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MEDIUM-TERM BUDGET POLICY STATEMENT OP-ED

MTBPS 2023 is a shoddy compromise that means death by a thousand cuts

MTBPS 2023 is a shoddy compromise that means death by a thousand cuts

Trying to achieve growth via austerity — cuts to basic services and other critical areas of spending — is like trying to drive uphill with the handbrake on.

We read the Medium-Term Budget Policy Statement (MTBPS) with relief and alarm.

It was welcome to see the National Treasury’s marked departure from the drumbeat of a looming “fiscal crisis” that has been repeated ad nauseam over the past two months. This “fiscal crisis” was almost completely absent from Finance Minister Enoch Godongwana’s speech and associated MTBPS analysis.

Rather, the minister identified a lack of growth as central to our economic and fiscal challenges. Despite this, the budget does not put forward a credible growth strategy, passing on this responsibility to the private sector.

We were, however, alarmed that the National Treasury doubled down on the existing path of austerity that has, and will continue to fail to grow the economy and improve the wellbeing of everyone in South Africa. Trying to achieve growth via austerity — cuts to basic services and other critical areas of spending — is like trying to drive uphill with the handbrake on.

South Africa’s crises

The emphasis on a “growth crisis” rather than a “fiscal crisis”, and the importance of economic expansion to achieve a sustainable fiscal path, vindicates the arguments we, as staff of the Institute for Economic Justice (IEJ), have repeatedly made. We have argued that South Africa does not face the risk of imminent fiscal collapse and that this has been exaggerated to justify indiscriminate budget cuts.

In fact, the projected revenue shortfall of R44-billion is actually below that estimated by the IEJ and most analysts, indicating a somewhat “less bad” picture than expected.

This revenue shortfall is also within the range of previous shortfalls that the country faced between 2017 and 2020, of between R30-billion and R70-billion.

Further, our budget deficit, projected to be 4.7% for 2023/24, is noticeably lower than the average expected deficit for countries at our level of economic development, which the IMF estimates to be 5.9%.

Similarly, although the debt-to-GDP ratio forecasts increase, this is not portrayed as pushing us over a mythical “fiscal cliff”. Rather, following the approach taken by the IEJ in recent months, the high cost of debt servicing is identified as a key fiscal concern. Unfortunately, the MTBPS offers no direct measures to reduce the cost of borrowing.

Disappointingly, the MTBPS is largely silent on the dire socioeconomic crises we face. This is in a context where there are currently 11.9 million unemployed people by the expanded definition and 62.6% of South Africans live in poverty. Around a fifth of households lack access to adequate food and regularly send out a household member to beg for food. This is worse for rural and female-headed households. These are the crises that the budget should be overtly geared towards solving.

Austerity — past, present and future

While in-year spending cuts are far below those desired by the National Treasury, the proposed recipe for growth still centres on austerity. There has been a R62-billion real-terms reduction in non-interest consolidated government spending from last year (2022/23 to 2023/24).

Compared to its allocations in the 2023 February Budget, main budget non-interest spending falls by R85-billion over the next two years. This continues the failed path we have been on for almost a decade. It is both retrogressive and self-defeating.

Over the next three years, the government will decrease spending on every public school learner and public healthcare user. The MTBPS reports a decrease from 2022/23 to 2023/24 of real spending in health and basic education of R10-billion and R2-billion, respectively.

In the medium term (over the next three years), the government aims to decrease real spending on basic education and healthcare by R16-billion and R14-billion, respectively. This means spending per enrolled learner will fall, in real terms, from R25,387 in 2022/23 to R23,363 in 2026/27. It also means that while each public healthcare recipient was receiving an average of R5,326 in 2022/23, by 2026/27 this will fall to R4,525 in real terms.

This comes on top of cuts proposed in the 2023 Budget and previous years. In February 2023, over the medium term, healthcare, basic education and social protection were cut by R47-billion, R39-billion, and R37-billion, respectively.

