Minister of finance Tito Mboweni presents the medium-term budget policy statement in the National Assembly on October 30 2019. Picture: ESA ALEXANDER/SUNDAY TIMES
Minister of finance Tito Mboweni presents the medium-term budget policy statement in the National Assembly on October 30 2019. Picture: ESA ALEXANDER/SUNDAY TIMES

Finance minister Tito Mboweni finds himself in a rather curious position. On Wednesday, he is supposed to deliver what may well be the most difficult — if not the most important — budget since the advent of democracy. Yet he won’t be burdened by oversized market expectations.

Sure enough, markets have been tanking in recent days and the rand is trading near its weakest levels since October above R15/$.  Stocks on the JSE were taken to the cleaners on Monday, with the all share index posting its biggest intraday decline since the depths of the global financial crisis in 2008.

BUDGET ANALYSIS: Where will we get the money?

But this had more to do with external events, and overseas markets were similarly hit as concerns about the economic effect of the coronavirus outbreak mount. European stocks posted their biggest losses since their tumble in the wake of the UK’s Brexit vote in June 2016.

On the other hand, SA’s bond markets do not show a sign of panic though the country still has much higher yields than its emerging-market peers, some of which are already in subinvestment grade. The resilience may well be an indication that investors have already resigned themselves to the government not being able to produce a budget that moves the needle much in terms of dealing with the country’s fiscal situation and dire economic growth outlook.

The GDP growth forecast for 2020 will be downgraded from the 1.2% that was contained in the medium-term budget policy statement (MTBPS) four months ago. That will make it even harder to contain the deficit, translating into an even higher debt-to-GDP ratio. From 23% when Trevor Manuel presented his last budget in 2009, the debt-to-GDP ratio is headed for the 70% level.

Already, at the release of the MTBPS in October, the government was talking up the need to deal with what it acknowledged was among the highest deficits among peer countries, requiring urgent action to narrowing the gap between revenue and expenditure.

To achieve a main budget primary balance — revenue matching non-interest expenditure — Mboweni proposed spending cuts of R150bn over three years. With little room for more tax increases, the government then highlighted the need to reduce the public sector wage bill, which takes 35c of every rand it spends, and come up with a sustainable plan for state-owned enterprises (SOEs) to reduce future transfers.

“These measures require difficult decisions that will affect the economy and the distribution of public resources,” we were told. The problem is that very few people think they will be forthcoming.

And the reason for the scepticism isn’t hard to work out. Mboweni simply doesn’t have the political backing for the really hard choices available to him. Attempts to increase VAT are likely to be resisted, while unions, which are only midway through a multiyear settlement, are unlikely to agree to a revision of that deal or to cuts later on.

So markets are braced for higher deficits above 6% of GDP. While it might sound counterintuitive, the relative lack of optimism might work in Mboweni’s favour. Any piece of good news on spending is likely to please investors and might even nudge markets higher.

What he doesn’t want to do is to spook investors with unrealistic and uncosted commitments on vanity projects such as the proposed state-owned bank or sovereign wealth fund. These, announced in President Cyril Ramaphosa’s state of the nation address, speak to the dysfunctional policy-making environment in SA, where ANC directives override research by experts at the Treasury.

Wits academic Michael Sachs, a former head of the budget office, put it succinctly last week. Addressing a Gordon Institute of Business Science conference, he spoke of what he called “the Polokwane class project” after Jacob Zuma won the ANC presidency from Thabo Mbeki. That was about asserting the power of alliance structures in setting policy, which by definition meant a weakening of the Treasury, both in influence and capacity.

With policy increasingly set at ANC mass meetings, this has resulted in the credibility of the budget process being undermined. That’s a fight that Mboweni has to tackle in the long term. For now, not underdelivering on already modest expectations is paramount.