/ 25 October 2017

Medium term budget policy statement: If only Gigaba was credible

Malusi Gigaba says Standard & Poor's downgrade of South Africa to junk status is a setback.
Malusi Gigaba says Standard & Poor's downgrade of South Africa to junk status is a setback.

Malusi Gigaba, for all his sins — among them, his supposed role in state capture and his peacocking outfits — did a good job reminding us that we’re navigating very difficult times whilst still convincing the influential credit-ratings agencies that all is well. It was the most challenging Medium Term Budget Policy Statement, ever. But some of the difficulty was his own-doing. He had to table the MTBPS in the period of the slowest economic growth since 1994. 

Despite having emerged from a six-month technical recession in the second quarter of 2017, the South African economy is expected continue struggling over the foreseeable future, and grow by a modest 0.7% this year and 1.1% next year, while our developing country peers roar ahead, growing by 4.6% this year and 4.9% in 2018. As government revenue depends on the state of the economy, the economy’s poor growth performance and outlook means that Gigaba had the tough task of confirming the market’s fears of larger revenue shortfalls for the current fiscal year and beyond. Based on the revised revenue projections, the country will need to plug a fiscal gap of a whopping R49-billion for the current year.

Gigaba had the choice of increasing revenue, decreasing expenditure or issuing more debt, or a combination of all three.

None of these are cost-free policy choices.

Increasing revenue through increasing taxes will harm economic growth, and could harm poorer households disproportionately.

Reducing expenditure will negatively affect government’s ability to deliver essential socio-economic services.

Issuing more debt will increase government’s debt stock and also increase the share of the budget allocated to interest on debt as well as precipitating a downgrade of the country’s credit ratings – which could in-turn cause the rand to tumble- and debt costs to soar.

Gigaba, but mostly the team of experts he inherited from Gordhan and Nene, opted for a reasonable-in-the-circumstances combination of all three.In his speech, Gigaba announced the sale of government’s stake in Telkom, presumably to government’s pension fund manager the Public Investment Corporation (PIC), to raise much needed revenue and fund the two bailouts of South African Airways (SAA). Selling government’s shares in a profitable company like Telkom, which were expected to generate R507-million of income through dividends for government this year, to bail-out a loss-making SAA with no strategic value for the country makes little sense. 

Whilst Gigaba will be justified in pointing out that not bailing-out SAA would result in considerably larger costs for the country’s finances and economy, he should also remember that the financial problems at SAA as well as Eskom and other state owned enterprises festered along with wholesale corruption and looting under his watch as an erstwhile Minister of Public Enterprises. He has now forced taxpayers into paying for his incompetence. Additional revenue measures, expected to raise R15-billion next year, will be tabled in February next year with the Budget Review. If you believe Judge Dennis Davis, the chairperson of the government-appointed independent tax committee, it will most likely be VAT. Increasing VAT will increase the cost of living for households, and reduce the amount of money consumers have left over to continue spending, which will harm households contribution to economic growth, but all tax increases come at a cost. Gigaba & Co. also made adjustments to the country’s spending plans.

Government non-interest spending, which has not been keeping-up with the growing population and its demands, has been cut by R18-billion over the next three years. This marks the fifth consecutive cut in medium-term expenditure. Cutting expenditure will directly affect the country’s ability to deliver upon its socio-economic mandate. This is especially a concern with the public sector wage bill consuming 35% of total consolidated spending by government, leaving fewer resources for spending on actual programs. In spite of a particularly tricky economic environment, the Treasury’s progressive Budget Office must be commended for ensuring that expenditure growth over the medium term will consider to grow faster than inflation. No austerity, as yet!As the measures to increase revenue and decrease expenditure to plug the fiscal gap are insufficient, the Treasury’s respected and capable Assets and Liabilities team will now have to go and borrow more money over the next three years.

By 2020, government net-debt stock will be R126-billion bigger than estimated in February.

Higher national debt, means that more resources are diverted to servicing government debt, reducing funds available to pay for schools, medication, and social grants. Over the next three years, debt-service costs are expected to consume around 15% of expenditure. Borrowing more than previously projected means that Gigaba had to announce that the government’s stated fiscal objective of stabilising debt as a share of GDP will yet again be delayed. This would’ve certainly caught the attention of the credit-ratings agencies, particularly S&P and Moody’s, who have the country rated one-level above sub-investment grade. 

A downgrade of the country’s domestic-currency credit ratings to sub-investment grade will result in a weaker rand and higher borrowing costs for the country. This was surprisingly not mentioned in Gigaba’s speech or in the MTBPS.The horrible fiscal and economic situation the country’s finds itself in, laid bare in the MTBPS, highlighted the limited ability of the state to meet current socio-economic obligations, let alone nice-to-haves like NHI. Gigaba’s notable exclusion of nuclear procurement from the MTBPS is welcome given that it’s simply unnecessary and unaffordable, suggesting that he’s not executing the the Zuma-Gupta-Mahlobo mission, just yet.

While the MTBPS was overall a good effort by Malusi and the Treasury faithful in these trying times, the fact that the minister of finance runs at a credibility deficit, may just be what sways ratings agencies S&P and Moody’s to downgrade South Africa to sub-investment grade. We wait and see now.

*Larry Plume, is the pseudonym for an economist working in the public sector.