The cost of the continued austerity

Ongoing cuts will put further stress on already struggling public services. There are currently around 224 people for every nurse and 29.8 learners for every educator in the public sector, ratios much higher than recommended.

Much of the burden of coping with the additional pressure caused by spending cuts falls on women. Given that women constituted more than 60% of public service employees, the freezing of posts or “managing headcounts” undermines women’s employment and wellbeing. Further, as access to healthcare and other services decreases, women have to fill the gaps, such as taking care of sick relatives who should be in hospital or under professional care.

These budget cuts will also result in a shrinking economy. As evidence has shown, fiscal contraction larger than 1.5% of GDP generates a negative effect of more than 3% on GDP even after 15 years. The drop in GDP reaches 5.5% for cuts larger than 3%.

In this sense, the needs of the poorest are being sacrificed on the altar of achieving a primary surplus — a surplus that will fail to alleviate poverty, hunger and unemployment.

The case of the SRD grant

While the National Treasury has begrudgingly allocated resources to the Social Relief of Distress (SRD) grant, this is its absolute bare minimum duty. Terminating the SRD grant — as the National Treasury clearly wanted to — would be a breach of basic rights. This is a perfect illustration of the backwards logic of the budget framework, which puts the notional idea of a primary budget surplus over the immediate needs of real people.

Despite the fanfare about the grant’s extension, the National Treasury continues to unilaterally undermine it. While hunger and the depth of poverty climb, the SRD grant’s budget has steadily decreased — from R44-billion in 2022/23 to R36-billion in 2023/24 and now to R34-billion in the MTBPS.

Whereas the IEJ estimates that at least 16 million people should be receiving the grant, the new allocation allows for only 7.5 million beneficiaries (see Figure 1). The National Treasury’s excuse is that the Department of Social Development (DSD) has underspent on the SRD grant allocation.

mtbps shoddy

This underspend does not reflect lower levels of need but rather how the government has deliberately excluded eligible applicants. Due to pressure from the National Treasury to keep recipient numbers artificially low, the DSD has put in place regulatory and procedural hurdles to access. This has given the National Treasury exactly what it wanted, an excuse to slash the grant’s budget even further. This is heartless and unconstitutional.

The IEJ and #PayTheGrants have taken the government to court over this injustice. The court documentation shows that approvals decreased from 10.9 million people in March 2022 to 8.3 million approvals in March 2023. The minister of finance recently applied to intervene in this litigation to oppose our efforts to enable greater access to the SRD grant.

It is also egregious that the value of the SRD grant remains at R350, which, in real terms, takes us backwards. If the value of the grant had increased in line with food inflation it would be R449 in 2023, another aspect tackled in the litigation.

The failure to maximise available resources

Given the structural social and economic challenges South Africa faces, it is indefensible that the MTBPS offers so little in the way of measures to increase revenue. Only R15-billion in (unknown) additional tax was announced for the next budget cycle, meaning a falling tax-to-GDP ratio, which already lags behind OECD countries.

This R15-billion is insufficient to meet the requirements of protecting people while growing the economy; a range of other revenue-raising options exist. The February Budget allocated R305-billion in income support to the highest-earning 30%. Reducing tax breaks for those earning above R750,000 per year could raise up to R83-billion.

The reduction of the corporate income tax rate from 28% to 27% has cost R11-billion — R13-billion a year. This is on top of ineffective corporate tax subsidies, such as the Employment Tax Incentive which costs about R6.6-billion a year with little evidence that it has supported youth employment.

In the context of needing to ensure a progressive tax mix, we are pleased that the National Treasury’s ill-considered proposal of increasing VAT has not (currently) been tabled. This would make the tax mix more regressive, increase inequality, and have a disproportionately negative impact on the poor, particularly women and children. In addition, the 2018 increase from 14 to 15% did not lead to meaningful revenue generation, with the VAT increase raising only an additional R612-million, as opposed to the R22-billion that was expected.

