Mboweni unfolds a road map — but now it must be followed

It was a refrain in the budget review and again in the budget speech: budgets are complex but the numbers are simple. And the numbers were grim — even though it was a bold budget. Finance minister Tito Mboweni did what was right fiscally, pencilling in deep cuts to the personnel budget and calling a halt to major tax hikes. But even if the pay cuts pan out politically, the budget deficit heads towards a psychologically scary 7% and the public debt heads towards 71% and keeps climbing. If there are zero cuts, the deficit gets closer to 8%. And the simple truth of the numbers is that, in an economy growing at just 1% a year, there are no more options. SA spent its way out of the great recession in 2008/2009 and kept spending, particularly on the public sector wage bill but also on bailing out ailing state-owned enterprises (SOEs), even as economic growth and tax collections kept falling short of budget targets.

Over the past five years, successive finance ministers have kept raising tax rates — particularly personal income, fuel and value-added tax rates — in an effort to rein in the deficit and the debt. Yet actual revenue collections have kept falling far short of what was hoped for. The turnaround at the South African Revenue Service will yield more revenue over time, but there is no further scope to increase tax rates — indeed, any more increases would do further damage to economic growth and to tax morality.

Which is why Mboweni opted to provide tax relief for individuals and signalled plans to cut the corporate tax rate, making it clear at a prebudget media briefing he would have preferred to cut it right now.

Essentially, the fiscus has run out of road on the tax side of the budget. It is running out of road, too, on the spending side — except for one very big-ticket item, public sector pay. An expenditure ceiling was first imposed in 2012 in an attempt to rein in spending growth, and finance ministers have sliced and diced government spending every which way since then, in ways that have become dysfunctional for service delivery. It hasn’t helped that departmental and provincial budgets have had to be cut to keep the likes of Eskom, South African Airways and Denel afloat. Bizarrely, as one MP pointed out this week, the R162bn of government money that has gone into bailing out “financially distressed” SOEs over the past 12 years is almost exactly the amount Mboweni seeks to cut from the personnel budget over the next three. The credibility of his budget framework depends on it.

But SA’s contested politics will also shape whether it can get the economic growth that is the only real way out of the fiscal crisis. As long as the economy languishes, SA simply cannot sustainably support the kind of public spending to which the government is committed. The more we have to fund rising budget deficits, the more the interest on that debt increases and the worse the debt trap becomes.

Mboweni and Team Finance have laid out what needs to be done to boost the economic growth rate, but the minister himself can’t implement the structural reforms recommended in the paper the

Treasury published last year. His cabinet colleagues need to make those reforms happen, and progress has been slow and difficult.

There are some things that could boost investor confidence and growth which are in the province of the Treasury to implement. Mboweni did his best to deploy those, with the undertaking to cut the corporate tax rate as well as to liberalise the last, clumsy vestiges of the old exchange control regime.

It all helps at the margins. But the bottom line is this is not a budgetary problem but a political one. Mboweni can do little unless SA’s political and labour leadership are willing to implement the fiscal and growth-boosting reforms that would bring the public finances back into balance.

With no more tools left in the fiscal toolkit, the danger is that if the coronavirus or loadshedding drive the economy into recession, our public finances could be in real trouble.

This is not a budgetary problem but a political one