Can Tito deliver on his mandate?
Treasury team has achieved tough fiscal acrobatics before
On October 9, President Cyril Ramaphosa appointed Tito Mboweni as SA’s new finance minister. Mboweni’s experience in the areas of central banking, economic policy and governance makes him suitably qualified for the job. Just as well, because his task is an unenviable one: tighten fiscal policy even further to prevent the state’s already worryingly high debt load from escalating, amid various forms of new — and old — fiscal constraints.
So, will he be able to deliver on his mandate? The answer will be clearer after he has presented the medium-term budget policy statement on October 24.
Unfortunately, Mboweni faces an even more challenging landscape than the one mapped by Treasury in February. This was when it tabled a budget based on GDP growth accelerating from 1.3% in 2017/18 to 1.5% in 2018/19, and 1.9% in 2019/20.
Despite this projected revival, Treasury still had to introduce new revenue measures to raise R36bn more, by increasing VAT and other taxes. All this while simultaneously cutting spending by R27bn to ensure that the budget deficit falls from 4.3% of GDP in 2017/18 to 3.6% in 2019/20 and that the state’s debt load stabilises at (a still uncomfortably high) 56% of GDP.
The terrain has grown more unforgiving since February. With economic growth likely to markedly undershoot Treasury’s estimate for this year — and, to a lesser extent, for next year — tax revenue will be hit. Also, it’s quite possible that tax buoyancy rates won’t recover as quickly as anticipated eight months ago: compliance rates have deteriorated, and Sars’s tax-collection capacity has been unduly damaged — the full extent of which is becoming evident, thanks to recent disclosures made to the Nugent Commission of Inquiry.
And there are more rockfalls to negotiate.
The minister will have to respond to some known spending pressures. The threeyear public-service wage agreement reached in June, which turned out to be more expensive than planned, is one of them. Another is a likely sharp increase in state debt costs, given the 20% drop in the exchange rate, and the sharp upward shift in government bond yields.
These setbacks, and the odds of real borrowing rates continuing to exceed Treasury’s (new and likely lower) real GDP growth estimates this year and next, suggest that Mboweni will have to implement substantial fiscal tightening. Just to stick to the originally planned budget deficit and debt sustainability targets would require tightening of as much as R20bn–R30bn in 2018/19, and even more than that in 2019/20. This is on top of the tax and spending initiatives already in place.
How, then, will he navigate forward with even less fiscal room for manoeuvre?
Personal income tax payments already account for a staggering 38% of gross tax revenue (a 20-year high), company tax rates globally continue to trend lower, and the VAT rate has only just been raised — by one percentage point to 15% — making another hike implausible, with general elections looming.
Some of the additional revenue to flow from this hike might now also have to be sacrificed, should the list of products currently exempt from VAT be expanded.
Enter the escape route of government spending cuts? Not so quickly. Here too, a number of new spending commitments limit the minister’s options. A critical objective of Ramaphosa’s economic stimulus package announced in September is to accelerate state capital expenditure. This is a welcome departure from the past two years when investment in real terms contracted. Even so, the renewed emphasis on boosting capital expenditure means that current expenditure (specifically, current non-interest expenditure) must fall if total expenditure is to fall. This is easier said than done.
Alas, efforts to cut corruption and wasteful spending won’t deliver him to his savings destination in the short term, either. Simultaneously, transfers to households (social grants, land reform grants and fee-free education) are clearly off bounds, and most of the state’s operating expenses simply grow with inflation.
So, with capex now set to rise rather than fall, and state-owned corporations likely in need of further capital injection, one of the only remaining options is to cut spending on staff and salaries. At 39% of non-interest expenditure, it’s the obvious place to start.
It has been done before — successfully so. In fact, the past offers a viable way forward for Mboweni, who could formulate solutions not dissimilar to those the government applied in the 1990s, when it, too, was under pressure to fix a damaged fiscus.
When the ANC came to power in 1994, it faced a conundrum not unlike the one he faces today — a pressing need to reform and increase social and welfare expenditure, while at the same time having to contain debt levels amid an environment of weak revenue collection.
To be sure, in 1994, just as now, there were growing concerns about debt sustainability amid the debt-to-GDP ratio accelerating from 32% in 1990/91 to 48% in 1994/95. In the past five years, this ratio has also jumped by a not-too-dissimilar 12 percentage points to 53% in 2017/18.
Correctly anticipating at the time that the so-called economic growth dividend of democracy wouldn’t materialise early enough to positively affect tax revenue and the debt ratio, the government decided to take alternative interim action. As weak
GDP growth and the need for broad tax reform precluded raising taxes, the onus had to fall on cuts in non-interest expenditure — with specific emphasis on the wage bill.
Strikingly, through a mix of policies ranging from wage restraint to outright headcount cuts, government successfully deflated the wage bill from an estimated 36% of non-interest expenditure in the late 1990s to about 28% a few years later.
Mboweni’s policy actions don’t have to be as extreme. An easier route would be to combine moderation in the wage bill with initiatives to boost non-tax revenue.
This is exactly what his colleagues of yesteryear did — and it worked. For years after 1995, billions of rands were added to the fiscus through the sale or restructuring of state assets. In the end, the combination of the eventual recovery in GDP growth, curbs on wages and other expenditures and asset sales not only had the desired effect of stabilising the government’s debt-to-GDP ratio, but went on to see it fall to 44% by 1999/2000 (and even lower still thereafter).
The fiscal reforms required to arrest the accelerating debt levels of the 1990s were substantial. History suggests it’s possible for the ANC to achieve such difficult reforms while facing weak economic growth and an electorate with high expectations.
Recent signals from the government such as to encourage civil servants who qualify for early retirement to exit public service, and the announcement to auction off additional telecommunication spectrum (which also represents a form of non-tax revenue), are reassuring. Mboweni could forge a feasible path for public finances by taking sustainable strides in this direction.
Le Roux is chief economist of Rand Merchant Bank, and Boshoff is associate professor and director at the Centre for Competition Law and Economics in Stellenbosch