Dispatch in Dialogue Unpacking Mboweni’s ‘Covid budget’
When finance minister Tito Mboweni tabled the country’s budget in February, no one could ever have thought four months down the line he would need to present an emergency supplementary budget.
But this is where we are: the outbreak of the Covid-19 pandemic has forced Mboweni to rearrange the budget that he had painstakingly planned for a year.
No one could forecast the damage a national lockdown would cause to our livelihoods. It forced a radical change to the figures.
For a start, government announced a Covid-19 assistance package of R500bn. This pushed the budget deficit far beyond its February estimates.
In a normal year unforeseen expenditure does also arise after the approval of the budget. Generally the government waits until the medium-term budget policy statement in October to get ex post approval.
Unfortunately 2020 is different. Let’s evaluate the supplementary budget by looking at its intended contribution to the four basic functions, or objectives, of an economic system. These are:
● To efficiently allocate and apply resources to the delivery of private, public and merit goods;
● To sustainably grow the output of the economy to keep pace with a growing population;
● To operate stably in several areas;
● To ensure an optimum level of fairness in the distribution of the pains and fruits of the nation’s economic endeavours.
In addition, the approach to support the economy in performing its four basic functions is three-phased.
Phase 1 — Financial aid: The first phase started with the announcement of the R500bn Covid-19 fiscal package, aimed at keeping households and businesses afloat.
Phase 2 — Recovery: The national Treasury names the second phase a recovery phase with the focus on systemic growth and stability. Phase 3 — Growth: Once recovery is established, the aim is to move into a phase of faster growth to tackle burning issues like unemployment, poverty and inequality.
In a dynamic system like an economy, it is not possible to give an exact ex ante timeline for the progress from one stage to the next. The first public good that presented itself for an allocation rethink, however, was the country’s public health services.
The supplementary budget prioritises health, peace and security in objective No 3, stability, which is linked to social development in No 4, the fairness or distribution objective. Departments which are only indirectly involved with these priorities will have to give preference to tasks which support those objectives.
In a medical crisis, it is logical that the health budget is allocated an additional R21.5bn, and more than R13.5bn goes to “other frontline services”.
Education is another key area and its budget strengthens the preference given to health. Here again, reprioritisation is required.
The stability objective also gets a reallocation in the form of R19.6m for job creation and job protection.
Stability of employment will further benefit from the support for small and informal businesses of just over R6m, simultaneously supporting the third phase of growth.
Then, although the agricultural sector was not specifically named, the Land Bank is recapitalised by R3bn.
This is meant to stabilise the institution from a position where it defaulted on a loan commitment to where it can stabilise the agricultural sector. Farmers are recovering from a severe drought and now have the added effect of Covid-19.
The distribution objective casts its net over those members of the community who cannot participate in economic activities due to age, disabilities and job losses and who have no other means of support. The supplementary budget provides nearly R41bn to support vulnerable households for six months.
The supplementary budget adds R145bn to the expenditure allocation. After reprioritising from the February budget, R36bn remains to be newly funded.
There are implications to this, covered under the discussion of public debt below.
Where do the sacrifices of R109bn come from to reduce the R145bn to R36bn?
Three sources of terminated and suspended allocations are mentioned:
● Delays in spending caused by the lockdown;
● Suspension of capital projects that can be rescheduled to later fiscal years;
● Suspension of poorly performing or slow progress projects.
The areas of economic development, and learning and culture, have seen a net reduction of allocations.
The provinces have agreed to reprioritise R20bn from public works, roads and transport as well as from planned sports, arts and culture events.
Public health capacity gets R15bn and education the remaining R5bn.
Health in the Eastern Cape scores nearly R2bn from within the province, and education just short of R663m.
Municipalities have a duty to apply aspects of the Covid-19 response like temporary shelters for the homeless and provision of water and sanitation, and Mboweni allocated them R20bn for this purpose.
Will this money be wisely spent? Only time will tell.
The elephant in the room is in the stability function, meaning the financial stability of the fiscus. The minister referred to the task of reducing public debt as a Herculean task.
We can see why: the February budget estimated that the debt to gross domestic product (GDP) ratio would reach 65.6% by the end of the present fiscal year. Covid-19 borrowing takes this to 81.8%, far beyond the international debt:GDP benchmark of 50%. However, these figures exclude the considerable contingent liabilities towards the debt of state-owned enterprises like Eskom and SAA.
