ANDREW DUVENAGE: Mid-term budget offers little reason for optimism


Although the 2020 medium-term budget policy statement stated its intention to prioritise economic recovery and fiscal consolidation in order to support government's economic recovery plan, the reality is that while this budget hit some of the right notes, it did little to instil confidence that the country is on the path to economic recovery.

The numbers have remained relatively unchanged since the June emergency budget with total debt at R4 trillion, the budget deficit at 15.7% or R76.1 billion and gross debt at 81.8% of GDP, going up to 95.3% in 2025. However, given that government have consistently missed debt estimates this is massively concerning.

Debt continues to be the biggest risk facing South Africa with the cost of debt servicing the fastest growing item of spending. By 2023/4 debt servicing costs are expected to rise to R353.1 billion, an increase of 12.9% to 18.3% of expenditure.

To deal with the looming debt trap Finance Minister Tito Mboweni announced tax increases of R5bn in 2021/2022, details of which will be revealed in his February budget. While detail was not expected in this budget, it certainly represents a U-turn from February when he indicated that the country couldn’t tax its way out of the crisis. It now appears that the focus will go back to trying to eek more yield out of an already over-stretched and highly concentrated tax base.

As a strategy it is doubtful that this will ultimately prove to be effective given that the concept of the ‘Laffer curve’ is likely to come into play. The concept of the ‘Laffer curve’ is the theory that at some point increasing tax rates actually starts to result in lower yield.

Over the next three years government says it plans to cut expenditure by R306.7bn and in an effort to close the gap between expenditure and income there will be no further recapitalisation of state owned enterprises.

Eskom is to receive R23bn but there was little detail provided on the plan to stabilise the power utilities growing – and unsustainable – debt.

The minister has, however, capitulated on South African Airways as a result of pressure from his cabinet colleagues and allocated R10.5 billion to implement the beleaguered airlines proposed business rescue plan as well as R6.5 billion to settle its guaranteed debt and interest.

Mboweni has previously stated his aversion to bailing the airline out and said the taps would be closed for state owned enterprises. Unfortunately this allocation undermines the credibility of everything Treasury is saying providing little evidence or reassurance that it will adhere to other stated objectives.

The minister has also frequently said that government needs to reign in public expenditure. The public sector wage bill, for example, accounts for around 40% of total government expenditure. He announced that in order to support fiscal consolidation public sector wage increases are to be limited to 0.8% over the next three years.

While the explicit statement of tackling the public sector wage bill are encouraging, this will clearly be massively contentious – and politically difficult – issue given the ruling party’s alliance with the Congress of South African Trade Unions. What remains to be seen is whether the unions accept this and whether government ultimately has the political will to follow through on this.

Despite frequent announcements regarding plans to cut expenditure the reality is that to date government’s inability to achieve meaningful progress in this area puts its latest expenditure cut objective into question.

The minister also announced that South Africa’s fiscal multiplier had declined from R1.6 to less than R1 between 2009 and 2019 as a result of spending skewed towards consumption rather than investment, regulations that impede innovation and productivity, and a high debt burden. The challenge now is that we are the point where debt servicing, public sector wages, and social welfare costs are crowding out investment into economic capacity.

Although the minister said the intention of this budget was to prioritise an economy recovery he made only very vague references to growth focused interventions. The reality is that the only long term solution to the mess we currently find ourselves in is sustainable and meaningful economic growth.

Similarly, there was no focus on smaller, achievable and easily deliverable projects – the so-called quick wins – but instead only a reference to grand concepts, including the government's vague economic recovery plan. Unfortunately, government does not have a good track record when it comes to delivering on these grand plans.

Disappointingly government has consistently failed to implement structural reforms which, despite being continually referenced, remain elusive with the result that there is a continued deterioration in public finances. It would be a mistake to blame the crisis on COVID-19 as South Africa’s structural problems were in existence long before the pandemic.

Government’s failure to execute previous budgets – and the rolling over on SOE support – does not instil confidence. Question marks persist over its ability to stabilise debt and to stick to its guns with regard to the public sector wage bill. What looks more likely is the higher risk of a sovereign debt crisis.

Andrew Duvenage is a managing director at NFB Private Wealth Management. Follow him on Twitter on @AndrewDuvenage.