A bold budget that now has political rapids to negotiate

Speaking to journalists after Wednesday’s budget, governor No 10 — as finance minister Tito Mboweni likes to call current Reserve Bank governor Lesetja Kganyago — congratulated governor No 8 on a “bold” budget. And in many ways it was. It provided three crucial signals. Yet it is subject to at least three key risks. The first signal was, simply, the vaccine. There can be no more economically potent way of spending taxpayers’ money than to fund a mass vaccine rollout. And after all the ludicrous talk about having no money to pay for it, Mboweni made it clear the government will fund it straight out of the budget, and made available up to R19bn to cover this.

The second signal was that the budget largely saved, rather than spent, its R99bn revenue “windfall”. This is how much more it now expects to collect for the current fiscal year, compared to its bleaker numbers in October’s medium-term budget. And though it still leaves a massive revenue shortfall, the relative overrun enabled Mboweni to reduce the deficit and trim the government’s enormous borrowing requirement — with hardly more than a third used to pay for Covid-related spending (including on the vaccine), which Treasury officials emphasised was a short-term and not a structural (long-term) addition to spending. Lower borrowing not only means a lower debt ratio in years to come but should also help to narrow the high interest rates the government is paying on its debt. This was the signal the financial economy was closely watching: whether

Mboweni would stick to the fiscal consolidation plan to cut spending and stabilise soaring debt over the next four years. And he did.

The third signal was one with a more direct impact on the real economy: this budget was the first in several years to offer tax cuts. It cancelled plans for R40bn in tax hikes over the next four years and provided relief for fiscal drag for the first time in years. But the really strong signal was the cut to the corporate income tax rate. It starts SA on the way to a more competitive and investment-friendly rate. This was one of the few structural reform levers directly in the finance minister’s control, and he pulled it.

But much as the budget might have sent some of the right signals, its credibility was as much at risk as ever. One big set of risks that could derail the fiscal framework is economic growth. The budget ratios assume growth of 3.3% this year and an average of 1.9% over the next two years. That’s hardly growth, after the economy shrank by an expected 7.2% last year. But it’s still relatively optimistic given the prospect of further waves of the virus, further load-shedding, and the nonexistent pace of structural reform. In the Treasury’s own scenarios, growth could be as low as 1.6% if things go badly and no more than 3.6% if things go well. So it’s still pretty bleak and the improved revenue collections and deficit and debt ratios the Treasury has pencilled in for the next three years are by no means assured.

That’s particularly so given the risks around the politics of the budget. The consolidation plan relies on R285bn of spending cuts over the next three years, more than half from a public sector pay freeze. It hardly needs to be said that that is not at all assured. But if that’s contentious, cutting the social grants budget is potentially even more so. The budget reduces the social grants budget by 2.2% over the next three years, assuming below-inflation increases for the first time in years. The optics of cutting grants at the same time as cutting the corporate tax rate are surely not going to go down well in the ANC alliance.

The third set of risks to the market-friendly fiscal framework is the markets themselves. The government is still borrowing an awful lot of money. And it’s still set to pay over 20c of every R1 it collects in taxes to bondholders and lenders. This budget should help to keep them relatively sweet for now, but with an annual borrowing need of more than R600bn, SA is still highly vulnerable to shifts in investor sentiment. Bold as it was, there’s still much in the budget to worry governors 8 and 10.

The optics are not going to go down well in the ANC alliance