The writer says Treasury’s handling of Eskom debt will provoke a recession. File Photo: IOL

JOHANNESBURG – In the 2019 Budget Review, the budget baseline was lowered by R50 billion over three years. The policy was criticised by civil society organisations. 

The Treasury has been accused of austerity politics since at least 2014. The replies have also been a routine, namely that government spending still was planned to grow in real terms (after taking inflation into account). 

This time it is different. The order sent to the departments before the Mid-Term Budget should change the austerity debate. The order also concerns the “economic transformation” and “inclusive growth” document issued by the Treasury this month. 

The Treasury's order reads: “A compulsory budget baseline reduction scenario of 5 percent in 2020/21; 6 percent in 2021/22 and 7 percent in 2022/23 must be shown by institutions indicating where baseline reductions could be implemented with the least implications for service delivery.”

The order implies a R76bn cut in government spending next year and a R98bn cut the second year. The third year cut will be larger, but the budget ceiling for that year wasn't included in the 2019 Budget Review.

The Technical Guidelines 2020 is not in the list over media releases or the list Latest News on the Treasury website. Maybe this is the reason for the silence, together with the spin around prescribed assets, the perks of MPs and the Treasury's new discussion document.

Nevertheless, this three-year plan would cut the government's non-interest spending in the next budget by about 3.4 percent in real terms, ie after taking inflation into account.

Government spending comprises almost a third of gross domestic product (GDP). If the budget ceiling is lowered like this next year, more than 1 percent will be cut from GDP. 

This is only a first observation. Unfortunately, the so-called “multiplier effect” also applies when government cuts real spending. The depressing effect is bound to be stronger than 1 percent.

The directive is given in a situation: 

  • Where the economy is growing by less than 1 percent per year.
  • Where there is low growth in the world economy and a threat of a global recession.
  • Not the least because of the trade war between the US and China.
  • Where also big corporations like Apple are heavily indebted and a new financial crisis might be on the cards, similar to 2008-2009 when credit bubbles imploded.

As a comfort, the Treasury aims to “change the composition of spending towards spending that stimulates economic growth… particularly towards capital expenditure”, as the wording goes in the Technical Guidelines. 

That would be reasonable during fiscal expansion, like implementing a massive public works programme to get rid of 4 000 dangerous pit toilets in the schools, employing people as they are instead of wining about “skills shortages”. According to Equal Education and Section 27, Limpopo will start such a programme in 2026. 

But a cut in spending that hits “public consumption” harder – like public health and education services – will make the Treasury’s recessional push even stronger. The vast majority public sector workers spend all their wages each month. 

In contrast, the provinces and local governments every year return hundreds of millions of unspent infra structure money to the Treasury. To this fact can be added normal time lags, but also the need to curb corruption in infra-structure projects. For the looting of public resources to stop, there is frankly speaking more, and not less, “red tape” and controls needed: to impose rules and legislation that are already there.

The opening bid before the Mid-Term Budget makes it clear that Eskom’s debt crisis mustn’t be addressed by more budget allocations. Bluntly put, the R59bn Special Appropriation Bill is appropriating its funds from public services. The Treasury now plans to repeat this again.

Available state funds should instead be used. One fund is the Unemployment Insurance Fund (UIF) that has accumulated an investment portfolio of R154bn (March 2018). Official unemployment stands at 29 percent and the UIF makes an annual surplus of R8bn after paying benefits. There are 37 000 real vacancies in public health alone, according to the Presidential Health Summit in October last year. R8bn would finance these vacancies at an average annual labour cost of R216 000. 

The other fund is the Government Employee Pension Fund (GEPF) that has accumulated R1.8 trillion of assets manhandled by the Public Investment Corporation. 

As for the social use of GEPF there are many options.

Let us for argument’s sake do the opposite to the 10 percent public sector wage cut that the Treasury’s Director General Dondo Mogajane suggested a month ago. 

A one-year payment holiday from the 7.5 percent employee contribution to the GEPF would put some R28bn in the pockets of the government employees and stimulate economic demand in the local economy. It would repair some of the R22bn damage done by the VAT increase.

A simultaneous one-year government contribution holiday would let R52bn remain in the national budget. It would start to break the spiral of debt service, more budget austerity and still more debt service. 

The GEPF is currently paying an estimated R100bn in pensions and benefits over a year and receives an estimated R75bn in cash income from dividends and interest payments. Some 45 percent of these cash incomes come from other parts of government! GEPF is a main creditor of both the government and Eskom. With a contribution holiday, the R1.8trln in the GEPF’s fund would decrease by R25bn, other things being equal. 

The contribution holiday would pose no threat to the guaranteed pension and benefit payments to state employees and their spouses. The surplus after paying all pensions and benefits amounted to R47.5bn in 2018. 

Another obvious option is to change the investment policy of the GEPF. The policy is in breach of prudency standards. 

The 2018 audit showed that the GEPF’s solvency fund should have R402bn as protection against a financial crash. The requirement is only covered to a third. This alone is a compelling reason for shifting a lot of the GEPF’s more than R1trln investment in shares to government bonds, selling them at regulated interest rates to handle the debt crisis at Eskom.

GEPF’s ability to pay benefits currently would in fact improve, even when interest rates on loans between state organs are rebated. 

GEPF’s cash dividend returns from its shareholdings are historically more than 3 percentage points lower than interest incomes from GEPF’s bond possessions. 

As for the Treasury’s discussion document, the National Health Insurance isn’t mentioned. 

On the face of it, the state is depicted as a procurement provider. The planned shock-therapy reflects a strategic quest for a smaller public service sector as a share of the economy.

Dick Forslund is senior economist at Alternative Information and Development Centre. The views expressed here are his own.

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