Medium-term budget: there’s good news, but…

Despite the bleak global economic outlook, the National Treasury has produced a progressive and pro-growth medium-term budget that both spends and saves much more than expected — while still coming out way ahead of its debt reduction targets.

The medium-term budget policy statement (MTBPS) is progressive because it extends the R350 a month social relief of distress (SRD) grant for another year while also significantly increasing allocations to health, education and policing to counter some of the erosion these core public services have suffered over the past decade.

It is pro-growth because it also increases allocations to infrastructure investment, as well as Transnet and the South African National Roads Agency Ltd (Sanral) to shore up South Africa’s crumbling logistics backbone, while simultaneously reducing the debt burden. The latter should lower fiscal risk and economy-wide interest rates, helping to crowd in private sector investment.

If only the risks on the spending side weren’t so high, it might even have been believable. But, as ever, the fiscal framework faces a credibility problem because of the Treasury’s inability to budget accurately for the big spending risks that are coming down the line.

For instance, nothing is pencilled in for public sector wage bill growth next year. The government’s unilateral move to pay a 3% increase this year actually amounts to a 7.5% inflation-busting increase once the R1,000 monthly gratuity and 1.5% pay progression are included. While budgeting for a zero increase next year may be a savvy negotiating ploy, it renders the expenditure framework unreliable.

Similarly, no provision has been made for the continuation of the R45bn SRD grant after the end of March 2024, even though its withdrawal in an election year is politically implausible. Equally, nothing was firmly indicated for the highly anticipated Eskom debt swap, which has the potential to add R200bn (3% of GDP) to the country’s debt ratio. The detail has been kicked out to the February 2023 budget, though the Treasury is working on the basis that whatever modality is decided upon, the effect must be deficit neutral.

It’s not finance minister Enoch Godongwana’s fault that the political trade-offs and complex technical decisions have yet to be taken by other parts of government, but it does make it hard to take the medium-term budget at face value and to celebrate the good news it contains.

And of that there is plenty. There is no denying that South Africa’s fiscal position has improved dramatically over the past few years, thanks mainly to commodity-fuelled revenue overruns and conservative budgeting, coupled with high inflation and expenditure restraint.

For the past few years, high commodity prices have buoyed up mining company profits and percolated through the economy, boosting tax revenues way beyond expectations. South Africa is set for a R106bn main budget revenue overrun in the current fiscal year on top of the R197bn overrun it clocked up in 2021/2022.

But ongoing expenditure restraint has also played a role in South Africa’s fiscal turnaround. This pattern is set to continue, with Godongwana budgeting to save 65% of the revenue windfall this year, 45% of the carry-through into next year and 37% in 2024/2025.

The upshot is that whereas previously gross debt was set to stabilise at 75% of GDP in 2024/2025, it is now expected to stabilise two years ahead of schedule and lower than before — at 71.4% in the current fiscal year (2022/2023) — before gradually declining.

At the risk of mixing our metaphors, the once gaping “jaws of the hippo” — the term for the gap between revenue and expenditure coined by former finance minister Tito Mboweni — will snap shut next year, placing the public finances on a gentle glide path back to sustainability in which the debt ratio arcs like the back of a humpback whale.

In fact, even in the Treasury’s downside scenario, where the global economy slows more than currently expected, while inflation remains persistently high, the debt ratio does not rise beyond its current peak. (Cue snorts of derision).

If debt can successfully be stabilised at 71%, South Africa can likely look forward to its first sovereign credit rating upgrade in years. However, this forecast assumes that the country will achieve a growing primary surplus (revenue minus non-interest expenditure) for the next three fiscal years in a row. The last time we achieved a primary surplus was in 2007.

While seasoned economists are having a hard time accepting the plausibility of this forecast, Treasury deputy director-general Duncan Pieterse says he is “pretty confident” that South Africa will achieve it, arguing that the Treasury’s growth and revenue forecasts are “quite conservative”, and the framework is sensitive to the fact that we’re entering a “very difficult” global period.

That’s putting it mildly. Many delegates have said the mood at this year’s International Monetary Fund (IMF) October meetings in Washington was intolerably bleak. But what Pieterse is really referring to is the fact that the Treasury has stashed R110bn away in the contingency and unallocated reserves to cover the big spending pressures that are coming down the track.

The Treasury doesn’t deny that, despite the stronger fiscal picture it presents, significant fiscal risks have started to materialise and that urgent action is needed to mitigate these risks and accelerate growth-enhancing reforms, especially those that boost energy availability and state capacity.

In short, while South Africa’s fiscal position has improved dramatically, serious economic challenges remain. Until there is more decisive action to address the country’s growth constraints, it is unlikely that improvements in the fiscal position will be sustained. Not even the best budgeting in the world will be able to change that.