It has taken a decade of fiscal decline to arrive at this point, but the October 2020 medium-term budget has finally forced the government’s hand, making it impossible for SA to continue to avoid its fiscal reckoning or ignore the hard decisions that go to the heart of what it means to be a developmental state.
Though some have decried the softening of the fiscal stance since June — budget cuts will now be spread over five years, not three, meaning SA’s debt ratio will stabilise at 95% in fiscal 2025, not 87% in fiscal 2023 — this doesn’t amount to wholesale capitulation by the National Treasury.
The 87% target wasn’t fiscally feasible. The 95% target, though still extremely tough, is a bit more realistic. But, in an important change designed to shore up SA’s fiscal credibility, shift spending to fixed investment and protect pro-poor services, the public sector wage bill will now bear the brunt of the R300bn in proposed expenditure cuts.
Effectively, wages will have to be frozen for this and the next three years or the debt ratio won’t stabilise inside of 100%.
Since SA’s fiscal framework — and the avoidance of a debt crisis — now relies almost entirely on the state securing a huge wage concession from its trade union allies, it is time for President Cyril Ramaphosa to achieve the social pact that he has been pretending already exists.
But that’s not all. The medium-term budget policy statement (MTBPS) acknowledges that, after a decade in which government spending has exceeded annual revenues, the level of spending is too high relative to SA’s narrow tax base or the degree of economic activity.
This means difficult decisions about the structure, effectiveness and affordability of certain big-ticket programmes can no longer be put off.
"High-level policy decisions" are needed not only about the affordability of the wage structure, says the MTBPS, but also about whether the state can continue to provide free higher education, subsidised public transport and free housing, and whether it can maintain the number and size of departments, ministries and public entities at national or provincial level.
Such is the level of attack on workers and the poor that we can expect the streets, not the boardrooms, to be the main battlegrounds
— Cry of the Xcluded coalition
"It goes to what the ANC is, in essence," says Prof Philippe Burger of the University of the Free State. "What the MTBPS means is that we can’t be a developmental state — we must pick a few things and do them well."
That these tough trade-offs didn’t feature in the negotiations between government, business and labour that underpin the president’s new economic reconstruction & recovery plan highlights the disconnect in SA between fiscal and political realities.
The MTBPS should mark the moment when that changes. However, even with SA on the brink of a fiscal crisis, it is difficult to see the Ramaphosa administration taking the really hard decisions.
For Wits associate professor Michael Sachs, a former head of the Treasury’s budget office, the MTBPS is effectively asking the ANC to submit to the idea that private capital must drive growth, which is akin to asking the government to admit "ideological defeat".
He thinks a fiscal crisis is almost certain because the extent of fiscal consolidation required — even in the 95% scenario — is so large that it can’t be achieved without significant social and political contestation.
For instance, "anyone who walks into an ANC meeting and says the government needs to step back from providing free higher education will make the SAA issue look like a picnic", Sachs explains.
In other words, if the ANC does what is in the MTBPS, it will likely self-destruct. Put differently, Ramaphosa will not easily be able to implement the fiscal path mapped out in the MTBPS and hang onto power.
Intellidex’s Peter Attard Montalto expects provinces and municipalities to be in shock when they realise the full extent of the cuts they are expected to suffer.
"The level of cuts being pushed down to the provinces [about 5% a year over the medium term, or R91bn in the coming two years] has never fully crystallised into hard choices until now," he says.
The Western Cape government is incensed. Finance MEC David Maynier says the R10.5bn bailout for SAA alone will cut R86.6m from the province’s budget, defunding hospital services and projects that provide food security, support property ownership and land transformation, and create jobs.
In addition to internal pressure from underfunded provinces and municipalities, there is a real risk that, if students and public sector workers are forced to carry the burden of the fiscal adjustment, they could form a mass coalition with other civil society groups that reject fiscal austerity as a betrayal of the poor and working class.
These include the Budget Justice Coalition, which represents Section 27, the Treatment Action Campaign, Corruption Watch, Equal Education and Wits University’s Institute for Economic Justice, among others.
Responding to the MTBPS, the Alternative Information & Development Centre, the Assembly of the Unemployed and the Fight Inequality Alliance, acting under the banner of "The Cry of the Xcluded", warn that it "is bound to lead to a major clash with the public sector unions, similar to the clash with the coal miners in Britain 40 years ago under Margaret Thatcher".
The group adds in a statement, which lists among its official contact persons SA Federation of Trade Unions general secretary Zwelinzima Vavi and Joseph Mathunjwa, who heads the Association of Mineworkers & Construction Union: "Such is the level of attack on workers and the poor that we can expect the streets, not the boardrooms, to be the main battlegrounds."
The big question is whether the government has the resolve to see this through, including whether Ramaphosa will back finance minister Tito Mboweni to the hilt and, indeed, how much longer Mboweni will choose to suffer along in his post if that support is not forthcoming.
Attard Montalto points out that though Mboweni has a key ally on the wage bill in public service & administration minister Senzo Mchunu, neither Ramaphosa nor Mchunu has publicly backed such a restrictive stance before, even if the president has said the wage bill must be "dealt with".
"It’s going to be a really rough ride," agrees Burger. "They need to have the resolve to sit this through, because the students and the unions will pull out all the stops. The MTBPS is basically a self-imposed International Monetary Fund programme and countries that [undergo] that go through a lot of turmoil."
Given the government’s tendency towards vacillation and the intense political pressure that is going to coalesce around both the local government elections in 2021 and the ANC elective conference in 2022, it is hard to imagine the government sticking to the 95% fiscal path doggedly for 10 more budget events over the next five years.
In addition to the risk that the wage bill cuts may fail to materialise, there are two other main risks to the fiscal framework: that SA’s economic recovery could be weaker than forecast and that the government will cave in to additional demands from insolvent state-owned enterprises (SOEs).
Though the Treasury has kept the path for nominal growth the same as in June, many economists fear the revenue projections are too optimistic, given the devastating effect of Covid-19 on business profitability and employment.
But, on the whole, the Treasury’s new real GDP forecast of 3.3%, 1.7% and 1.5% for 2021-2023 is seen as broadly credible, as is its assumption that, beyond 2023, growth will average only 2%.
Ratings agency Moody’s, however, remains unconvinced about both SA’s prospects for achieving pro-growth reforms and the planned expenditure restraint, saying the MTBPS lacks specificity.
"As a result, we expect the economy will remain subdued and fiscal consolidation slow, sustaining the rise in government debt in the next couple of years," says senior credit officer Lucie Villa.
Moody’s expects SA’s debt ratio to hit 100% by 2022, but this includes Eskom and most other SOE guarantees, which are excluded from government’s headline debt calculation.
Weak SOE balance sheets — combined with R694bn in government-guaranteed SOE debt — pose a significant risk to the fiscal outlook. Guaranteed debt redemptions are expected to average R35.6bn over the next three years, compared with R27.5bn in the past year.
So it was notable that the MTBPS ignored fresh demands from the SA Post Office, the SABC, the Land Bank and Denel.
The sands may have shifted by the February 2021 budget, but SA’s lack of resources, coupled with the public backlash over the latest R10.5bn SAA bailout, may finally force the government to allow the worst serial offenders to go to the wall.
In short, having kicked the can down the road for so many years, SA finds itself at the very edge of the fiscal cliff. The only way out is to shrink the role and size of the state, and allow private enterprise to drive a growth recovery.
If the penny still hasn’t dropped after the MTBPS, it will very soon.
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