By: Arthur Kamp, economist at Sanlam Investments
Listen to a voice note from Mr Kamp on the budget statement below:
Revenue is a thorn in government’s side
Government’s 2018 Medium Term Budget Policy Statement (MTBPS) provides clear links between the medium-term expenditure statement on the one hand and, on the other hand, President Ramaphosa’s five growth enhancing reforms, namely:
- reprioritisation of expenditure
- support for job creation
- establishment of an infrastructure fund
- addressing pressing problems in education and health
- promoting investment in municipal infrastructure.
Spending to be done wisely
Importantly, government’s intention to get things going has not led to a boost in the overall level of spending (although we should be cutting spending). Rather, the National Treasury has stuck closely to its expenditure ceiling despite the increased wage bill and additional payments to state-owned enterprises. It is also clear Minister Mboweni intends to promote accountability and good governance, while spending available resources more wisely and efficiently. To back this up the Statement emphasised the need to bolster capital expenditure, while curbing consumption. Total public sector infrastructure spending over the new medium-term expenditure period up to 2021/22 amounts to R855 billion – similar to the R834 billion announced in February 2018 for the three years up to 2020/21. So, no major increase there. However, encouragingly, the Minister provided a list of examples of targeted projects already under way, which support the five growth enhancing reforms.
Intention still to stabilise debt ratio
As regards the debt trajectory, the intent of the National Treasury is clear. It wants to stabilise the debt ratio and eventually reduce it. And, apart from the need to lift economic growth, it has identified the government’s wage bill, which accounts for 35% of consolidated spending, as one of the major obstacles to achieving this. The Minister stressed that the R30.2 billion shortfall in the national and provincial departments’ wage bill, related to the recently concluded wage agreement, must be absorbed within the current budget. That will prove difficult. It seems to imply reducing employment.
Maintain institutional strength
The 2018 MTBPS hit some of right notes in emphasizing the importance of using scarce resources productively, stamping out graft, improving the operational efficiency of state owned companies and maintaining institutional strength. On the latter, the Minister gave a nod in support of the Reserve Bank’s pursuit of a suitably low and stable inflation rate. This is especially important at this time, given the tightening of global financial conditions and the concomitant volatility of the Rand.
Revenue, the thorn in Treasury’s side
But, there is a problem, namely revenue. There is a larger than expected revenue shortfall in 2018/19 due to the repayment of overdue VAT receipts (although addressing this issue is a positive step) and disappointing growth in company tax receipts. Accordingly, a wider budget deficit is projected for the next three years. Specifically, a Main Budget deficit of 4.3% of GDP is expected for 2018/19 (0.5% of GDP higher than previously expected), which increases to 4.4% of GDP in 2019/20, before easing just a bit to 4.2% of GDP in 2021/22. We need to do better than that. More importantly, the primary budget balance (revenue less non-interest spending) remains negative over the next three years, decreasing from -0.7% of GDP in 2018/19 to -0.2% of GDP in 2021/22. At some point, in the absence of stronger real GDP growth or lower real interest rates, the primary deficit must switch to a meaningful surplus in order to stabilise the debt ratio. As it stands the government debt ratio climbs to 59.6% of GDP by 2023/24.
Ratings risk is back
Overall, years of fiscal revenue underperformance and excessive expenditure linger in the fiscal numbers and risk remains elevated. It’s no easy task to stabilise the debt ratio in the absence of a decline in expenditure relative to GDP. In turn, cutting spending is no easy matter considering South Africa’s high unemployment rate. Also, there are latent risks in non-financial public enterprises and corporations. The state’s balance sheet remains under strain. And without a marked improvement in the primary budget balance, the fiscal maths is not adding up to a stable debt ratio as yet. That implies the risk related to sovereign debt ratings is back.