DURBAN - Finance Minister Tito Mboweni must present a budget that builds national resilience and helps South Africa brace for impact.
Negligible economic growth and high levels of debt have obliterated South Africa’s ability to engage in counter cyclical measures- to save in times of plenty, and to spend in a time of crisis.
In short, South Africa has lost resilience. Businesses are vulnerable, families are vulnerable, government is vulnerable. Many people have lost their lives and livelihoods who need not have. There is no doubt that the ANC-led government will table this ‘emergency budget’ with blood on its hands.
As a result South Africa urgently needs a plan to restore resilience. We need a “resilience budget”. In this dire context, a resilience budget must acknowledge that neither austerity (sharp cuts to basic services) nor a big expansion in spending is possible now. The only available option is a very careful deployment of debt to fund the crisis response, while ensuring economic reform can spur growth, and showing a clear path to debt stability.
This is how we will measure the Minister’s emergency budget this week - does it:
- provide a credible plan for deploying debt and resources efficiently in the medium term to provide crisis relief,
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put in place measures that will allow us to stabilise debt and avoid wide-scale impoverishment by growing the economy?
Ultimately, does it help South Africa brace for impact, or does it only exacerbate our vulnerability?
Economic reform and driving down cost of debt
Achieving economic growth will require wide-ranging economic reform, which includes interventions such as: cutting the public sector wage bill, selling or shutting down state-owned enterprises that cannot remain viable without state bailouts, end Eskom’s monopoly and open the electricity market to competition, rejecting investment-killing policies of EWC, NHI, prescribed assets and SARB nationalisation.
It is possible that these reforms further help to reduce the cost of debt by reducing the risk lenders face in borrowing to South Africa. We must focus on reducing debt costs, which are affected by the debt trajectory, and by perceived levels of risk.
Stabilising Debt
The Minister needs to demonstrate that the government is also committed to reducing overall debt levels over time by showing a clear path to debt reaching a maximum, and then beginning a slow descent.
Such a path was not shown in the February main budget. And in leaked presentations from Treasury to Nedlac ahead of the Emergency Budget, Treasury does not seem to be able to show such a path now either. According to Treasury’s projections, debt will reach 113.8% of GDP by 2028, and will still be growing. This is unacceptable.
Government must stick by the R160 billion cut in public sector wage expenditure over the medium term. Minister Mboweni also has to ‘hold the line’ on any further bailouts to SAA. It would be wrong to prioritise SAA bailouts over funding the Covid response.
Perceptions about South Africa’s risk can be reduced by (1) showing credible commitment to fiscal discipline, and (2) focusing on growth-spurring economic reform.
Restructuring spending and priorities
The only way to achieve debt stability over time and reduce risk perceptions is to restructure spending and priorities, namely reduce spending on unnecessary and non-essential items. This is the only way to protect spending on essential basic services, and on growth-spurring infrastructure investment.
Zero based-budgeting and/or conducting comprehensive spending reviews can help to introduce fiscal discipline. Obstacles to making this successful, however, include political will, the skills to execute, and lack of data to make the exercise meaningful. Without clear expression of how to overcome these obstacles announcing a new approach to determining expenditure will amount to wishful thinking.
We propose 3 principles to guide spending priorities:
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Impact on growth: spending must be aligned to interventions which have the most significant multiplier effects.
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Contribution to social net: In addition to high levels of poverty (over 50 percent of the population is chronically poor), over 20 percent South Africans face high risk of slipping into poverty. Meaning over 70 percent of the population lives with poverty as a constant threat.
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Efficiency: Spending which enhances government efficiency must be prioritised, e.g. skilled personnel, efficiency enhancing technology etc.
Conclusion
South Africa needs a ‘resilience budget’ to help it brace for the impact of an economic depression. Minister Mboweni must show a credible path to debt sustainability, a commitment to lowering the cost of debt, and he must ‘hold the line’ on public wages and bailouts. Most importantly, he must demonstrate a real commitment to sweeping economic reform to get the economy growing. Without deep reform, a full-blown sovereign debt crisis is all but unavoidable.
Geordin Hill-Lewis MP - Democratic Alliance (DA) Shadow Minister of Finance