The resources available in the Gold Foreign Exchange Contingency Reserve Account (GFECRA) were also not taken into consideration. The GFECRA remains a feasible and relatively low-risk option to support essential spending for an inclusive growth path. There is no evidence that drawing on a portion of the account would be unduly legally or technically complex. Rather, the main reason for not doing so appears to be that this would throw a spanner in the works of the National Treasury’s austerity agenda. By contrast, the National Treasury has a constitutional duty to utilise all available resources to meet socioeconomic rights.

Outsourcing the responsibility for growth

While the minister of finance’s speech correctly identified the need for economic growth, the budgeting behind this statement abdicated much of his responsibility for driving economic expansion, instead presenting overt and covert privatisation as the solution.

While the increased spending on economic regulation and infrastructure is welcome, total medium-term spending cuts will undermine development through a real decline in spending on job creation (-1%), industrialisation and trade (-13%), agriculture and rural development (-11%), and innovation, science, and technology (-20%). The MTBPS cuts these non-infrastructure development priorities by R9-billion next year while increasing infrastructure and regulation spending by R7-billion in real terms.

The responsibility to grow the economy is essentially being placed on the shoulders of private finance through proposed public-private partnerships infrastructure projects, while the National Treasury fails to leverage fiscal policy to industrialise and diversify. The National Treasury adopts this approach despite evidence that private-finance-centric regimes have failed to mobilise the necessary financing internationally.

In addition, this approach risks reducing access to public services and saddles the state with massive financial, legal and social risks, while allowing the private sector to extract rents from the privatisation of public infrastructure.

An unaccountable minister of finance and National Treasury

The minister of finance is using fiscal policy like a handbrake — to obstruct and even dictate government policy. This lack of democratic accountability seems to have found widespread support within elements of the business press. The line goes that because the government cannot be trusted with public money, the National Treasury should conspire to withhold available resources from the government. This is profoundly cynical and anti-democratic.

While corruption and wasteful spending must be opposed at every turn, to support the position that we wish to deny the government funds that belong to it to force its hand to implement austerity is profoundly cynical. The National Treasury is only accountable to our democratically elected officials and to the public — not the other way around.

An ongoing choking of public services and social protection perpetuates the erosion of the social compact and paves the way for maladministration. For a decade, austerity has been sold as a panacea for our growth problems and high debt costs.

Yet, as successive finance ministers double down on austerity, these problems worsen. It is past time for politicians to realise that austerity is a cause of our economic stagnation, and more of the same will only bring us closer to the edge while obfuscating the true lines of political accountability.

A budgetary regime which takes growth, employment, poverty and inequality as seriously as debt stabilisation would ensure that resources are mobilised through:

  • New forms of tax;
  • New channels of concessional development finance;
  • Untapped pools of public funds; and
  • Credit allocation policies to lower the cost of available debt.

It would reverse budget cuts and abandon the National Treasury’s quest for an immediate primary budget surplus. A development-focused budget would prioritise public investment in physical infrastructure, the care economy and the green economy, all of which have been shown to have a positive impact on employment outcomes and GDP growth.

This is the type of national budget everyone should demand from the National Treasury in February 2024. DM

The authors work at the Institute for Economic Justice, IEJ.

Gallery

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  • David Walker says:

    What a load of cobblers. The authors clearly have no grasp of basic economics. The correct term for ‘austerity’ is really ‘living within your means’. Our government spending has exceeded income for years, mostly because of a massively inflated public sector wage bill. Growth has been choked by loadshedding, the nightmare in our railways and ports, over-powerful unions, and the threats of expropriation without compensation, not by so-called austerity. The chickens have now come home to roost.

    • Philip Conradie says:

      100%. Certainly we need more nurses, teachers,policemen etc, but need a lot fewer ministers, deputy ministers and “admin managers”.

