Frederik Scholtz shares his five takeaways from Tito Mboweni’s medium-term budget policy statement.
On 28 October, Finance Minister Tito Mboweni presented the medium-term budget policy statement (MTBPS) to parliament. The MTBPS sets out the policy framework for the main budget (presented in February each year), updates National Treasury’s economic projections, adjusts the budgets of government departments and makes emergency changes to spending.
Here are my top five takeaways from the 2020 MTBPS:
1. Ballooning debt
SA’s debt obligations are massive at present. It is projected to reach almost the same value as GDP (95.3 percent of GDP) by 2025/2026 and also to be among the fastest growing debt-to-GDP ratios of developing countries over the next three years. This, coupled with the much higher debt servicing costs (expected to grow by 16.1 percent over the MTEF period – the fastest growing functional expenditure item on the budget), compared to what it had been before SA’s sovereign credit downgrade to sub-investment grade, is a major source for concern to the Minister of Finance and National Treasury alike. Not only does it leave no room for fiscal manoeuvring, the conditions associated with loans obtained from international agencies like the International Monetary Fund would imply that there will be significant limits to the potential uses of a significant portion of such loans.
The MTBPS states that amid the inevitable severe fiscal consolidation it should not lose sight of the growth enhancement function of the government. Government plans to use large parts of this debt in President Ramaphosa’s Economic Recovery Plan for a Marshall Plan-like infrastructure spend – focusing on capital expenditure. This logic of spending long-term borrowed funds on growth enhancing capital projects can generally not be faulted. However, if we consider that Eskom’s massive construction cost overruns and outright wastages on Medupi and Kusile are classic examples of how important the prudent monitoring of such spending is to ensure efficient spending in such projects. Given the government's poor track record in achieving such efficiency, I almost feel that there should be a technocratic oversight body in these spends that is entirely insulated from political influence in order to ensure efficiency.
2. Projecting a protracted economic recovery
In the MTBPS, Mboweni stated that the South African economy is projected to only return to its 2019 levels of output in 2024. This will impose severe constraints on government’s ability to raise sufficient revenue to support an economic recovery but also to make significant inroads into poverty alleviation. Fiscal consolidation is therefore imperative, as shown in the adjusted budget allocations over the MTEF period.
This comes at a time where the synchronised events of the Covid-19 impact on an already downward-spiralling economy has almost rendered the conventional fiscal interventions totally impotent. Minister Mboweni took great pains to emphasise the emergence of “green shoots”, though he also warned that in fiscal policy conduct there is “no room for slippage”.
3. Deep cuts in government spending
Slower economic growth and the steep decline in the tax-to-GDP ratio is of course bad news for any government spending. A secure electricity supply is essential for any form of sustainable economic growth in a developing country. Coupling this expenditure focus with trying to keep all the other public enterprises financially afloat has probably led to a decision to allocate no additional funds to the SA Post Office, the SABC or Denel.
The minister also announced cuts to provincial and municipal allocations, as well as cuts in allocations to most other government departments. The minister also announced a public sector wage freeze over the MTEF period. Treasury also stated that it wants the government to reconsider how the NSFAS schemes effectively fund free education to poor households. Payment of and benefits to senior government officials are also in policy crossfire at the moment.
The implementation of these budgeted proposals will undoubtedly prove to be a highly contentious political issue, something that will of course be watched very closely by ratings agencies.
4. Mum on anticipated tax changes
Though the MTBPS is traditionally not used to announce significant tax changes, many commentators expected to hear what the government plans to do to recover the tax-to-GDP ratio to pre-Covid levels. Instead, the MTBPS merely stated that it expects to raise an additional R40 billion from taxes over the MTEF period and that the tax-to-GDP ratio is only expected to recover to the 2019/2020 levels by 2027/2028, without disclosing details on how they expected to achieve this.
Silence on this topic should not be construed as policy inaction in this case. Government is acutely aware of the economic shock that Covid-19 has caused for most household incomes. It also probably realises in the wake of the Covid-related corruption scandal and widespread government corruption being uncovered almost daily at the moment, the timing for significant tax changes would probably amount to political suicide. From the 2019/2020 budget onwards, we have seen concerted efforts to rebuild capacity at SARS and thus improve lost efficiency in revenue collection. And though there is little evidence of improved collection rates, this rebuilding of capacity at SARS can not reasonably be expected to occur overnight.
5. Dealing with the elephant in the room
The additional allocation of R10.5 billion to SAA has been widely condemned since yesterday’s MTBPS. However, as the minister explained, the additional allocation is intended to honour past guaranteed debt obligations of the embattled national carrier – and the government had virtually no other option but to make this allocation. Though a bitter pill for everyone to swallow, at least this allocation was made from cuts in other allocations and will as such not impact the budget balance.
In all, I think that the 2020 MTBPS has probably signalled the first budget in a series of tough budgets to come. In this budget, the minister displayed a thorough understanding of the tough economic realities facing our country and the fiscal environment specifically. There were however some “tough sells” proposed and the successful implementation of these proposed initiatives however remains a notable uncertainty. I simply hope that everyone involved realises that there is literally no room for error on the edge of this cliff we are finding ourselves at this very moment.
