MEDIUM-TERM BUDGET POLICY STATEMENT
EDITORIAL: Swallowing the bitter pill
‘At a debt level of 60% of GDP, a full-blown downgrade moves from a probability to a certainty’
At least there was no sad attempt to sugar-coat the pill. Delivering the medium-term budget policy statement, Finance Minister Malusi Gigaba set out the situation in all its gory detail. The two key figures were the calamitous income shortfall and, inevitably, rising debt.
Government revenue is now forecast to come in about R50.9bn less than budget, which would be the worst miss since 2009. As a result, the consolidated budget deficit will widen to 4.3% of GDP against the 3.1% forecast.
That’s an unexpectedly large jump, which organically leads to the second problem: Gross national debt is projected to reach more than 60% GDP by 2022, with debt service costs reaching 15% of main budget revenue. At a debt level of 60% of GDP, a full-blown downgrade moves from a probability to a certainty.
This picture resulted in a thumping fall in the rand exchange rate on Wednesday. The most profound and very obvious problem is that the government keeps overestimating growth. For the umpteenth time, the budget growth forecast had to be revised downwards. This time, Gigaba has really slashed it from expectations of 1.3% to 0.7%, and when that happens, the whole fiscal ship begins to wobble.
The most immediate result is that the expenditure ceiling, carefully implemented because it is one of the numbers the ratings agencies consider to be a key figure, will probably be breached by R3.9bn in the current year.
And that points to another problem. The reason for the breach has to do with the government’s recapitalisation of South African Airways (SAA) and the South African Post Office. The past is what it is, but the basis on which his function will be judged is not on what has happened but how he plans to fix it.
It’s here that the picture gets mistier.
Several things should be noted in Gigaba’s favour. The first is that he has grasped the nettle and is reaching into areas where the government has previously indicated by its actions it is loath to go. Gigaba said the "government is considering the disposal of assets to offset these appropriations during the current year" and of these, the most obvious is the government’s stake in Telkom. But the very vagueness of this declaration suggests actually doing so might be much harder than Gigaba expects.
The second hazy issue concerns the other state-owned enterprises. On the plus side, Gigaba was absolutely unflinching in laying down the law. Talking about state-owned enterprises in general, he said, "as the shareholder, we are tired of being dragged into crises by those we employ to govern and manage state-owned companies. This must end."
The fear that these were simply words was not soothed by his ringing endorsement of SAA, which he said "plays a priceless marketing and branding role".
In fact, it is on the spending side that Gigaba and government’s true colours show most clearly. Gigaba said that over the next three years, consolidated spending would increase by an annual average of 7.3%, from R1.6-trillion in 2017-18, to R1.9-trillion in 2020-21. Tax hikes or expenditure cuts could be counterproductive.
That may be true, but it does mean Gigaba has set his face against cuts in real terms. Hence, the bloated public sector salary bill will not be cut back. The budget documents themselves show what a problem this is. Public servants are now outearning their private-sector counterparts in every decile other than the very top. In the middle decile, public sector employees are earning two-and-a-half times more than taxpayers as a whole.
And there is an even larger problem: growth. Gigaba spoke warmly about private-sector involvement, a notable and welcome change. But on what exactly the government’s growth plan will be constituted, he was frustratingly blank apart from platitudes such as "building confidence".
The brute fact is that the government’s growth plan used to revolve around "taking a lead" in the economy and spending billions on infrastructure. Having fluffed that effort through incompetence and corruption, it has no cards left to play.
A problem not just for the government but for all of us.