EDITORIAL: Tito Mboweni’s moment of truth
The medium-term budget policy statement is the first concrete opportunity for the new administration to distinguish itself fiscally from the last
SA’s medium-term budget policy statement today takes place at a pivotal moment, not just for SA’s fiscal propriety but for the nation’s politics.
SA has a new president in Cyril Ramaphosa; it has a new finance minister in former Reserve Bank governor Tito Mboweni; it has effectively a new senior administration, although of course many of the old regime are part of the new. Much of the budget will have been formulated some time ago, but it is the first concrete opportunity for the new administration to distinguish itself fiscally from the last.
There are some very immediate and pressing issues. SA sits on the verge of a unanimous junk rating by the three main ratings agencies, which, if it took place, would make SA's ballooning debt more expensive and would signal to the world the country’s decline has not been reversed.
SA sits on the verge of a unanimous junk rating by the three main ratings agencies, which, if it took place, would make SA's ballooning debt more expensive and would signal to the world the country’s decline has not been reversed.
More broadly, the economy is in a terrible state. Growth estimates for the first two quarters have shocked economists and required the government and the Reserve Bank to slash estimates for 2017/18 growth by half. The Institute of Race Relations’ Centre for Risk Analysis has calculated that SA is in the longest downward business cycle since 1945. Business confidence has improved marginally but remains low by historical standards.
Yet, prospects for the future are looking up a bit, and there are encouraging signs that the biggest failings of the Zuma presidency — endemic corruption, low growth, low job creation and low levels of investment — are being addressed if not yet in concrete policy, then at least at a conceptual level.
The Zondo and Nugent commissions are laying bare the extent of the gratuitous looting of government and state resources, and the wilful decimation of state institutions. The recent jobs summit and the upcoming investment summit suggest the government is determined to address the two key issues of the day.
Mboweni’s biggest problem is the country’s declining fiscal space. SA has been running a fiscal deficit of around 3.7% on average for nine years and it ultimately begins to hurt. SA is now at that point. The splendid budget conservatism in the Mbeki era provided the fiscal space to lean against the wind during the Zuma era.
Sadly, that space has been squandered. Now that SA's debt-to- GDP ratio has crept up to 53.1% of GDP. Concerns that SA might tip over from understandable flexibility into positive fiscal irresponsibility have risen. Mboweni’s job will partly be to convince sceptics that this will not happen.
In that process, he does have some wind at his back. First, prospects for economic recovery look a little better, particularly after the shocks of the first two quarters, and SA is likely to emerge from its surprise recession. Second, the global economy is currently growing well, although doubts have risen about how long this will last.
Third, despite the recession, tax receipts for the first seven months of the year have come in above budget, mainly because the VAT increase announced in February garnered more than estimated. If tax collections continue to perform as they have done in the first five months of 2018, the budget forecast will be exceeded by between R8bn and R11bn by February 2019. That means the tax increases of previous years will probably not be necessary for the 2018/19 budget.
However, Mboweni also faces headwinds. Primary among these is the worrying consistency that the public sector wage bill keeps rising ahead of inflation. In addition, the government’s contingent liabilities in terms of state-owned enterprises are now at hair-raising levels and show no sign of declining.
The tone of the budget presentation will also be important. Mboweni is somewhat of a contradictory figure in SA’s politics; his image is partly shaped by the stern Reserve Bank governor that he was and it is partly that of an economic radical keen, as he mentioned in a recent tweet, to tweak the nose of “the establishment”.
Yet there is nothing more “establishment” than being the finance minister. For Mboweni personally, being a convincing exponent of fiscal probity is just part of the challenge that lies ahead.