THE WEEKEND READ: Analysis– a budget long on words but short on detail.

Finance Minister Tito Mboweni’s emergency budget on June 24 was meant to provide a roadmap showing how the government intends to deal with a dire fiscal situation.

Unfortunately, the speech underwhelmed on detail.

We already had a good idea of what the Treasury expects with regard to the economic and fiscal outcomes this year -due to the ‘leaks’ over the weekend-  but what we were looking for was detail on how Mr Mboweni plans to manoeuvre the ship back on course.

The Treasury now expects GDP to contract by 7.2% this year compared with the 0.9% growth rate expected in February; the fiscal deficit is expected to reach 15.7% of GDP in FY 2020/21 compared with the 6.8% of GDP deficit projected at the start of the year; while public debt is now expected to end the fiscal year at 81.8% of GDP from 65.6% of GDP previously.

In the official budget publication, the Treasury puts forward two scenarios: active and passive. The passive scenario refers to the debt trajectory if current trends persist, while the active scenario incorporates all the intended adjustments.

The passive scenario sees public debt remaining on a strong upward trajectory, reaching 114% of GDP by 2024/25, while the active scenario sees public debt peaking at 87.4% of GDP in FY 2023/24.

Mr Mboweni noted that the government needs to find spending adjustments of about R230bn over the next two years.

Tax measures of R40bn over the next four years will also be required.  Details with regard to these tax proposals will be given in the 2021 budget. Nothing was said about South African Airways (SAA). The Land Bank will be recapitalised with R3bn.

No further information was given with regard to the ongoing public sector wage dispute or the government’s intentions after the current bargaining round ends next fiscal year.

Mr Mboweni stated that this year, nearly half of all consolidated revenue will go towards the compensation of workers in the public sector.

On the ongoing wage dispute, the finance minister stated, “Minister Senzo Mchunu is negotiating with our partners in the labour movement to find a balanced solution that sets compensation at an appropriate, affordable and fair level. We wish him well.”

It is important to note that the R230bn in spending cutbacks required over the next few years is in addition to the R160bn cut to the public-service wage bill set out in the 2020 budget. In commenting on the latter, Mr Mboweni stated: “Failure to achieve these reductions will require larger reductions to wages and other spending areas in the outer years of the spending framework, and higher revenue increases.”

Mr Mboweni confirmed that the country would be borrowing $7bn from international finance institutions.

During his post-address media briefing, the finance minister said that South Africa would be asking the IMF to approve a $4.2bn loan in early July.

It was previously said that the country would be making use of a $1bn facility from the National Development Bank- that is, the BRICS Bank-  meaning the balance is likely to come from the World Bank.

Approaching the IMF and World Bank for assistance will rankle many within the ruling African National Congress (ANC) and its alliance partners. Mr Mboweni found himself in the cross hairs in April when ANC Secretary General Ace Magashule and his alliance counterparts called on President Cyril Ramaphosa to reject an approach to the IMF or World Bank for assistance in the fight against Covid-19 following comments by the finance minister.

The perhaps unavoidable decision to turn to international finance institutions will no doubt expose ideological cleavages within the alliance, as Mr Mboweni, with the presumed backing of Mr Ramaphosa, may be seen to have crossed a red line.

No major intentions with regard to policy reform were mentioned. While a budget reading does not usually play host to such announcements, many hoped that the unprecedented nature of the situation would encourage bold action.

Mr Mboweni did, however, state that a firm policy basis has been laid by the Treasury’s Towards an Economic Strategy for South Africa paper, which was considered by Cabinet and accepted last year.

After conceding that progress has been slow, partly attributable to Covid-19-related delays, the finance minister stated that “we are now ready”.

Another noteworthy comment by Mr Mboweni, in referring to the policy shifts put forward by his policy document, went “One of these is to shift away from the electricity supply system that was introduced in 1923, when George V, the Queen’s grandfather, was the king of what was known as the Union of South Africa. The last few years have shown the inefficiency of this archaic system. Provisional allocations to Eskom were made on the understanding that government’s Electricity Roadmap would be implemented.  Progress is slow.  The principle of zero-based budgeting is that we must see demonstrable value for money: Eskom will need to show progress in meeting the milestones as laid down in the Roadmap. This is non-negotiable. Progress on the other reforms will be given in the MTBPS [Medium-term Budget Policy Statement].”

The emergency budget describes a desirable fiscal destination but does not provide a credible roadmap to get there.

Mr Mboweni used a significant proportion of the speech to give listeners an economics and history lesson on sovereign debt crises, suggesting that there are a few that still need some convincing.

Given that the current wage dispute is ongoing in the courts, it is understandable that no further details were provided on the matter.  But given the importance of containing this spending, the lack of a medium-term plan left the speech wanting.

Furthermore, Mr Mboweni highlighted the severity of the fiscal situation by starting the speech with a striking statistic: “This year, out of every rand that we pay in tax, 21 cents goes to paying the interest on our past debts.”

This, combined with the fact that around half of all consolidated revenue will go towards the compensation of workers in the public sector, clearly shows why the country is in such a fiscal mess.

Jacques Nel – Economist

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