/ 1 September 2023

Medium-term budget will leave big spenders out of pocket, says treasury

Head of treasury’s budget office Edgar Sishi said fiscal consolidation will have to be extended by at least another two years

The upcoming medium-term budget “is not going to be happy for the spenders”.

This is according to the head of treasury’s budget office, Edgar Sishi, who added that the fiscal consolidation measures that were due to end this year will have to be extended by at least another two years.

Sishi was talking on a panel at the South African Reserve Bank’s biennial conference on Friday during a session that focused on improving fiscal and monetary policy coordination. The conference was held against the backdrop of tough financial conditions worldwide, as well as a growth crunch at home — both of which stand to hurt South Africa’s public purse.

This is as Finance Minister Enoch Godongwana prepares to table his medium-term budget policy statement. The treasury has reportedly, through a technical guideline, already told all government departments in provinces to brace for budget cuts in 2024, informing them that no new spending will be allocated to them.

In February, after surging commodity prices buoyed tax revenues, the treasury declared it would in the 2022-23 fiscal year achieve a primary surplus — when revenue exceeds non-interest spending — for the first time since 2009. The primary surplus ought to have marked the end of a painful period of fiscal consolidation.

The treasury said that in 2023-24, the budget deficit will narrow to 3.9% of GDP — the lowest since 2019. South Africa would achieve successively larger primary surpluses in the medium term (0.9% in 2023-24, 1.2% in 2024-25 and 1.7% in 2025-26), according to the forecasts contained in the 2023 budget.

But building spending pressures (paired with low economic growth) have since prompted scepticism that the treasury will be able to achieve these targets.

Absa economists, for example, don’t see the government achieving a primary surplus until 2026-27. They also forecast a revenue shortfall of R39  billion compared with the 2023 budget target.

However, some have questioned the efficacy of inflicting further fiscal consolidation, given its effect on the country’s economy. 

Also speaking on the panel, independent economist Thabi Leoka asked about the treasury’s fiscal consolidation agenda.

“What are you consolidating? Why? Which areas? What extent? … Are you targeting expenditure? Are you targeting revenue and why? All of this needs to be looked at … Because it sounds like, again, that you are kicking the can down the road. You can’t be perpetually consolidating.”

Leoka noted that countries that have successfully consolidated are typically richer. “But one of the things they’ve done really well is they have committed to consolidation, regardless of what happens. And that’s where political buy-in needs to come in.”

In response, Sishi said Leoka was preaching to the converted. “It is quite clear what the budget is trying to do. It is also quite clear that there are slippages from time to time. I think that is the key issue.”

Sishi also acknowledged that the government’s fiscal anchors — which help guide spending policies — require strengthening, a fact that Godongwana noted in his 2022 budget speech.

Weighing in on the question of credibility in July, Wits University’s Public Economy Project (PEP) noted that planning for the 2024 budget has begun with the release of treasury’s technical guidelines.

“The starting point is that no additional resources will be provided to accommodate the unbudgeted salary agreement. Reliance is placed on reducing headcounts through attrition and reduced recruitment, and/or defunding other line items to support compensation spending,” the PEP said in a report. 

“If the recent past is any guide, it is likely that new additional resources will be added, but only as an in-year adjustment that accommodates the lowest feasible amount. This will serve to contain compensation spending further yet result in spending outcomes that departs considerably from the budget.”

In the process, the credibility, performance and quality of the medium-term fiscal framework’s projections are sacrificed. 

“Human resource planning is severely compromised as sector departments are unable to gauge what their annual budget will effectively be and, while attrition systematically weeds out the best performers and those with portable skills. Pressure to fund the [unfunded] compensation budget will drive the build-up of accruals and the neglect of maintenance and training expenditures,” the PEP said.

“More broadly, government’s own estimates of the fiscal trajectory are less credible to the extent that the expenditure path they are based on is unlikely to materialise.”