By: Maarten Ackerman, Chief Economist and Advisory Partner, Citadel
During South Africa’s 90 days of lockdown, our Minister of Cooperative Governance and Traditional Affairs Nkosazana Dlamini-Zuma has banned the sale of cigarettes, in part hoping that some addicted to the habit will quit smoking. However, the government has an addiction of its own: overspending. And it needs to curb the habit – and fast – if we are ever to see a balanced budget.
The Finance Minister presented a very bleak budget, but no-one expected otherwise. He has also said all the right things, again. But can government, finally, cut its spending habit especially now that revenue is drying up fast?
The economy is expected to contract by 7.2% this year, and while this represents the worst performance in 90 years, it is roughly in line with the market’s expectation. Economic growth is likely to return next year, with 2.6% in 2021 and 1.5% in 2022, which are realistic forecasts but still too weak to address many of our structural issues.
The budget deficit, at close to 16% of gross domestic product (GDP), is slightly more than the 14% that the market was projecting. However, this compares to the 7% contained in the February 2020 Budget, which provides an idea of the extent of the deterioration in revenue while expenses remain heightened.
The debt-to-GDP ratio for this year will be close to 82%, ahead of market expectations of around 76% and the 60% in the February Budget.
The virus response has added some R145 billion to government spending. However, through reprioritisation, Treasury has managed to shift about R100 billion in spending from other departments.
We will borrow more
Unfortunately, we are likely to undershoot our revenue target this year by about R304 billion, which will need to be funded. Borrowing requirements are increasing rapidly to cover the shortfall, which now stands at R780 billion, compared to about R340 billion in the February Budget. Importantly, government has mentioned getting some funding from external providers – Finance Minister Tito Mboweni mentioned $7 billion which might be from the IMF.
But taxes will also need to rise
Over the medium term, there will have to be an increase in tax revenue. Government is looking for some R40 billion over the next four years. In part, this will come from stimulating the economy, which will obviously lead to increased revenue. But there are also likely to be some tax changes that will take place, which will be on the cards for October’s Medium-Term Budget Policy Statement and the February 2021 Budget.
And expenses will be trimmed
What is important is that Treasury is targeting a primary budget surplus by 2023/24, which means that by then we will only spend what we can afford, excluding our interest payments. So, we’re not going to run a deficit: we cannot spend more than we have. The aim is for debt-to-GDP to peak at about 87% and then be reduced to about 73%, through fiscal discipline.
This will clearly place a considerable amount of pressure on government spending, but at least putting that peg in the ground shows determination in trying to get the fiscal environment under control. The minister made the point that for every one rand spent, 21 cents is used servicing debt. That is certainly not sustainable, so we need to see some serious action on that front.
Mboweni was very clear on the need for fiscal discipline, explaining that overspending leads to hyperinflation and long-term penury for the country, citing examples such as Germany in the 1920s, Argentina and Zimbabwe in the early 2000s, and Greece more recently.
As usual, he’s talking the talk
The speak is very solid. The minister is saying all the right things in terms of preventing runaway inflation and lowering the cost of doing business. He even used the phrase: we spend with wisdom. And by doing that we will create jobs, reduce costs and build a competitive economy.
By taking an active, rather than passive approach – which would just prolong the weakness in economic growth, currency depreciation and high borrowing costs – government expenses can be reduced to sustainable levels and spending efficiency improved.
And a hard-line approach has been taken on the SOEs, which need to be more efficient and financially sustainable. The reforms will focus on rationalisation, reducing the number of and merging some of the SOEs together, equity partnerships (which is very positive), and stronger policy certainty. And any transfer from the fiscus will be strictly conditional on improving their balance sheets.
However, we have seen this playbook before. Quite a few times, in fact. From Mboweni’s own economic development plan earlier this year to the ANC’s economic recovery plan, majority of the policies that are being communicated are the right policies, but they simply have not been executed. So, once again, we are at the point where we are hearing the right words, but we have to see the delivery for this to manifest in a strengthening of the economy.
Now we have to walk the walk
The minister made the point that in zero-base budgeting and in trying to reach a surplus position, it will require enormous discipline and cutting all expenditure that we can’t afford. He made the point that we’re not as rich as we were ten years ago, so hopefully the reality is sinking in for government in general that we simply cannot continue to spend the way we have done. Unfortunately, he provided no further details on this, referring to the medium-term policy statement for more.
We have to rebuild investor confidence and that means confidence in our fiscal strategy. Given that the massive deterioration in circumstances for South Africa and Minister Mboweni since the February Budget are the result of a major global event, rather than anything local, at least talking about tight fiscal discipline should start rebuilding some confidence.
However, that is not enough. We urgently need to start implementing our strategy to get the results in order to reduce our risk premium and get investment capital flowing into the country. Policy implementation would help to support business confidence and incentivise firms to invest.
The time is now!