted by the department to set overall budget priorities.

The mandate paper has set down increased funding for higher education as a priority.

Mogajane said he could not speak on the revisions to the budget under discussion as these were only “mooted changes”. He said his understanding of the process in which Treasury and the department were engaged did not only have the objective of finding funding for higher education but also intended to find cuts that could reduce South Africa’s debt burden.

Due to an expected revenue shortfall of R50billion, the medium-term budget policy statement made drastic revisions to South Africa’s debt-stabilisation profile. While in February, debt was forecast to stabilise at 52.3% of GDP in 2018 it is now projected at 60.8% by 2021.

Rising debt and the apparent abandonment of the fiscal consolidation project has rattled investors, who have viewed the policy statement as credit negative. South Africa is on the cusp of having its domestic bonds junked by S&P Global Ratings and Moody’s, both of which are due to update their ratings on November 24.

Reserve Bank governor Lesetja Kganyago warned at the SA Tomorrow investor conference in New York last week that a downgrade of South Africa’s local currency debt to subinvestment grade would negatively affect the rand, bond yields and confidence.

Moody’s has South Africa’s foreign and local currency ratings at Baa3, – the lowest rung of investment grade. S&P, which has already junked South Africa’s foreign currency rating, has the local currency rating on the edge of investment grade. — With Hilary Joffe