Left leaning economists and trade unions urging the government to throw caution to the wind and spend more in an effort to boost economic growth will be disappointed as Finance Minister Tito Mboweni sticks to his guns in a bid to stabilise debt.
However, economists urging fiscal restraint will not be satisfied either, as Mboweni bowed to pressure and stumped up the R10.5-billion required to recapitalise SAA.
In other words, it is the typical middle-of-the-road budget the country has come to expect as the ANC tries to juggle ideology with fiscal prudence.
In the meantime, debt continues to rise and the date at which debt stabilises is pushed ever further out.
In June, National Treasury estimated that gross debt would reach 81.8% of GDP in the current year, or R3.9-trillion, up from 63.3% or R3.2-trillion in February. This figure remains constant.
But from there it deviates from June projections. By the end of 2022/23, gross loan debt is now projected to tip the R5-trillion mark (90.1% of GDP), rather than the R4.83-trillion, or 86% of GDP projected.
And far from stabilising at that point, it is projected to rise to R5.5-trillion in 2023/24 or 92.9% of GDP.
Whether debt can be stabilised depends on decisions made now.
Treasury remains committed to reining in consumption-related spending, specifically that of government employee wages which consume over 30% of national spending. This is in line with the thinking of the February 2020 Budget, as well as the June Supplementary Budget.
Cumulatively, the National Treasury has budgeted to spend R306-billon less than they had previously projected over the next three years – this is in line with earlier projections.
A big part of this reduction will come from limits to wage increases over the 2021 MTEF period. According to Treasury, wage increases will be held to 0.8% per year, which translates into a decline in compensation spending of 3.5% a year over the medium term.
Considering that government’s decision to renege on agreed wage increases this year is still to be challenged in court, it remains to be seen whether the cuts pencilled in can be achieved.
If it does succeed, the public sector wage bill will fall from 32.7% of government spending to 31.3% over the medium term.
Other cuts in non-interest spending include cuts in allocations to the National Skills Fund and sector education and training authorities, as well as to departmental budgets.
Treasury also hinted that “high level” discussions should be held on financial support to students in tertiary education, the number and size of government departments and the subsidy mix for urban transport systems, among others.
Funding for buildings and other fixed structures, provincial and local capital grants and the Infrastructure Fund is protected.
What is the right fiscal path – expansionary vs austerity – for South Africa has been a subject of much debate, which National Treasury has now weighed in on.
The fiscal multiplier – a ratio that measures the extent to which national income changes in response to government spending – is a useful tool for assessing the trade-offs involved in this debate.
A multiplier of more than 1 implies that every rand of government spending will translate into an additional rand of GDP – and is therefore growth enhancing.
However, research by the SARB suggests that SA’s multiplier declined from 1.6 to less than zero between 2009 and 2019.
There are several reasons for this. One is that spending patterns have skewed towards consumption rather than investment, regulations that impede innovation and productivity, and a high debt burden which means interest repayments crowd out investments in the economy.
To illustrate this point, consider the fact that funding the interest on SA’s debt cost R233-billion in the current year (R3.8-billion more than projected), and will rise to R353-billion in 2023/24.
Or looking at it more holistically, as a result of this year’s steep economic contraction, government’s gross borrowing requirement – the sum of the budget deficit and maturing loans – has increased by R342-billion to R774.70-billion, relative to the 2020 budget.
The research also shows large negative multipliers from revenue increases, suggesting that SA’s growth slowdown over the past five years may be related to rising taxes.
What all of this means is that efforts to narrow the budget deficit and stabilise debt, complemented by implementation of structural reforms, is more likely to support growth than continued spending funded by higher borrowing and taxation.
However, it may be too little too late.
The efforts outlined in this MTBPS cannot prevent the inevitable slippage which sees SA’s national debt stabilise (all going well) at 95.3% in 2025/26.
The probability of a debt trap, in which rising debt-service costs are increasingly paid from additional borrowing, has increased.
Countries like Argentina, which defaulted on its sovereign debt in March 2020, and Zambia, which has announced its imminent default, serve as a stark reminder of what happens when countries do not manage to stabilise debt.
Adding to the concern is the fact that South Africa’s three-year increase in debt to GDP is the largest, by a country mile, among its developing country peers.
The budget also does not elaborate on how demands from indebted SOEs, social security funds and municipalities will be resolved, and this remains an elevated risk. DM/BM