MTBPS: brave and optimistic but risks abound

The medium-term budget policy statement (MTBPS) uses every lever at the National Treasury’s disposal to try to correct South Africa’s fiscal course, and almost succeeds in crafting a credible framework that could get the debt ratio to stabilise inside of 80% over the coming two years.

No-one doubts the Treasury’s resolve or intent. However, despite the MTBPS having allayed the further build-up of fiscal concern for now, a deep and abiding scepticism over the country’s fiscal future is likely to persist in the absence of faster growth.

The budget framework has been knocked off course this year by a R56.8bn revenue undershoot caused in large part by the waning commodity boom, higher load-shedding costs and disappointing corporate income tax collection.

In February the Treasury was expecting the consolidated budget deficit to drop to almost 3% over the medium term and debt to stabilise at around 73.6% of GDP by 2025/2026. Now it has the deficit swelling to almost 5% this fiscal year and remaining sticky at about 4% for the next two years.

The debt ratio — already among the highest in emerging markets — stabilises four percentage points higher at 77.7% as a result, but achieving this is going to be an extremely tall order that will require the buy-in of the whole of government.

The Treasury’s plan to stabilise the public finances rests on three main pillars: significant spending restraint, moderate tax hikes, and quite a lot more borrowing.

Importantly, it relies on spending cuts (not tax hikes) to do most of the heavy lifting: R213.3bn will be cut over the next three years. This is roughly in line with the recommendation by the International Monetary Fund (IMF) that South Africa reduce expenditure by 3% of GDP over three years to prevent debt from marching relentlessly through 80% of GDP.

The Treasury also flagged that it will announce a new “fiscal anchor” in next year’s February budget — another IMF recommendation. It will hopefully involve the introduction of an explicit debt ceiling to signal to investors that the government is serious about keeping its books in order. This would strengthen the credibility of the fiscal framework, reducing fiscal risk.

The Treasury has until now resisted the imposition of hard fiscal rules, but admits that its self-imposed, nonbinding expenditure ceiling has failed to stop the relentless build-up of public debt.

Since 2008, the debt ratio has risen by over 47 percentage points of GDP. Gross debt is set to exceed R6-trillion by 2025/2026, up from R4.8-trillion now. Debt service costs — the fastest-growing item of state expenditure — will consume a whopping 22c of every rand the government collects over the medium term, cannibalising funds that could be used to provide pro-poor services and support economic growth.

While nobody thinks South Africa is facing an imminent fiscal crisis, it is clear that unless the Treasury alters the fiscal path, the debt ratio will just keep rising, inviting a funding crisis.

The fact that the Treasury is sticking to its guns on fiscal consolidation while seeking to tilt the balance of spending towards growth-enhancing capital expenditure and accelerate the pace of infrastructure investment in partnership with the private sector has been warmly welcomed by business.

In his MTBPS speech, finance minister Enoch Godongwana undertook to facilitate “a quantum shift” in the delivery of infrastructure by mobilising private sector financing and technical expertise at scale. This will involve, among other things, amending key Treasury regulations to speed up the implementation of capital projects, in line with the recommendations of the long-awaited review of the public-private partnerships framework.

“I expect that there will be criticism of this MTBPS for being ‘an austerity budget’,” said Business Leadership South Africa CEO Busi Mavuso. “But it delivers the fiscal discipline that is critical to business confidence. With business faith in the government as a custodian of the nation’s finances, companies will invest. That investment is key to drive growth which will enable the revenue to support government spending. Today’s MTBPS was a credible step towards delivering the growth that will support sustainable public spending allied by the reforms announced.”

The problem is that with growth being so slow to take off, deeper spending cuts can no longer be avoided if the goal is to prevent the further unsustainable build-up of debt.

This will depend not just on hard budget cuts imposed by the Treasury but also on whether the government has the political will to “reconfigure the state”. This will include the closure and/or merger of nonperforming programmes, departments and public entities.

The cuts and efficiency savings need to be significant not just to align spending with the slow pace of economic activity but also because they will be partially offset by a host of spending additions that were implausibly left out of the expenditure side of the budget in February.

These include the need to accommodate at least some of the carry-through costs of the 2023 wage settlement (an extra R57.2bn over the next two years) and extend the social relief of distress grant (almost R70bn has been earmarked to cover it for the next two years). Together they will cost almost R130bn, reducing the anticipated expenditure savings to a net R85bn.

With the gross borrowing requirement now set to exceed February’s estimates by a considerable R48bn this year, R55bn next year and R69bn in R2025/2026, the upshot is that tax hikes have become unavoidable. The Treasury has promised to hold these down to a “moderate” R15bn next year to limit the dampening effect on growth.

The medium-term framework is more credible and conservative on the revenue side than February’s in that it forecasts real GDP growth to average just 1.1% over this and the next two years and strips out R178bn in previously anticipated revenue over the medium term.

But on the expenditure side it relies on the assumption that wage bill growth can be kept below the rate of inflation over the medium term, something that implies deeply unpopular restrictions to headcounts.

There is also nothing set aside for state-owned enterprise (SOE) bailouts, which have averaged R24bn annually in recent years.

But perhaps the biggest credibility gap is that the budget is silent on what to do about the looming implosion of Transnet, which has R60bn of debt and interest due in this and the coming two fiscal years. This is a massive potential hole in the budget that cannot be ignored.

Godongwana was full of fighting talk at the pre-budget press conference, saying he would not give Transnet a bailout until it had internalised the freight logistics roadmap, which embraces private participation as the way to fix South Africa’s logistics logjam.

The goal of any bailout wouldn’t be just to fix Transnet, he said, but to address the efficiency of the national logistics system as a whole. There is a very welcome sense that the Treasury really is getting tougher on SOEs, but the challenge should not be underestimated.

The bottom line is that unless the government does more to reform the economy and moves faster to accelerate growth, it is doubtful whether it will succeed in stabilising the debt ratio.

The MTBPS provides a brave but optimistic fiscal roadmap towards achieving this goal; if only the government’s track record of sticking to its fiscal targets was more impressive, it might even be believable.