SA’s fiscal position is dire, but rather than try to spin the numbers in his maiden budget, finance minister Malusi Gigaba has laid the full extent of SA’s fiscal deterioration out in clear, precise terms.
He scores 100% for transparency but given that SA’s fiscal deterioration is even worse than expected, the minister is unlikely to be rewarded by the financial markets or rating agencies.
The rand and bond yields responded aggressively, the former diving by almost 25c to R14/$ before pulling back slightly just after 3pm. Bond yields rose from 8.86% to 9.1% within an hour of the speech and continued to climb.
The main shock is that the projected revenue shortfall for 2017/18 is a staggering R50bn due to weak growth and tax collection. This translates into a cumulative R209bn shortfall over the next three years.
As a result, the consolidated budget deficit is set to spike to 4.3% of GDP in the coming fiscal year, against a target of 3.1%, wiping out the last five years of fiscal progress.
And unlike in previous years, when the treasury budgeted for the deficit ratio to shrink each year, it now expects it to remain elevated at just under 4% over the medium-term.
The treasury also expects gross national debt to keep climbing until it hits 60% in 2020/21 and for GDP growth to average just 1.7% over the medium term.
This trajectory is a big departure from recent medium-term budgets, which have always assumed that growth would pick up sufficiently to stabilise the debt ratio, with the help of fairly routine expenditure and tax adjustments.
Effectively, the treasury is acknowledging that a perpetual round of limited expenditure cuts or tax hikes is no longer going to cut it. The only way to avoid an unsustainable increase in the debt burden is to raise the growth rate.
SA is stuck in a low-growth trap and will remain there unless it steps onto a new path, increases the pace and scale of structural reform, and introduces measures to stimulate growth, says Gigaba.
But the 2017 medium-term budget policy statement (MTBPS) is unconvincing about where that growth will come from, or how business and consumer confidence will be restored.
Gigaba is staking much on the successful turnaround of the state-owned enterprise (SOE) sector, both to restore the trust of the private sector and to reduce the risks building in the fiscal system.
“Eskom is simply too important to the country to fail,” he says. “We will not allow it to.”
But the central risk to SA’s economic outlook, admits the treasury, is elevated policy and political uncertainty, which is discouraging investment and consumption.
Given the political hiatus in the ANC until after the elective conference in December, the MTBPS is really a holding document.
Unable to assume that the government will have the political will to make the deeply unpopular fiscal adjustments that will be required to stabilise the debt ratio in the coming years, the treasury has done the unthinkable — allow the ratio to keep climbing.
“Previously the national treasury attempted to lead the rest of government by pre-announcing measures that they believed were important to enable fiscal consolidation and higher growth. In contrast, this MTBPS acknowledges that treasury is powerless to make the hard decisions that are required,” explains Investec Asset Management’s Nazmeera Moola.
“It’s a high-risk strategy that markets and the rating agencies could dislike intensely. However, it is a fair reflection of the current political environment.”
Just to stick to the fiscal trajectory outlined by former finance minister Pravin Gordhan, which aimed to get gross debt to peak at about 53% next year, would now require R40bn in tax hikes and spending cuts in 2018/19 alone.
Gigaba would, for instance, need to raise the value-added tax (VAT) rate by a percentage point, and increase the personal income tax rate by a percentage point, for all but the lowest earners to find an additional R40bn next year — measures that might spell electoral suicide for any sitting president.
So in the absence of political certainty, Gigaba has been forced to step off the fiscal consolidation path laid down by Gordhan — something he has consistently sworn not to do.
In his budget speech, Gigaba describes the current situation as “a setback” for fiscal consolidation but says he is resolved “not to deviate irretrievably” from the existing consolidation agenda.
It’s not a claim that holds much water, other than the fact that Gigaba intends to stick to Gordhan’s expenditure ceiling and implement the (now inadequate) medium-term fiscal measures announced in the February 2017 budget.
The ceiling is threatened with a R3.9bn breach in the current year as a result of government’s recapitalisation of South African Airways and the South African Post Office. Gigaba says government will not allow the breach even if it has to dispose of a portion of its Telkom shares to do so.
“If we can’t maintain the ceiling, what confidence should rating agencies, investors or anyone have that we will maintain our medium-term fiscal framework,” said Gigaba in a pre-budget briefing to journalists.
The resultant budget framework is a half-baked document. It assumes that the rating agencies will understand that nothing big can be decided until after December and will hold fire until after the real budget is delivered in February next year.
It’s a lot to ask.
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