Minister of Finance Tito Mboweni. Picture: ESA ALEXANDER/SUNDAY TIMES
Minister of Finance Tito Mboweni. Picture: ESA ALEXANDER/SUNDAY TIMES

The national budget is so dense with numbers that the National Treasury helpfully provides simple graphs in its budget documents to tell the story of SA’s fiscal predicament in a way that a child, or even a politician, could understand.

In a fortnight, the first thing analysts will do when they get the 2020 Budget Review is turn to the graph showing SA’s debt-to-GDP outlook. The big question is whether it will look as bad as it did in the medium-term budget policy statement (MTBPS) in October.

Over the past decade, the Treasury has almost always budgeted for debt to plateau over the medium term. (Granted, it almost always missed its targets by a few decimal points, but it was resolute in sticking to the expenditure ceiling and aiming for debt stabilisation.)

The shock in October was that it was now allowing the debt ratio to race unhindered up a steep slope, from 60% now to 70% in three years and reaching 75% by 2027/ 2028 (or 80% if one includes support for Eskom). The Treasury was no longer expecting debt to stabilise — not even in the longer term.

Some interpreted this to mean that the Treasury had abandoned its dependable fiscal conservatism and risk aversion. It has not. The problem is political: repairing the fiscus depends on the political decisions taken by the president and the cabinet to revive growth, address the lack of finances at state-owned enterprises (SOEs) and restrain public sector wages.

Picture: 123RF/Milosh Kojadinovich
Picture: 123RF/Milosh Kojadinovich

The Treasury needs to cut expenditure by R150bn over three years to get debt to stabilise. It has identified R80bn worth of cuts to departmental budgets — so, in the absence of growth or SOE restructuring, it must cut R70bn off its only other big-ticket item, the public sector wage bill.

But until a new wage agreement is reached with public sector unions, the Treasury cannot credibly assume those cuts will materialise. And as there have been no apparent talks to reopen the current three-year wage agreement, the 2020 budget will likely look as bad as the MTBPS foretold — SA will face a rising mountain of debt with no plateau in sight.

It is probably too late, but the FM’s big tip for finance minister Tito Mboweni would have been to get a deep conversation going with the unions before the budget on the need for wage restraint. If the unions are unusually quiet post-budget, it will suggest that the right conversations are being had. This would bode well for fiscal stability.

Another tip would be to cut spending rather than hike taxes. Not only does global experience show that to be sustainable, since large fiscal adjustments should involve spending cuts, but SA has also raised taxes significantly in the past few years. It’s reaching the point where further hikes on an overburdened tax base could be self-defeating.

In fact, now would be the perfect time to cut the corporate tax rate to boost business confidence and support firms’ profitability in the face of industry-wide retrenchments. However, it would need to be accompanied by a crackdown on base erosion and profit-shifting to plug the revenue gap. The government should also urgently explore the sale of state assets. Its property portfolio — much of which is vacant — is worth roughly R7.5bn. Far better that this resource be run down than taxes run up.

But no matter how many levers the Treasury pulls, the government cannot avoid making hard choices. These include detailed policy decisions on what to do about Eskom’s debt, how to change the business models of SOEs and, preferably, which ones to close.

As long as no action is taken, SA’s public finances will keep deteriorating.

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