Many underestimated finance minister Tito Mboweni’s resolve going into the 2021 budget. While most expected him to stick broadly to his fiscal consolidation plan, no-one thought he would cut company taxes while reining in the welfare bill — and this in an election year.
Though Mboweni has deeply offended the left with his unapologetic stance on the welfare cuts, he emerged stronger late last week thanks to a rare public endorsement from President Cyril Ramaphosa.
Just think what could have been in the budget: a wealth tax, bailouts for state-owned enterprises (SOEs), backtrack on the three-year public sector wage freeze, and a further extension of the Covid-19 special grant as a precursor to a permanent basic income grant.
Instead, the budget not only held the line, it went somewhat further in wiping R40bn of proposed tax hikes off the table and committing to a reduction of both corporate and personal income taxes in time. Clearly, the Treasury has realised the futility of continuing to raise taxes in a severely weakened economy, while pursuing the same consumption-based spending approach that got SA into trouble in the first place.
The choice Mboweni faced was either to tax, borrow and spend more, or to cut taxes, expenditure and borrowing to reduce interest charges and stimulate confidence and growth. He chose the latter. If accompanied by accelerated structural reform, the economy should start to provide jobs in place of the state writing out endless welfare cheques — an option that has become unsustainable.
Given how South Africans have come to expect weak-kneed prevarication from this government, we should be grateful that at least one actor is still able to take the difficult decisions.
The 2021 budget marks a decisive shift from the tax-and-spend stance of the past decade to a new cut-and-save era in which the Treasury has shown it will do whatever it takes to head off a sovereign debt default, even if it hurts the governing party’s constituency most.
But not even the official opposition DA has fully appreciated the extent of this shift in approach, with its finance spokesperson Geordin Hill-Lewis bleating on about how Mboweni has “kick[ed] South Africans while they’re down”.
Mboweni conceded in his budget speech that continuing on the path of fiscal consolidation during the economic fallout was a difficult decision. “However, on this we are resolute,” he added. “We remain adamant that fiscal prudence is the best way forward.”
Given how South Africans have come to expect weak-kneed prevarication from this government, we should be grateful that at least one actor is still able to take the difficult decisions.
Among the most difficult would have been the decision to cut the social grants bill. Not that you would think it from Mboweni’s retort that there is “nothing to be apologetic about” because the government is not obligated to increase grants in line with inflation and, anyway, social spending already absorbs more than 50% of the budget.
One can view his stance either as arrogant and unseemly, or sheer bravado from a minister who has long tried to protect pro-poor spending but ultimately has been overwhelmed by the scale of the cutbacks required. The problem is that the consolidation required to get the debt ratio to peak inside 100% is now so large that it cannot be achieved without huge political contestation. This undermines the credibility of the budget since the implementation risks are big — maybe even insurmountable.
The biggest risk is that political constraints will prevent the wage bill savings from being fully achieved, while SOEs will continue to be bailed out and pro-growth reform will remain slow and patchy. If so, SA will fail to get on top of its debt mountain and could slide deeper into dysfunction.
This explains the deep scepticism of many commentators in response to what is in effect a landmark budget in terms of trying to shift SA in a new direction. In short, as uncompromising as Mboweni’s budget may appear today, with hindsight it may still end up being judged as having done too little too late to stop SA’s inexorable slide.
• Bisseker is a Financial Mail assistant editor.
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