Sunday Times

Budget’s reserve account withdrawal reflects the failure of the Treasury

- GILAD ISAACS Isaacs is executive director at the Institute For Economic Justice

● The most unusual element of this year’s budget illustrate­s the National Treasury’s failed approach to budget policy and its unwillingn­ess to leverage the budget as a vehicle for growth, employment and developmen­t.

I am referring to the decision to draw R150bn from the Gold and Foreign Exchange Contingenc­y Reserve Account (GFECRA). This is a portion of the more than R500bn sitting in the Reserve Bank account owed to the national government.

The manner in which the Treasury is accessing and deploying these funds highlights three things.

First, the R100bn drawn for the 2024/25 financial year is arguably the only thing that saves South Africa from even more devastatin­g budget cuts. While this is extremely important, it isn’t reflective of a broader rethink of the wisdom of budget cuts.

Following a lower-than-expected tax intake, the Treasury continues its decadelong strategy of slashing expenditur­e and hoping for private sector spending to fill the void. Between 2019/20 and 2026/27 the Treasury will have cut a whopping R270bn from actual government programmes (“main budget non-interest expenditur­e”). This comes on top of budget cuts made between 2014 and 2019.

The fall in spending is even more dramatic when calculated per person. Per capita non-interest expenditur­e is due to fall from R34,607 in 2019/20 to R27,283 in 2024/25 and further to R26,405 by 2026/27.

This has very real impacts, and will disproport­ionately affect lower-income earners, black women and children, who rely more on essential public services. Spending per health-care user and learner, for instance, falls meaningful­ly.

Despite the applause the minister received when announcing a R100 increase to the old-age pension, the picture for social grants is grim. These see an increase of 4.8%5% from last year, compared to an inflation rate of 5.6%. This comes on top of an erosion in their value over previous years. The lifesaving social relief of distress (SRD) grant continues to be strangled by insufficie­nt budget allocation­s, unfair barriers to access, and a falling real value.

This is all being sacrificed on the altar of fiscal consolidat­ion — attempting to reduce borrowing through expenditur­e cuts. Debt targets are more severe than in both the 2023 medium-term budget policy statement and previous budgets. Whereas the 2021 budget considered the stabilisat­ion of debt at 88.9% in 2025/26 as “a sound platform for sustainabl­e growth”, the Treasury now aims to cap debt at 75.3% in that year.

Such forceful debt stabilisat­ion is unnecessar­y and self-defeating. We know that such budget cuts lead to a decrease in GDP, and therefore will result in a higher debt-to-GDP ratio. South African debt levels are roughly in line with our peers, with official internatio­nal statistics putting South African debt at 71% and the developing country average at 68.3%. The government should instead prioritise reducing the cost of borrowing, which it rightly identifies as too high.

The impact of these budget choices would have been many times worse had it not been for the GFECRA’s R100bn injection. The decision to utilise this money does not, however, signal a rethink of the Treasury’s path of fiscal arson. Rather, it is utilising just enough of these idle resources to make the existing path a little more palatable.

Second, the Treasury’s original strident opposition to utilising the GFECRA resources in the first place is testament to its reluctance to mobilise the maximum resources available to the government.

The GFECRA balance has been growing for two decades and was untouched by the Treasury until the Institute for Economic Justice shone a spotlight on the account in October 2023. Originally, private-sector research group Krutham put the chances of the Treasury using these funds at almost nil, as the Treasury worried that doing so may spook markets and derail plans for budget cuts. The minister reportedly had been unaware of the account until this point, while the Reserve Bank governor warned against its use.

Acting in concert with Treasury bureaucrat­s, the business press hysterical­ly closed ranks against our proposal to release a portion of its balance to the fiscus. For example, Peter Bruce referred to the proposal as “arrogant alternativ­e economics” and Claire Bisseker, under a picture of the minister riding a My Little Pony beneath a rainbow, scornfully dismissed the proposal as purporting to uncover a hidden “pot of gold”.

As I argued at the time, the underlying undemocrat­ic impulse was to restrict access to these funds because facilitati­ng access risked scuppering the Treasury’s plans to take a chainsaw to government spending.

The same is true of other potential revenue sources that were conspicuou­sly absent from the tabled budget. In 2023, approximat­ely R83bn in handouts was given to those earning above R750,000 through medical aid, retirement fund and other tax breaks, while the SRD grant sees a further budget cut. The recent reduction in the corporate income tax rate, which has done nothing to spur investment, is costing the fiscus about R12bn to R13bn a year. Wealth remains undertaxed in South Africa, with high-income earners benefiting from inheritanc­e and dividend income at well below the applicable personal income tax rate. This only exacerbate­s our already astronomic­al levels of wealth inequality.

As illustrate­d by the GFERCA experience, it will likely take a concerted effort by those outside the Treasury to see movement on a net wealth tax. This will be opposed by business-aligned forces until it is eventually accepted as the logical course of action.

Third, the decision to deploy the GFECRA in the manner in which it was — piecemeal and as a small cushion against budget cuts — is emblematic of the dysfunctio­nal approach to national investment adopted by the Treasury.

In the face of crumbling economic and social infrastruc­ture and rising levels of destitutio­n there is no viable vision for economic renewal. As we argued at the close of 2023, the GFECRA funds could be dedicated to bold and strategic investment plans in critical infrastruc­ture, state-owned enterprise (SOE) support, a basic income grant, or capitalisi­ng developmen­t finance institutio­ns or a sovereign wealth fund. This list is not exhaustive, but it offers an opportunit­y to use these one-off funds cleverly and break from a fiscal policy stance that fails to ramp up state investment.

Instead, the Treasury is counting on private sector investment to ride to the rescue. It has doubled down on the use of private-public partnershi­ps and leveraging private finance for infrastruc­ture developmen­t and rescuing key network industries and SOEs.

This is a fanciful solution to the government’s mismanagem­ent and underinves­tment. Worldwide, private financial investment in infrastruc­ture has slowed and failed to meet developmen­t targets. When investment does occur, the state assumes disproport­ionate risks and the private sector is guaranteed profit, often at the expense of the environmen­t and the poor accessing critical services. Also ignored is that private sector investment is not itself a solution to government incapacity as it requires significan­t capacity (of a different sort) to ensure proper regulatory oversight and the harnessing of private investment for developmen­tal gains.

The GFECRA balance — of which R350bn still remains untapped — could have been a basis for the type of investment the economy sorely needs.

In all these respects, while we welcome the R150bn cushion, the Treasury’s use of these funds is a reflection of, rather than a departure from, its worn and failed fiscal conservati­sm.

 ?? Picture: Werner Hills ?? Grant recipients wait in a long queue at the main Post office in Govan Mbeki Avenue in the Eastern Cape. The social grant continues to be strangled by insufficie­nt budget allocation­s.
Picture: Werner Hills Grant recipients wait in a long queue at the main Post office in Govan Mbeki Avenue in the Eastern Cape. The social grant continues to be strangled by insufficie­nt budget allocation­s.
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