    • Grumpy Old Man says:

      Will say it again – the cost of our debt has tripled since 2009 & yet we have nothing at all to show for it. I suspect the greater majority of borrowings were spent on SOE bailouts – which was nothing more than ‘throwing good money after bad’
      Until we better at spending money & we tighten up on who spends the money any talk of investment in infrastructure development & growth is living in a parallel universe in a distant galaxy far, far away!
      If not a perfect MTBP – at the very least it was realistic

  • John Lewis says:

    Another dispatch from la la land. These magic mountain tree theorists get far too airtime.

  • William Kelly says:

    I got past the first paragraph. Not the second. After that it’s just drivel, ideological rubbish, and conjecture based on unsubstantiated speculation of the most ignorant kind.

  • Hilary Morris says:

    This is SO depressing that I actually could not read the article to the end. It seems that this government is literally hell-bent on taking the least effective, most destructive path possible. Greed and corruption aside, these cannot all be totally stupid people. Yet any other explanation is difficult to find…….. Or is it?

  • John Stephens says:

    I am sorry to say, but all comments thus far are made by blinkered, indoctrinated free market ideologues. You really don’t understand the basics of developmental economics. Before you all further demonstrate your lack of insight, please read the keynote lecture for EASA’s Europeanist Network Workshop, “Overlapping crises in Europe (or a never-ending crisis), held in Lisbon, 2-3 November 2023, delivered by Professor John Keith Hart.
    There now, you do know there is a long-standing Eurozone economic crisis, don’t you?

    • Dermot Quinn says:

      Yes, there is a crisis coming the way of all countries who monetised debt to keep living the dream. The main result has been the inflation of financial assets, massive wealth disparity as asset rich people got richer and a major issue to USD indebted emerging economies who borrowed cheap money that is not that anymore.
      SA’s issues are not monetary policy but the real economy where the ANC has broken so many things. SOEs are restricting the flow of goods, production chains, exports, imports, encouraging mafia construction cartels etc.
      Even if interest rates were much lower how can one invest not knowing if your apples can be exported or your iron ore smelted.
      Look elsewhere for your answer, its not at the SARB.

  • Concerned Citizen says:

    This is delusional. The ease and speed with which the authors dismiss the argument that government cannot be trusted with public funds, demonstrates their unwillingness to grapple with the reality that tax payers are being robbed blind in this country. Just calling that position “profoundly cynical” twice in a row (sloppy writing by the way) is not an argument. This government has demonstrated time and time again that it cannot be trusted as custodian of public money, yet you want to write them a blank cheque. If we manage to get something resembling public servants in positions of trust, we can talk about bringing spending in line with other countries. Until then, stop smoking your socks.

  • Dermot Quinn says:

    “National Treasury doubled down on the existing path of austerity.”
    Hardly austerity when the national debt continues to spiral to dangerous levels. Clearly it was not austerity that got us here. So I think we are now looking like understanding that debt/gdp is a real thing and we cannot borrow our way out of our predicament.
    No, with so much wasteful and fruitless spending within govt, the answer is not to create more funds available but to make those available work properly.

  • Rod H MacLeod says:

    Looks like we have already run out of other people’s money [as Maggie once said about socialism] so the only thing the authors can think of is … tax the productive enterprises to pay the unproductive ones, and hope to blue heaven inflation doesn’t run away from you. The only problem is … hope isn’t a strategy.

  • Johan Herholdt says:

    The authors of this article picked the easy job – advising our Finance minister on how to spend the money. That was not his essential problem, which was how to create more sources of revenue. Their only attemp at this was to fudge the funds we have available to cover our losses on the re-evaluation of our gold reserves (national savings if you will) and foreign exchange funds – oh sorry, that’s about spending again! I suppose that is what they mean with “untapped pools of public funds” which sounds a lot like “what else can we eat”.
    Minister Godongwana’s essential problem was how to create a bigger income for the state – an almost impossible job for an almost failing state. If he could pull this off we would have had a bigger pie to divide when it comes to spending. As far as I can see they had no concrete advice on this front – besides increasing taxes on the few faltering revenue-generating activities in our economy.

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