Credibility of budget plans is paper thin

For policymakers, it’s been a year like no other. When finance minister Tito Mboweni presented his budget in February, with a debt consolidation plan largely premised on cuts to the government wage bill, it wasn’t met by what one would describe as overwhelming credibility in the market.

It wasn’t because anyone disagreed with what he said. All the evidence on the unsustainable growth in the public sector wage bill, without delivering a corresponding amount in value for money, whether measured in hiring more nurses and teachers or growth-enhancing investment, was all there to see.

About a month after Mboweni had spoken, Covid-19 reached SA and the government responded with one of the most severe lockdowns seen anywhere. And that February budget wasn’t worth the paper it was written on.

It wasn’t until June that the minister presented another plan to the country. Again, nothing wrong with the message that tough decisions had to be made.

But still, there was a feeling that politics would get in the way and that the Treasury was unlikely to come out on top.

Throughout the year, and before, there have been rumblings about the political and technical weakness at the keeper of the national purse, at least compared with its glory days when Trevor Manuel ran the show as finance minister and Maria Ramos was directorgeneral at the Treasury.

But at least for 2020, Mboweni could, to an extent, look at circumstances beyond his control. By the time the medium-term budget policy statement came in October, Mboweni seemed to be more in tune with reality, and the spending cuts he announced were actually less ambitious than what was unveiled in June.

Shortly before he presented his statement, it emerged that the president’s economic advisory committee had proposed a different path, one that delayed debt consolidation, the argument being that this would not only give the battered economy a respite but would also have a higher degree of credibility with markets.

It ’ s not clear if that had any influence on the minister’s thinking, but he did relax, though the targets were still ambitious. Instead of pursuing an “active scenario” with the debt-to-GDP ratio stabilising at about 87% by 2023/2024, he would let it peak at 95.3% in 2025/2026 and then decline.

Ratios of 100% or above have become common in rich countries in recent years, but for emerging markets — which are set to average around 60% — that is mostly seen as a prelude to a proper fiscal crisis.

Much has changed since the period before the last financial crisis when orthodox thinking dictated that countries had to adhere to strict debt targets such as limiting the ratio for emerging economies to about 40% of GDP. But it hasn’t changed so much that there’s a general belief that SA can sustain the levels of debt it is carrying now without eventually having a full-blown fiscal crisis.

Those who followed the events of the past week will be wondering if such an eventuality is now all but inevitable. Perhaps it always was, as few believed that Mboweni would be able to deliver spending cuts of R306.7bn over three years, most of which would come from an effective wage freeze he hadn’t agreed with the unions. That was left to the public service & administration department, which spectacularly broke ranks and attempted to offer the unions a deal the Treasury had insisted was unaffordable. In court papers in July, the Treasury had gone as far as to imply that granting those increases would be immoral, given the sacrifices being made by workers in the private sector.

The departments even managed to find themselves in opposing corners in court in the past week over the legality of the original agreement signed in 2018.

Senzo Mchunu can plausibly argue that Mboweni had always dealt him a bad hand. Instead of negotiating with the unions in good faith, he presented them with a fait accompli that he should have known they would never accept.

And then he left the hapless Mchunu to wring concessions out of them after the event. “I proceed from the point that the conversations taking place between [Mchunu] and the leadership of the trade unions movement will result in a positive outcome,” Mboweni said in October. Perhaps the lesson for the minister is that if you want something done and on which your credibility rests, best do it yourself.

With all that background, it’s easy to see why the ratings companies were sceptical, and why the downgrades duly arrived. The latest bailout for SAA, announced at the time the government was pledging to get a handle on its debt mountain, was probably the first clue that the toughest decisions wouldn’t be made. Letting a bankrupt airline go should have been the easiest thing to do for a government quickly running out of cash.

And to think it’s not that long — about two months — before the finance minister presents another budget.

Having previously bemoaned how the extraordinary events of 2020 meant these documents were out of date in a matter of weeks after being printed, it’s possible that the next one has already been overtaken by events.

Much will be riding on whether Mboweni can regain the initiative and safeguard the credibility of the budgeting process.

FEW BELIEVED THAT MBOWENI WOULD BE ABLE TO DELIVER SPENDING CUTS OF R306.7BN

LETTING A BANKRUPT AIRLINE GO SHOULD HAVE BEEN THE EASIEST THING TO DO