HILARY JOFFE: Without growth, fiscal disaster looms

27 October 2019 - 00:12

When the then finance minister Pravin Gordhan presented his first medium-term budget policy statement in October 2009, in the depths of the global crisis, he spoke of a difficult time - but pointed to signs that the economic recovery had begun.He revealed that tax revenue would fall R70bn short of budget targets and that the budget deficit would be more than 7% of GDP - but that unlike other countries, SA could and would keep spending even as economic growth and revenue plummeted, "because we entered the economic downturn with a budget surplus and a healthy fiscal position".No longer. As we go into the 2019 medium-term budget on Wednesday, the fiscal position is terrifyingly far from healthy and SA is in crisis in a way it never was 10 years ago. The economy is stuck in its longest downturn on record and finance minister Tito Mboweni will have to slash economic growth forecasts yet again. Economists see this year's budget deficit coming in closer to 6.5% than the 4.5% pencilled into February's budget, with Mboweni having had to find the money for close to R60bn in Eskom and other bailouts in a year in which revenue could fall R50bn short of budget targets.SA's R3-trillion in public debt is already more than five times its pre-crisis level and as a ratio of GDP is heading towards 70%, if Eskom's debt is included. SA is borrowing just to pay the interest on its debt, which is the fastest-rising item of public spending - and is putting SA's credit ratings at risk of further downgrades, which would further raise the cost of borrowing and plunge the country further into a debt spiral. Rating agencies and investors will probably tolerate one year of bad numbers. But they want to see a plan to get out of the economic and fiscal mess over the medium term, and it has to be credible, with economists saying "credible" is more important this time than in any previous budgets. Mboweni and his team face the impossible task of crafting a medium-term budget that delivers on SA's repeated promises to restore fiscal discipline and rein in the public debt - at a time when the economy has stalled, as have revenues, but there is mounting pressure to spend. But budgets are ultimately just an expression of political and policy choices. The problem with the budget is it is not fiscal - it's political. So too are the solutions required to get SA's public finances back on a sustainable footing and out of crisis mode.Growth never did stage the sustained recovery on which Gordhan pinned his hopes in that 2009 budget, and instead of being temporary and targeted as it should have been, the spending the government did to get out of the crisis went on items that couldn't be rolled back - most notably the public sector payroll, which ballooned after 2009/2010.Personnel costs now consume almost 45% of the government's non-interest spending. Add the government's interest bill to that and 57% of total spending is already committed; crucial social grants take that figure up to 70%.Already, government spending has been sliced and diced every which way to accommodate higher personnel costs, Zuma's free higher education promise of 2016, and bailouts for Eskom and other state-owned enterprises (SOEs). There is little more room to cut without hitting service delivery and the economy. The only cut that will really make a difference to government spending's unsustainable trajectory is the public sector payroll. That's a political battle, not a fiscal one. It requires negotiating a longer-term deal with organised labour - and that requires leadership from the top of the government. So too does a turnaround of Eskom and other SOEs, which otherwise will continue to drain the public purse and drive up the debt. Investors and rating agencies will be closely watching on budget day for long-awaited details of plans to restructure Eskom's debt. Unlike many other countries in the past decade, SA has not had "austerity" in the sense of politically difficult real cuts in government spending. Instead, it has relied to a significant extent on tax hikes in recent years to try to close the fiscal gap, driving up the personal income tax burden and fuel taxes as well as, controversially, lifting the VAT rate. But all the evidence is that further tax hikes simply will not yield much more revenue and could even yield less.Evidence too is that February's budget projection that revenue would grow by 10.5% in the current year, almost double last year's growth rate, was way overambitious. All the tax types have underperformed in the first five months of the current year, in a much weaker economy than expected. And while there were hopes that the turnaround and cleanup at the South African Revenue Service would start to yield results soon, new commissioner Edward Kieswetter has made it clear the damage to Sars is deep and that the turnaround is a multi-year project, not a quick fix. Faster economic growth could solve the problem, lifting revenue and creating the space to spend while cutting the debt.Mboweni plans to publish a new version of the Treasury's economic strategy paper to accompany the budget on Wednesday, revised to take account of the views of members of the president's new economic advisory council as well as the 800 submissions received from the public. But implementing its recommendations is the issue, and if the plan is to have the desired effect in raising the growth rate, it will need political buy-in and negotiation inside and outside the government.

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