Finance Minister Tito Mboweni will table the Medium Term Budget Policy Statement (MTBPS) on Wednesday, October 30, wherein it is largely expected that the fiscal trajectory will worsen compared to the February Budget Review.
National Treasury has very competent public servants, who over the years have always been able to put produce a budget that just meets the rating agencies and market expectations. They are likely to succeed in meeting the revised but worse expectations if we compare with the February Budget as they currently face a different test. The test will not be about the numbers because it is almost a consensus view that the trajectory of both the fiscal deficit and debt-to-GDP ratio will deteriorate. The Treasury team faces a credibility test especially for the fiscal outlook beyond 2019.
For the past several years, National Treasury, along with many forecasters of the economy in the private sector, have tended to downwardly revise economic growth forecasts year after year. The near term forecast is always realistic because there is more information at hand that enables accurate forecast and as a result, there have been only marginal revisions to the current and perhaps the following fiscal year’s budget. The optimism has always been on the second and third fiscal years’ forecasts, where the expected performance of the economy is hinged on economic reforms and a difficult consolidation path.
Minister Mboweni will not have to convince the investor community about how difficult the 2019 economic environment has been. There is agreement on this. Real economic growth will likely print around half a percent and inflation just over four percent. Consequently, nominal economic growth will most likely be well below five percent. Tax buoyancy – the amount of tax revenue collections each rand of economic growth - will likely be trimmed from 1.3 to under 1.0. In addition to these poor numbers, the State-Owned Enterprises (SOEs) bailouts, especially for Eskom are all known. So, any fiscal deficit above 6.0% and debt-to-GDP ratio between 65% and 67% will not surprise anyone, including the credit rating agencies.
Here is the problem, to stabilise the debt at 67% of GDP, real economic growth should be at least 2.7% sustainably over the medium to long term. At the current pace of economic growth, South Africa’s debt trajectory is unsustainable and requires consolidation either by raising taxes, cutting spending or growing the economy at a minimum of 2.7%.
How can National Treasury consolidate when the economy is weak? Which spending can be cut? Salaries and wages? I cannot put my money on cutting salaries and wages given the political environment where it has proven difficult to reduce headcount at SOEs which are known to have more employees than they require. Can Treasury cut investment? Perhaps, but what type of investment when we are on an investment drive to attract US$100bn of private sector investment? It appears to me that only if the National Treasury can displace public sector investment with private sector investment will it be able to cut investment spending. The other obvious way would be to raise taxes, but this appears difficult in a weak economy and perhaps narrow tax base.
What is the way out? The way out seems to be bold economic reforms and the credibility of the proposed reforms. This credibility will have to be twofold. The first test will be that the actual economic reforms must be realistic, bankable and clearly outlined. The second credibility test will be whether there is political willingness to break the things and structures that might slow or prevent implementation of the reforms.
The announcement on the restructuring of Eskom’s operations and debt along with the management of energy utility will provide a litmus test on how credible will all the other proposed reforms are. If the Finance Minister announces a credible plan for Eskom with timelines, it will become easier to sell the reform agenda to any investor. So far the sale has happened on the basis of peripheral enhancements and good advertising but what we selling will need to be bold policies and backed by a ruthless implementation that recognises that there will not always be agreement on everything, trade-offs have to be made.