We must also consider that the credit rating agencies have downgraded SA government bonds to junk status.
No wonder the risk premium for SA bonds stood at 5.2% in June, 2 percentage points higher than at the end of 2019! Simply put, the public debt must be reduced and the GDP increased.
One of the principles of public debt management is to minimise the cost of debt. That means new borrowing must be restricted, and be at the most favourable interest rates. Existing loans must be restructured in accordance with trends in short- and long-term interest rates.
Cabinet aims at a primary budget surplus by 2023/2024, meaning revenue minus noninterest expenditure must be positive. To reach this objective, revenue can only grow if GDP grows or if the government succeeds in milking an almost dry cow, the taxpayer, of an extra R40bn.
Hopefully SARS will succeed in milking those cows that illegitimately escape the process!
The supplementary budget plans to curtail non-interest expenditure by R256bn, a Herculean task considering the hold of the public sector unions on government.
Government realises that to lift the GDP growth from -7.2 % to levels of about 5% is a mammoth task it cannot perform. Therefore it relies on the private sector, where it plans to lower the cost of doing business.
However, this is rhetoric which echoes through one budget speech after another while very little change. In August, national Treasury published a document setting out the road towards an economic strategy for SA. Immediately the critics loudly raised their voices, as they have now done again.
They deny an inter-generational debt burden, blame high borrowing rates on financial market manipulation and relaxed foreign exchange control, seek a wealth tax and ask the minister of finance learn from SA’s own public debt history since the late 1920s.
To appreciate the government’s policy dilemma, we need a short review of pre- and post-war economic history. The Great Depression, circa 19291933, led to the British economist JM Keynes’s policy advice published in 1936.
At the onset of a recession a government should increase spending and reduce taxation. This means a budget deficit, filling the gap by borrowing.
This macroeconomic approach was successfully applied until the early 1970s when the oil crisis led to the simultaneous problems of inflation and stagnation — stagflation.
These two economic illnesses required opposite policy measures based on Keynesian theory. To overcome the dilemma, governments relied on their central banks to control the money supply. The stagnation was tackled with supply-side economics which called for reduced taxation coupled with deregulation.
When the stagnation was reversed, interest rates dropped and prudent fiscal policy, already on the back burner, found this burner almost cold. Governments borrowed, ignoring the sound advice to borrow only when the intention was to fund something of lasting utility.
When the Great Recession struck in about 2007 governments found they were already heavily indebted. The result was the debt crises of Greece, Italy, Ireland and many others in 2011/2012.
These countries again faced a policy dilemma; their debt crises demanded a contractionary fiscal policy and their recessions an expansionary one.
The SA government was wise enough to manage its public debt after 1994 — the inherited portion labelled the odious debt in some circles —in accordance with four principles of public debt management. These are:
● To minimise the cost of the debt;
● To use the debt in an anticyclical manner to stabilise the ups and downs of the business cycle;
● To assist in the development of financial markets;
● To maintain the financial stability of the fiscus.
Our government was thus broadly able to stabilise the business cycle of the Great Recession.
Then things went wrong, the business cycle never fully recovered and taxation did not live up to estimates, partly because of the business cycle and partly because the grip on tax administration was relaxed.
Add to that poor management of state-owned enterprises, which led to rescue packages being demanded from the national Treasury. These were loan funded packages.
From budget surpluses before the Great Recession we now face a budget deficit, five times higher than the international benchmark of 3% of GDP.
Under these circumstances critics of the national Treasury believe we can spend ourselves back into prosperity with borrowed money.
The regular refrain in the reports of the auditor-general on unauthorised expenditures is absent from the criticism.
When the minister of finance seeks R40bn in taxes and the auditor-general reports unauthorised spending of R32bn, it undermines tax morality.
Savings on non-interest expenditures will have to be carefully selected.
For example, instead of a galaSona every year, one when a new president is elected should suffice; in other years, hold a Sona at an ordinary opening sitting.
Office-bearers can scale down on vehicles and support staff use even more modest cars. Change the Electoral Act and reduce the number of parliamentarians, shrink the cabinet and strip most ministries of their deputies.
Our budgets are at risk of proverbially paving the path to hell.