Budget shows ‘severe’ slide in public finances, says Fitch
Fiscal metrics worsen while efforts to curb spending ‘rely heavily on hoped-for moderation in public sector wages, which might not materialise’, notes the credit ratings agency
The budget delivered by finance minister Tito Mboweni highlights the “severe deterioration” of public finances and the long-term policy challenge of stabilising government debt, credit ratings agency Fitch said in a statement late on Wednesday evening.
“Fiscal metrics worsened moderately compared with the medium-term budget policy statement (MTPBS) in October, despite the announcement of significant expenditure cuts,” Fitch said.
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“Moreover, these consolidation measures rely heavily on hoped-for moderation in public sector wages, which might not materialise, adding further risks to SA’s deficit and debt trajectories.”
Fitch already rates SA at a subinvestment grade with a negative outlook, along with its peer S&P Global. Only Moody’s Investors Service rates SA at investment grade, by one notch, though it also has the country on a negative outlook.
Mboweni’s budget provided for cuts of R261bn in baseline allocations to departments, with R160bn of these coming from cuts to the wage bill. But thanks to poorer economic growth prospects which saw tax revenues disappoint, the state is still battling to shrink its budget deficit, particularly in the earlier years of the three-year medium-term expenditure framework (MTEF)
The state’s debt trajectory is not expected to stabilise in the coming years.
The consolidated budget deficit is expected to reach 6.3% in 2019/2020, rising to 6.8% in 2020/2021 and 6.2% in 2021/2022.
Meanwhile, government debt as a percentage of GDP is expected to reach 61.6% in 2019/2020, rising to 65.6% in 2020/2021, 69.1% in 2021/2022 and 71.6% in 2022/2023.
Rising debt levels are crowding out other spending needed to deliver social services, with debt service costs now absorbing 15.2% of main budget revenues.
Fitch cautioned that the most recent three-year public sector wage settlement expires only in April 2021, while the last agreement, made in 2018, “was significantly higher than budgeted”.
Though the government has tabled the issue of managing the wage bill at the Public Service Co-ordinating Bargaining Council, this would be the first time that an existing wage agreement has been reopened, noted Fitch.
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“A key public sector trade union has declared the agreement is sacrosanct and labour representatives are showing little sign that they would accept lower wage growth to support fiscal consolidation,” said Fitch.
Unions reacted strongly to budget proposals — with Cosatu telling Business Day that it amounted to an “attack on workers”.
Fitch noted that, contrary to its expectations, the government did not raise taxes given concerns about the effect this could have on already weak economic growth. The Treasury revised its forecast for growth down to 0.9% for 2020.
In a bid to address the poor growth outcomes, Mboweni said in his speech that government had embraced the reforms outlined in the Treasury’s economic strategy document, first published at the time of last year’s MTBPS.
The reforms include modernising the countries network industries, including electricity, ports and rail.
But Fitch cautioned that the reforms would not bring about immediate growth.
“Persistently low GDP growth, combined with bailouts of state-owned enterprises, have been the key factors behind the deterioration in public finances over recent years, and reforms envisaged by the government are unlikely to significantly improve growth prospects in the medium term,” Fitch said.