Can Mboweni find R400bn in savings?
Finance minister must sync with president and advisory council
Finance minister Tito Mboweni tables his medium-term budget on Wednesday after an unusually busy time in the economic policy space.
First the budget was postponed by a week, underlining just how complex and contested the process must have been. Then, last Thursday, President Cyril Ramaphosa presented his long-awaited economic recovery and reconstruction plan, coincidentally on the day he met the members of his economic advisory council.
The president’s plan set out the stuff the government sought to do to drive the recovery, from infrastructure investment and mass public employment to localisation and a rapid energy transition, as well as reaffirming its commitment to various reforms that have long been on the agenda.
Gradual change
The president’s economic advisory council (Peac) advised, meanwhile, that the “active scenario” that Mboweni set out in his June emergency budget to cut spending and put the lid on SA’s spiralling public debt level risked being neither credible nor economically desirable and suggested a more gradual approach.
Ramaphosa’s recovery plan speech mentioned budgetary matters only briefly. Yet his plan has huge implications for the mediumterm budget policy statement’s chances of success. How Mboweni’s budget talks to the president’s plan, and how it talks to the proposals from the president’s advisers, will be crucial.
It will shape not only how the budget is received by a sceptical market but, more profoundly, whether it can start to tackle SA’s growing fiscal crisis.
One big problem with the president’s plan was precisely that it didn’t clearly cost the initiatives nor engage with the question of where the money would come from.
Rating agency S&P has called it a spending plan rather than a reform plan.
In practice, the new spending it adds to the envelope in the current fiscal year may not look that large in the context of a R1.8trillion budget. But it comes on top of a whole lot of other calls on a dwindling pot of taxpayers’ money — at a time the government has committed to massive spending cuts to avoid a sovereign debt crisis.
Ramaphosa’s plan to extend the special Covid grant by three months will cost about R6bn. A further R13.8bn (of a promised R100bn) is needed in the current fiscal year for the public employment programme, according to officials.
That’s less than the R19bn which Mboweni had already set aside in June for the programme, so perhaps he has freed up some of that money for something else — the R10.5bn South African Airways bailout, for instance? Nor is SAA the only one in trouble, with bailout requests from state-owned entities totalling about R23bn.
Add to that the risk of another R37bn the government may need to spend on public sector wages if the courts find in favour of trade unions’ challenge to its decision not to implement the third year of the wage settlement agreed on in 2018.
Pressure on spending
At the margins, then, the president’s plan adds to pressure on government spending in the current year, and over the medium term, at a time when growth and revenue could come in even worse than June’s bleak forecasts, making the task of “fiscal consolidation” to rein in the public debt even tougher.
But it’s not just the money that’s the issue but the messaging.
Ramaphosa offered little more than fiscal platitudes in his speech and did not warn loudly that the government had no money and had to make tough spending choices. That risks fuelling denialism about SA’s debt crisis that will surely have made the politics of the budget even more difficult.
As it is, economic growth this year is widely expected to come in worse than the Treasury’s June projection of minus 7.1%.
That means the revenue shortfall could be even worse than the R304bn Mboweni pencilled in, in June, and the main budget deficit could be worse than June’s 14.6%.
There will have been some underspending, and some economists reckon revenue is looking slightly better than expected. But the numbers are still eye-wateringly bad, with the Covid pandemic greatly exacerbating the
fiscal crisis that SA was already in.
In the passive, do-nothing scenario Mboweni outlined in June, government debt hits 100% of GDP in a couple of years and keeps climbing.
In the active scenario, which is the one on which Mboweni based June’s budget numbers, the debt stabilises at 87% of GDP over the next couple of years.
But it requires R230bn of spending cuts over the next two years, on top of the R160bn of saving on public sector wages included in February’s budget.
With social grants, interest on the debt and salaries consuming more than half the budget, there’s limited space to find those cuts.
And hardly anyone believes there is the political will and support in the government to do so, especially after Ramaphosa’s plan. Which is where the Peac proposals come in.
In the macroeconomic chapter of its leaked report, the council questions the tabling of a budget that will not be credible in the market, but also argues that such large spending cuts, in so short a time, would hamper SA’s fragile economic recovery.
The Peac suggests a “less austere” debtreduction path which stabilises the debt at 100% of GDP and may be more supportive of the economy and more credible.
Its comments chime with those coming from the International Monetary Fund (IMF), which in recent days has been urging countries not to pull the plug on government spending too soon because it risks prolonging Covid’s economic impact and undermining the prospects of recovery.
Wednesday’s budget will reveal whether Mboweni has had to take those comments on board.
In a sense he hemmed himself into the active scenario by writing it into June’s budget numbers, and therefore the funding plan on which the Treasury’s regular borrowing in the bond market is based.
A retreat from the active scenario might not go down well in the market, and that could mean the cost of government borrowing rises even further.
As it is, interest on the public debt is already headed towards consuming more than a fifth of the revenue the government collects from taxpayers. That leaves ever less space for it to spend on social and economic programmes that would improve SA’s living standards.
Debt spiral
Ramaphosa offered little more than fiscal platitudes and did not warn loudly that the government had no money
The government is already headed into a dangerous debt spiral in which it is borrowing just to pay the interest on its debt.
That makes it ever more vulnerable to external shocks — and to ever higher borrowing costs, because the more risky investors perceive the government’s finances to be, the higher the yield they will demand to lend to it.
Unlike the advanced countries, which are running up their debt levels with the IMF’s blessing, and paying zero or negative interest rates, SA is paying ever higher interest rates on its long-term government debt, and getting into ever more of a debt trap.
There is no viable fiscal scenario that addresses that.
The only way out of the trap is faster and sustained economic growth that would boost tax revenues and enable the government to tackle its debt challenge. The credibility of Mboweni’s budget therefore depends crucially on the credibility of Ramaphosa’s economic plan.
Will his plan get economic growth going? Not unless he can turn SA’s economy into one in which the private sector is keen to put money knowing it can make profits.
There was disturbingly little recognition of the private sector’s crucial role in the public-sector-focused speech in which Ramaphosa presented his plan last Thursday.
Private sector
But there was a remarkable turnabout in his rhetoric a week later when he responded to the parliamentary debate on his plan (on Thursday this week) with a speech in which he more than once acknowledged that the private sector was the biggest driver of employment and investment – and that the government wanted to “unleash” it to do so.
Whether there’s the political will to make that happen is unclear.
Wednesday’s budget numbers will surely indicate there isn’t much alternative.