Is Mboweni’s goal to cut expenditure achievable?
JOHANNESBURG - Finance Minister Tito Mboweni highlighted the fact that South Africa’s public finances are dangerously overstretched when he delivered the Supplementary Budget on Wednesday.
In addition to putting the spotlight on a growing Budget deficit, he said a sovereign debt crisis would be devastating for the country, as it would result in interest rates rocketing and inflation taking hold.
Although Mboweni made numerous references to zero-based budgeting, he failed to provide any material detail on a number of key issues, including reforming state-owned enterprises (SOEs) and reducing the public sector wage bill.
From the outset, it was clear there was not going to be any good news in this Budget given the devastation caused to an already fragile economy by the lockdown.
Make no mistake, the country’s fiscal position is dire.
The consolidated Budget deficit is expected to reach 15.7 percent of gross domestic product (GDP) for the current financial year, which is sharply up from February’s estimate of 6.8 percent of GDP. Given that no one could have predicted Covid-19, this increase is not unexpected.
However, what is of concern is that the government has consistently missed predictions on GDP growth, Budget deficits, and debt levels over the past few years. Of additional concern is the fact that no insight was provided into government estimates regarding the Budget deficit in the year beyond this financial year.
The government anticipates that its debt levels will rise to 81.8 percent of GDP by the end of this fiscal year – compared with an estimate of 65.6 percent of GDP projected in the February Budget – and aims to stabilise debt at 87.4 percent of GDP in 2023/24. It’s also aiming for a primary surplus that year.
No detail was provided on how this primary surplus would be achieved with the exception of the fact that the Medium-Term Expenditure Framework process would be guided by the principles of zero-based budgeting, and that the government would try to reduce all expenditure that it thought it could no longer afford.
The National Treasury expects growth to contract by 7.2 percent, which is substantially worse than February’s forecast of 0.9 percent growth for 2020, and expects a revenue shortfall of R300 billion. The minister provided no detail on any expectation of a recovery after 2020.
The temporary Covid-19 grant comes to an end in October. However, given higher levels of unemployment, questions regarding whether this grant will be extended were being asked before this Budget. Mboweni, however, appears resolute on the temporary nature of this support.
Announcing that the Covid-19 loan guarantee programme now includes a business restart programme, and has been extended to businesses with a turnover in excess of R300 million, it is of interest that only 5 percent of the available R200bn has been lent, begging the question of just how effective this programme has been.
The minister also announced that the government intends to borrow $7bn (R1 21.5bn from international finance institutions. However, he failed to explain whether this figure included approaches to institutions that have already been made or whether this figure was over and above these loans.
Mboweni said the Covid-19 pandemic highlighted the need for urgent reforms in SOEs so that they can become financially stable and sustainable. Despite repeated rhetoric in recent months that the state could not afford further SOE bailouts, he announced that the Land Bank would be re-capitalised to the tune of R3bn because it was too important to fail.
Mboweni also made no commitment to reducing the bloated public sector wage bill, although he did say that negotiations were under way. Although the Treasury needs to find
spending adjustments of about R230bn over the next two years, he provided no detail on how this would be achieved.
There is no question that Mboweni provided an honest – albeit brutal – assessment of the country’s current financial position. However, the Treasury’s commitment to debt-level projections could come back to haunt Mboweni, given that the government has consistently tended to under project debt. A further blow to South Africa’s sovereign credit rating could occur should South Africa miss these debt-level projections. Mboweni also clearly explained the crisis that will follow if debt is not stabilised.
The trillion-dollar question is how achievable Mboweni’s expenditure reduction is in reality, given that there is limited evidence of any progress being made thus far in terms of reducing state expenditure.
The limited detail provided in the Budget was somewhat disconcerting, exacerbated by his continual references to the Medium-Term Policy Budget Statement, which had the air of “kicking the can down the road”.
Although expenditure cuts are an obvious and immediate solution to South Africa’s Budget deficit, the long-term solution is sustainable GDP growth. However, for this to be achieved requires a structural, policy and effectively, a seismic ideological shift. The jury is still out on whether the governing party has the stomach – or will – for this shift.
Andrew Duvenage is the managing director of NFB Private Wealth Management.