BUDGET: IT ALL COMES DOWN TO THIS
With good management, the government can prioritise cost-cutting while accelerating inclusive growth
Fiscal policy space has shrunk in the post-pandemic world. The Covid crisis was a painful reminder of the importance of reinstating financial buffers during healthier economic periods.
Countries are staring down wider fiscal deficits and inflated debt ratios. With the International Monetary Fund (IMF) expecting inflation to remain above pre-pandemic levels in more than 80% of economies in 2024, scope for lowering interest rates to encourage higher growth in domestic demand remains constrained.
The IMF has cautioned that the next crisis could be around the corner, so emerging markets need to restore fiscal, external and financial buffers. Exercising fiscal rules and reducing crushing public debt burdens can strengthen macroeconomic resilience.
In South Africa’s case, this has become increasingly tricky in a torpid economy. Public investment requires funding and calls on the government to expand the social safety net are growing louder. This has to be achieved while narrowing the fiscal deficit and stabilising the debt ratio.
Fortunately, South Africa’s fiscal accounts are expected to benefit from relatively high commodity prices in the short term. The South African Revenue Service tax statistics report for 2021 showed an outsized contribution from the mining sector of 21% of company income taxes in fiscal 2020/2021. This compares with an average of 10% since the global financial crisis.
Buoyant profitability in the mining sector reported in December suggests that another sizeable revenue windfall will be announced in next week’s budget. Alas, load-shedding and abject logistics failures are likely to see South Africa failing to gain its fair slice of the international commodity cycle.
Expenditure pressures threaten the government’s fiscal consolidation path in the medium term. The composition of government spending has a bigger positive effect on economic output if public investment, rather than public consumption, is prioritised. Regrettably, government spending on fixed investment has dropped to 4.1% of GDP, down from its post-global financial crisis average of 5.7%.
Worryingly, the Brookings Institution has calculated that the productivity of public sector investment was four times lower in South Africa between 2012 and 2017 relative to the period between 2000 and 2010. This measure also lags behind 82% of the country’s peers because of waste, corruption and inefficiencies.
In October’s mediumterm budget, the government pledged an inflationadjusted wage decrease for civil servants of 1.3%, on average, for the next three years. Yet, with food and fuel costs burning a hole in consumers’ pockets, it is difficult to see the National Treasury sticking to its guns.
A looming election year introduces an additional challenge to curbing the salary bill through real wage cuts or a meaningful dent in public sector headcount. Fewer professionals in education, health and security relative to the population unsettles the government, and it intends to increase capacity in these critical areas.
In our view, the government can prioritise cost-cutting while maintaining service delivery. This goal can be realised through reviewing excess administrative and managerial staff, matching pay to equivalent skills in the private sector, assessing allowances and pay progression and rationalising committees and institutions across the various spheres of government.
Similarly, discussions on the future of the social relief of distress grant beyond the end of March 2024 are continuing, given thorny financial trade-offs.
South Africa’s budget remains highly redistributive in nature, with the social wage (spending on free housing, services and social grants) nearing 60% of noninterest spending. As such, the Treasury has deliberated on how to offset any permanent increases in social grant funding with a combination of tax increases and credible cuts in other budget areas. Economic hardship nevertheless argues against raising revenues through higher taxes. Instead, addressing nonpayment by wealthier individuals, collecting revenue lost through base erosion and profit-shifting, and recouping tax gains from illicit trade can help to plug the gap. Finally, in addressing the R397bn elephant in the room, all eyes are on the Treasury to announce a turnaround strategy that creates certainty for Eskom’s business model. Restructuring the utility’s balance sheet is pivotal to its financial sustainability. Further financial relief for Eskom needs to be explicitly linked to cost containment, efficiency gains in procurement processes, recruiting skilled individuals, maintenance projects and unbundling targets.
The government’s inability to make tough decisions in the past is reason for apprehension. Against pedestrian growth, decisiveness has become ever more urgent.
Timely implementation of economic plans, including better management of state entities, reducing regulatory and policy uncertainty, improving the ease of doing business, providing reliable services and executing on initiatives to boost investor confidence, can ease the government’s battle in counterweighting fiscal prudence with inclusive growth.