Defend Truth


South Africa’s MTBPS needs to win next year – and in the medium term


Nazmeera Moola is Head of SA Investments at Ninety One.

This weekend, my household, like many others in South Africa, was fixated on the rugby. By half-time, my eight-year-old daughter was trying to understand who was playing better. The score was marginally in South Africa’s favour. However, the rhetoric she was hearing suggested we weren’t playing so well. Finally, she resorted to asking if possession determined ‛playing better’.

Next week Wednesday (30 October), Finance Minister Tito Mboweni is due to present his medium-term budget policy statement (MTBPS) to Parliament. Prior to 2015, the MTBPS was there to extend the three-year fiscal framework by another year (in this case, he will include the projections for the year ended 31 March 2023). With the persistent deterioration in South Africa’s finances over the last five years, this has become a widely watched policy document.

In October 2017, the then finance minister Malusi Gigaba opted to mark-to-market the deterioration – he reflected the weaker growth and R50-billion revenue shortfall without taking any policy action to reverse the decline. Perhaps it is unfair to blame Gigaba entirely when it was the dysfunctionality of the ANC that was culpable. The government’s inability to take any hard decisions at that juncture eventually led to the loss of South Africa’s investment-grade credit rating from Standard & Poor’s.

Two years later and Mboweni is facing a similar dilemma. The optimistic revenue forecasts expect a R50-billion shortfall from the February 2019 projection. It could be as bad as R95-billion. Weak growth is hurting both personal and corporate tax collections and net VAT collections are severely impacted by the clearance of the backlog in VAT refunds that Tom Moyane used to artificially buoy revenue collection under his tenure as SARS commissioner.

In these circumstances, it is imperative that the government does not present a rerun of the 2017 MTBPS. Hard decisions need to be made. Prescribing what a “good MTBPS” should contain is not easy – as there is no single solution for South Africa at this point.

A very plausible Eskom restructuring plan that the president and Cabinet unequivocally support will provide a great cushion for revenue and expenditure slippage. Similarly, deep and convincing expenditure cuts in the year starting 1 April 2020 will allow a further delay in the Eskom plan. A clear signal of a willingness to increase the VAT rate would also create room, as would an agreement with public sector unions to freeze public sector wages in real terms, ie only allow inflation-adjusted increases.

These are some of the options that could stabilise the debt-to-GDP trajectory – and signal to the bond market that the government is serious about consolidating the fiscus. Essentially, what we need is a clear sign of action, whatever that action is.

In recent weeks, both President Cyril Ramaphosa and Mboweni have been clearly signalling the need for South Africa to take “serious action”. We can only hope that their understanding of clear action is the same as ours. If instead, they are opting for incrementalism and a hope of better things it will not be enough.

There is a very real risk that they will not do enough. While I can list the options open to the government, all are politically difficult to implement. A VAT hike would be deeply unpopular – as the 1% increase announced in the February 2018 Budget proved to be. Unfortunately, hiking personal income taxes will yield no more money, as last year’s increase in the top marginal tax bracket from 41% to 45% yielded much less than expected.

The Eskom plan has been repeatedly delayed. Last week’s unexpected load-shedding highlights the desperate need to reduce South Africa’s dependence on Eskom, but when will Ramaphosa take on his alliance partners and push ahead with the break-up?

Sustainable expenditure cuts necessitate lower compensation growth – either by cutting jobs in a targeted manner or an agreement to below inflation increases in the public sector in the coming years. The Treasury has been curtailing budgets for years without dealing with compensation. The result is that compensation now accounts for the lion’s share of budgets in a range of departments. This creates dysfunctionality, where students do not receive textbooks or government departments stop paying their suppliers nine months into the financial year due to lack of funds.

These are the complex choices that South Africa faces. When the game is done, judging a rugby game by attacking flair, or lack of mistakes or “belligerent and brutal defence” ends up being irrelevant. South Africa may have had less possession – but that was the game-plan. But while they won, it is unlikely that game plan coupled with technical mistakes would triumph against Wales next weekend or (hopefully) New Zealand thereafter.

In the case of this crucial MTBPS, a result is a tangible progress next year, however they get there. We no longer have the luxury of three-year plans where the consolidation is expected in the third year. However, we also need a plan that sustainably solves South Africa’s finances over the medium term. So it is a bit like the knock-out rounds of a tournament – you have to win the next game and every one after that. BM


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