New broom Gigaba could sweep to the wrong door
ALL EYES ON ME: New finance minister Malusi Gigaba THE integrity of South Africa’s fiscal policy will be at risk and with it the potential deterioration of the country’s investment grade credit rating to junk status if changes by new finance minister Malusi Gigaba steer the Treasury in a new direction.
On Friday South Africa is due to receive its first credit rating review since it managed to stave off downgrades from all three ratings agencies late last year.
Under former finance minister Pravin Gordhan, the Treasury took a stringent approach to cutting costs, even empowering the office of the chief procurement officer to take a more rigorous approach to public spending. It also aimed to reduce debt of more than R2-trillion in an environment where tax revenues are at least R30billion lower and economic growth below the potential of 1.4%.
A senior official said this week the Treasury was at pains to communicate that the fiscus was following a “reasoned and balanced consolidation path” in the hope this would continue to build confidence in the country.
Constraints at fiscal policy level — which means there are limits on further tax to extract and what the government can spend to stimulate growth — is mirrored by constraints at monetary policy level. The Reserve Bank said this week it expected inflation to peak in the first quarter of this year. Investors seeking higher yields are less interested in a low-interest rate environment.
Ian Stuart, chief director for fiscal policy at the Treasury, said: “There’s always the question why we don’t just spend our way out of this lowgrowth environment? It’s complicated because if we were to breach our expenditure ceiling, there’s a very good chance we could be downgraded, possibly to junk status for all of our debt.” The government could suddenly find itself spending possibly “tens of billions more on financing its debt”.
Interest rates would rise and the private sector might find suddenly that financing was drying up. Stuart said: “The question is for that small stimulus of government spending what are going to be the long-term growth consequences or even short-term growth consequences . . . every decision has trade-offs.”
Private sector investment has dropped to levels last seen in the aftermath of the global recession seven years ago, which must be a concern for a government with a high social burden and unemployment.
“Ultimately there is going to be a limit on how much you are going to spend. It can be imposed on you by credit rating agencies or you have to make those decisions as a sovereign government,” Stuart said.
The budget process had an eight-to-10-month cycle and the Treasury aimed to keep its integrity intact as “it is such a complex and big machine”.
“If you come in at any point in that cycle and say we are now going to change our spending priorities, then you are effectively taking away the ability of the department to plan.”
President Jacob Zuma has clashed with the Treasury, seeing it as a stumbling block to achieving a developmental state.
“It doesn’t matter which economic policies you follow, you’re never going to avoid that fact that there are fiscal constraints.
“The reality is also we have to think about the tax morality of the economy,” Stuart said.
Many other countries struggled to maintain a healthy taxpaying base. “I think we’re open about the fact that if we think continuing to raise taxes is the only way, we’ll get into that situation over time. “
Lesiba Mothata, chief economist at Investment Solutions, said the new minister would face a maxed tax structure. “It will be very difficult to further tax households. Corporate taxes are three percentage points higher than what we find in comparable emerging-market countries.”
South Africa had been able to provide certainty around its fiscal policy through the medium-term budget policy statement. “With a new head of fiscal policy coming in it would be surprising to see the course of fiscal policy changing as a result, given that these medium-term forecasts are binding,” Mothata said.
Razia Khan, chief economist for Africa at Standard Chartered Bank, said: “South Africa now looks much more likely to lose its investment-grade rating amid deeper concern over institutional strength.” There were concerns that investor confidence would take a hit, over the management of stateowned enterprises and the transparency of public finances.
Gordhan and Jonas were lauded for efforts at improved governance on state-owned enterprise debt. “These safeguards now appear at risk of being substantially eroded,” said Khan.
We have to think about the tax morality of the economy