Tough budget ahead as state struggles to make spending cuts
Concerns are rising the government will come nowhere near its target of slashing its wage bill
As February’s budget looms expectations are building that it will be difficult for the government to deliver on targeted spending cuts and institute policy reforms to lift business, consumer and investor confidence.
Bank of America Securities head of SA research Michael Jacks said on Thursday the investment bank expects the government’s main budget deficit will rise to 6.5% come February and that it will only be able to deliver on half of the R150bn in spending cuts that finance minister Tito Mboweni flagged in his medium-term budget policy statement in October.
The investment bank’s estimates are higher than the Treasury’s forecast of 6.2% for 2019/20 made in the medium-term budget, which outlined the parlous state of government’s finances and resulted in both Moody’s Investors Services and S&P Global changing their outlook on SA’s credit ratings to negative. Moody’s is the last agency to rate SA debt at investment grade.
In the 2020/21 year the firm expects the deficit to come in slightly higher at 6.9%, vs Treasury’s 6.8%.
The lack of political will to institute reforms is one of the biggest issues confronting the government, said Jacks.
“You’ve clearly seen the divisions in the ruling party, so you do have will to reform in some corners but it’s not unanimous and that slows down policy rollout,” he said.
Bank of America joins Absa in expecting a tough budget, forecasting that the main budget deficit will reach 6.9% for 2019/20.
In the medium-term budget the Treasury forecast that the government’s debt-to-GDP levels would rise to 60.8% in 2019/20 and reach 71.3% by 2022/23.
According to SA Reserve Bank data, however, the state’s gross loan debt for the 2019/20 fiscal year, reached 61.5% of GDP, by the end of September, already overshooting the medium-term budget estimates. Jacks said the Bank of America expects debt to GDP levels to rise closer to 80% in the medium term.
Mboweni has flagged the public sector wage bill and the “never-ending demands” of state-owned entities, such as SAA and Eskom, as the threats to fiscal sustainability. In October Mboweni pointed to the wage bill as a means to find the R150bn in savings that the government is targeting to achieve a primary budget surplus — meaning revenue matches non-interest expenditure.
The ANC’s labour ally, Cosatu, has decried “unwarranted” attacks on public servants. The federation has called for an extensive skills audit of the public sector, redeployment of staff across government and deep cuts to cabinet and senior management level pay, as opposed to civil servant layoffs.
International investors are however becoming impatient for reforms, said John Morris Bank of America Securities SA investment strategist. First among these would be getting a handle on the fiscal deficit, he said.
“Our fiscal deficit is crowding out the private sector,” he said, adding that with bond yields in the region of 9% this is raising the cost of capital for companies who want to invest in the economy.
“We need to get expenditure under control, that’s what investors want to see ... because we can’t continue on this path,” Morris said.
Problems at power utility Eskom continued to weigh on SA’s growth prospects, said Jacks, and the bank has downgraded its growth expectations for the country to 0.3% in 2019 and 0.8% in 2020.