After the Bell: Why have we lost Trevor Manuel’s stellar example of fiscal restraint?
Essentially, Manuel’s strategy was one of delayed gratification: then, as now, debt repayments were the largest single budget item. So what he did was pay down the debt, and with every reduction, the amount the government would have to pay out to its lenders every year decreased, and with that, he increased social spending.
Every time the budget or the mini budget comes around, financial journalists get full of anticipation and expectations. When I worked in the newspaper industry, the paper’s circulation would explode on budget days. There were “lock-ups”, and there still are.
This is the process whereby journalists get to read the budget documents in a locked room but can’t report on the contents until the finance minister starts speaking. The internet is blocked and mobile phones are held hostage. The intention is to improve reporting on the budgets so there isn’t a mad scramble as soon as the documents are released.
But increasingly, budgets are getting to be less high-impact news events. Often the Treasury hints at bad news before the budget is released because they don’t want that aspect of the budget to be the main focus of the reporting.
And so it was this year. The main bad news was that government tax collection has come up short big-time, something most economists (and financial journalists for that matter) could have guessed anyway because commodity prices have come down and SA has had more load shedding this year than the past four years put together.
But the actual extent of the under-collection was specified before the budget, so everybody who was even vaguely interested knew there was going to be a thumping great hole in government income. And that of course, throws out all the other numbers and poses the uncomfortable question about what the government is going to do about it.
Complicating the issue are the elections next year, which, if the polls are to be believed, are going to be tough for the ANC. So Finance Minister Enoch Godongwana announced his intention to cut back on expenditure and was promptly attacked pretty viciously by the left in government and outside of it, who warned of the dire consequences of what it calls — inaccurately, as it happens — austerity. Austerity merely means trying to live without unnecessary expenditure.
Anyway, the fightback campaign by the left was carried into the Cabinet, and Godongwana was apparently told that he was not allowed to cross three red lines: reducing the public sector wage increase, scrapping the Social Relief of Distress (SRD) grant or increasing VAT.
So if you can’t increase taxes, reduce the size of the public service or scrap the SRD grant, the consequence is obvious: the deficit — the amount the government spends beyond its income — goes up, and government debt increases. The estimate for the 2023/24 budget deficit was revised from 3.9% of GDP in the budget to 4.7%.
The debt-to-GDP ratio is still set to peak in 2025/26, but at a much higher level of 77.7% as opposed to the 73.5% projected in the budget. Theoretically, it is going to come down much more slowly than before, but I can tell you now that it will not come down in the near future.
The problem is that there are many unfunded government programmes in the works or that have been proposed, including enormous schemes like the National Health Initiative and the basic income grant. On top of that, nearly all the state-owned enterprises are screaming for cash, including Transnet, the Post Office, and the road agency Sanral. Some departments are also on the brink of cracking, like the SANDF.
The problem is that a finance minister’s attempts to control the budget depend on support from the President; without that he, or she, can just forget it.
The great irony is that the ANC has been in this exact position before. Shortly after the advent of democracy, Trevor Manuel became finance minister and there was an emerging markets crisis in which SA got badly caught. Partly because the premium on fiscal rectitude was higher then, Manuel argued in favour of consolidating the budget, even in the face of huge social demands.
Essentially, Manuel’s strategy was one of delayed gratification: then, as now, debt repayments were the largest single budget item. So what he did, with the support of then President Thabo Mbeki, was pay down the debt, and with every reduction, the amount the government would have to pay out to its lenders every year decreased, and with that, he increased social spending.
The system worked like a charm, until that fateful budget in 2006/07 when for the first time in SA’s modern history, there was a positive budget balance. In other words, the government spent less than it took in, and that was achieved mainly by saving on debt repayments. Then the following year, there was another positive budget balance. Debt at that point was 25% of GDP — peanuts in today’s terms.
But somehow the ANC has lost that foresight and has just become an uncontrollable spending machine. Instead of driving along in manual (or, um, Manuel), we are now in automatic.
What became clear on Wednesday is that President Cyril Ramaphosa had the choice of standing with his finance minister, or going with his spendthrift colleagues worried about losing votes in the election next year. And I am afraid he has come up a bit short on the backbone front and chose the easy option involving fewer vertebrae. DM