Speak to officials, past and present of the National Treasury, and the concern is for how one of the state’s strongest institutions is now a shadow of what it used to be in terms of authority and forecasting.
Yet, Finance Minister Tito Mboweni has tabled a Budget that seeks to take out R156-billion in state compensation costs over three years in the face of the most powerful trade union lobby in the country. Can he do this with a president who is risk-averse and consensus-seeking, especially with the Cosatu-aligned public service unions who helped bring President Cyril Ramaphosa to power?
“The answer is yes,” said Mboweni in reply to a question of whether he had the political support to push through the cuts to the wage bill, which is one of the fastest-growing parts of state expenditure.
The Budget Review notes that: “the composition of spending has deteriorated. Debt-service costs have been the fastest-growing area of spending, rising from 9.8% of main budget revenue in 2010/11 to 15.2% in 2019/20. The wage bill has grown strongly over this period, averaging 35.4% of total consolidated expenditure.
“Civil servants’ salaries have grown by about 40% in real terms over the past 12 years, without equivalent increases in productivity. Growth in the wage bill has begun crowding out spending on capital projects for future growth and items that are critical for service delivery.”
Strong men and women of the public service unions
These are strong words, but are they stronger than the public service unions who on Tuesday, February 25 declared war on Mboweni’s recommendation that the already concluded wage deal be reopened to renegotiate its terms? Cosatu’s public service unions, including the teachers union, Sadtu, and the health and allied workers union, Nehawu, are its strongest affiliates. The Public Service Union, an older craft union, is even more powerful and it is in a loose coalition with the Cosatu unions in negotiations with the government. Union members believe they should not be made to pay for the era of state capture.
“I really had one of the nicest Cabinet meetings this morning when I had to present the Budget Speech. (There was) full support for the direction we are taking. (There was) much appreciation that we are taking a tougher stance on issues,” said Mboweni.
But the Treasury’s ability to influence the cost of the state wage bill has been steadily denuded. The mandates committee, which was a committee chaired by the Public Service and Administration Minister (whoever it was at the time), and on which the Finance minister had a seat, has not sat for years, said officials.
The mandates committee gave government wage negotiators a mandate for increases. Without this check in the system, the negotiators concluded the three-year wage agreement, which was budget-busting, without consideration by the Treasury.
Can Mboweni reassert the Treasury’s authority over the government wage negotiating round? He and deputy finance minister David Masondo want to try, but it will depend on whether or not Ramaphosa can face down the political heat that is now likely to come from his trade union allies.
Mboweni can’t stop a free-spending state
Treasury has been so denuded of authority that in a pre-Budget press conference, Mboweni said that the Treasury could not stop the state buying overpriced water.
“The state sector is an amazing place to be – there’s too much wastage in the government sector. A simple thing like taking out subsistence and travel allowances (for public servants) is a huge issue. You put it in a speech and drafters take it out. You can’t get turkeys to vote for Christmas. A bottle of water sells for R3, but the state buys it for R17 – it’s ludicrous,” said the jocular Mboweni.
He was giving humorous examples of his failed efforts to trim the cost of running the state, but it was also clear that Mboweni did not support the creation of a sovereign wealth fund anyway, but announced it on Wednesday, February 26 as part of Budget2020. There is consensus that a wealth fund is a good idea, but one entirely unaffordable in a country with runaway debt.
And it’s clear the Treasury’s ability to forecast is weakening too – for the ninth year in a row it has over-estimated GDP growth by gradually increasing proportions. This year was a complete blow-out with growth estimated at 1.7% at the start of the year, and government is now anticipating growth of 0.3%.
Mboweni also revealed that he wanted to cut corporate taxes to stimulate business confidence and investment, but he had failed to convince the budget drafters.
Mboweni versus Mantashe is no contest
The Budget documents reveal that the state has paid R162-billion in bailouts to state-owned enterprises in the past 12 years. Of that amount, Eskom took the lion’s share and so Mboweni did not increase bailouts for the electricity utility in Budget2020.
Instead, his Budget documents are peppered with the words “urgent” and “rapid”, with regard to new power generation.
Mboweni notes several times that the ball is now in the court of Minerals and Energy Minister Gwede Mantashe, who must oversee the policy and regulatory changes to liberalise the energy market, and reduce Eskom’s monopoly. But earlier this week, Mantashe told energy analyst, Chris Yelland that he would not be forced into panicked action; earlier this month, he told Business Day that he was in no hurry to open the next bid window for renewable energy producers.
The Budget Review says, “Government can expand private-sector power generation by rapidly implementing the commitments made in the President’s State of the Nation Address. These include acquiring additional electricity from existing independent power producers, opening bid window 5, procuring an additional 2,000 to 3,000 megawatts (MW) of emergency power for the national grid within three to 12 months from approval, and allowing municipalities to procure power from the private sector.”
In the governing ANC, Mantashe is Mboweni’s senior because he is the party’s national chairperson, so it’s not difficult to see who will win the fight on the correct pace and scale of deregulating the energy market. (Hint, it’s not the finance minister). “The Eskom story is a bit tired now,” said Mboweni, indicating that he has thrown in the towel on the much more radical energy plan he revealed in a policy paper released by the Treasury in August 2019, but which has gone exactly nowhere in being implemented.
As a further illustration of the Treasury’s weakened position, Mboweni has long advocated that SAA be sold or mothballed, yet the Budget allocated R16.4-billion more to the ailing national airline. This is because the ANC has decided that South Africa must have a national carrier and efforts by the business rescuers now nominally running the airline are also being scuppered by politics. In his state of the province address yesterday, KwaZulu-Natal premier Sihle Zikalala accused the business rescue practitioners of economic sabotage because they canned the SAA route between Cape Town and Durban.
Smashing the expenditure ceiling
The Treasury has won South Africa global plaudits because of its prudent and intelligent fiscal management. One of the ways it has done so has been by setting expenditure ceilings and then budgeting within those.
But in the past decade, this method of cutting the national cloth to fit the fiscal size has steadily been denuded as government departments ignore the ceiling or smash it as they tried to balance the growing wage bill with the imperative for better services.
The Budget Review puts it this way: “Government’s long record of prudent debt management has enabled the National Treasury to consistently match higher borrowing requirements without dramatically increasing the cost of debt. Nonetheless, prudent debt management cannot substitute for sustainable public finances and a growing economy. The risk to South Africa’s remaining investment-grade credit ratings has become more pronounced.”
In his pre-Budget press conference, Mboweni downplayed the risk of an investing rating downgrade by Moody’s, which could happen as soon as March 2020. But the Budget documents take the downgrade almost as a given.
The Budget Review says that: “The risk to South Africa’s credit ratings became more pronounced in 2019. Only Moody’s and Ratings and Investment Information (R&I) rate the country’s debt at investment grade.”
“The Treasury is weak. It has been weakened over the past few years,” said a National Treasury official who feels that without strong and bold reform-minded leadership by Ramaphosa, the institution was becoming less effective.
More than anything, South Africa needs an authoritative and influential National Treasury as the country stares down global risk made that much sharper by the Coronavirus and the domestic risk likely if Moody’s declares the sovereign rating of the country to be sub-investment grade. DM