MAMOKETE LIJANE: Fiscal credibility deficit persists before medium-term budget

The National Treasury will present its medium-term budget policy statement (MTBPS) later in October. In it, the Treasury outlines its three-year budgeting framework, which it will operationalise in the February budget.

The predictability and improvement from budget statement to medium-term budget policy statement have historically been a key underpin of SA’s fiscal policy credibility. Credibility is earned gradually by making credible revenue and expenditure predictions and following through. If the fiscal outcome is better than predicted it is a win. If it is worse, a loss.

There is room for some reasonable losses in this game, but too many and your credibility erodes. If they are of your own making, as with the UK’s ill-advised fiscal plan, your credibility is toast.

SA’s fiscal policy credibility frayed in the mid-2010s, largely due to disappointing growth outcomes and a failure to course-correct. It collapsed in 2019 when Eskom’s calls on state support upended deficit and debt targets.

The country’s fiscal credibility as we went into the Covid-19 crisis was thus a shadow of what it was going into the global financial crisis in 2008, leading to less policy support for the economy in 2020 than would have otherwise been the case.

The post-Covid-19 period offered an opportunity for redemption, and the people at 240 Madiba Street took it. The Treasury used a fair portion of the policy room created by windfall taxes from high commodity prices and a better-than-expected post-Covid-19 economic recovery to lower deficits and the debt path.

As quoted by Bloomberg, Reserve Bank governor Lesetja Kganyago has lauded the Treasury’s performance in the past two years. He is correct that impressions of the Treasury team had improved in 2021 and in 2022 to date. However, the government is still under pressure, and still has a fiscal credibility deficit before the medium-term budget policy statement.

Eskom’s debt

On three important questions — wages, state-owned entities and social support — it looks unlikely that there will be final answers when this statement is delivered. The government, which in its February estimates assumed it would keep wage growth at zero, is in discussions with public sector unions on a wage agreement for this fiscal year. The latest offer, which the unions have yet to agree to, would result in a wage bill almost R40bn higher than the numbers tabled in February.

The minister has promised to unveil the much discussed solution for Eskom’s debt, which involves the transfer of up to half of the power utility’s R400bn debt onto the government’s balance sheet. The fiscal implications of this move are unclear. Does the state continue to give cash to Eskom even after this transfer? If so, how much? 

On social transfers, the government is under pressure to extend and expand the social relief of distress grant, which costs R44bn annually. Between the wage bill, Eskom and social grants, expenditure could be R100bn, or 1.6% of GDP, higher in the coming fiscal year. Just for context, recently ousted UK chancellor of the exchequer Kwasi Kwarteng was felled by 1.7% of GDP in unfunded tax cuts.

The piecemeal approach to wage bargaining, a departure from the multiyear wage agreements of old, reduces the credibility of the budgeting process. State-owned entities remain a key point of vulnerability to any fiscal outlook. Eskom, Transnet, Sanral and Denel, among others, have question marks around government support and sustainability.

We are unlikely to receive final answers to these questions next week, and the debate on social support is far from over. Will the social relief of distress grant be expanded and extended? Are we on track for a basic income grant? The market needs answers that are valid beyond a year or two.

SA will continue to struggle in turbulent times due to a surfeit of fiscal policy credibility. This is something we need to keep in mind before the coming downturn. As in 2020, policy options remain limited. The fiscal buffers that enabled SA to weather the 2008/2009 crisis with aplomb, took a decade to build. It took a decade to erode and will take more than the two years of good luck in 2021 and 2022 to regain.

• Lijane works in fixed income sales and strategy at Absa Corporate & Investment Banking.