The sooner we bite the bullet and implement difficult structural adjustments, the sooner we will emerge better equipped to address the daunting social challenges we face, says Johan Rossouw,  a group economist at Vunani. Photo: Supplied
The sooner we bite the bullet and implement difficult structural adjustments, the sooner we will emerge better equipped to address the daunting social challenges we face, says Johan Rossouw, a group economist at Vunani. Photo: Supplied

Budget opinion: Government must enable private sector to flourish

By Johan Rossouw Time of article published Jun 26, 2020

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JOHANNESBURG - Finance Minister Tito Mboweni can hardly be faulted for reflecting the brutal truth in the 2020/21 Supplementary Budget tabled this week.

The fact of the matter is that the numbers don’t lie and reflect a grim fiscal conundrum. His caution regarding a debt trap and the need to stop eating into our children’s inheritance are equally justified.

Although Covid-19 added to the fiscal pressures, and can largely be blamed for this year’s Budget deficit at R761.7 billion ballooning to more than double the number envisaged at the time of the main Budget, our economy was already in recession, and the government’s finances on a slippery slope as we entered the lockdown.

A Budget deficit to gross domestic product (GDP) ratio of 15.7 percent amid a debt to GDP ratio hoped eventually to be curtailed below 90 percent sounds like an economic horror story. 

Even at the time of the main Budget, a deficit ratio of 6.8 percent and an escalating debt ratio at 65.6 percent were flashing red lights.
Although other countries might have much higher debt ratios and comfortably live with them, South Africa’s unique economic and fiscal landscape means it cannot afford to pay 21 cents in every tax rand towards servicing its debt.

Yes, the deficit gap would probably be plugged by willing debt providers – entities such as the International Monetary Fund (IMF) or the private sector, but the question is at what price?

A certainty would be an even higher interest bill and, eventually, even less of the tax rand remaining to allocate towards other much-needed priorities, and potentially, stringent (and painful) requirements by the likes of the IMF, looking to “force” the economy towards fiscal redemption.

In the short term, the question is whether the envisaged cost-cutting measures will be delivered. Mboweni might struggle to find support among his peers for dealing decisively with struggling state-owned entities such as SAA and Eskom.

Moreover, the intention to, for instance, shave about R72bn off non-interest expenditure in 2021/22 vis-à-vis 2020/21 could also be a challenge.

Even if we perfect zero-based budgeting and manage to control expenditure perfectly, the key challenge is to grow the tax base. For that, we need significant real economic growth.

The dismal economic performance over the past few years did not help, and plodding along with barely positive economic growth over the next few years will not do. The sooner we bite the bullet and implement difficult structural adjustments, the sooner we will emerge better equipped to address the daunting social challenges we face.

Getting this right does not mean more government involvement – to the contrary, it essentially means the government getting out of the way of the private sector and facilitating an enabling environment that allows the private sector to thrive.

Although the need to accommodate fiscal slippage to deal with short-term pressures is well understood, ultimately the challenge is to demonstrate a commitment to rein in South 

Africa’s fiscal parameters to “acceptable” levels. The commitment, for instance, to target a primary Budget surplus by 2023/24 is laudable and necessary. But it will take much more than that.

Johan Rossouw is a group economist at Vunani.

BUSINESS REPORT 

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