Basically in a space of eight months the economic and fiscal policy outlook of South Africa had turned for the worst in a way that government was unable to contain. Are we in free-fall or are we directing the pace of decline? writes Lukhona Mnguni
Finance Minister Tito Mboweni has been lauded for tabling a progressive budget at a time of massive economic crisis that confronts South Africa.
He managed to put something back in the pockets of hard working South Africans through tax relief that will amount to an estimated R14-billion.
The hope is that this money will be used by citizens strategically, resulting in a boost for economic growth, in part.
This relief and further increases on social security spending, grants, has earned Mboweni some brownie points with the public.
However, it is not brownie points of short-term relief that will solve what is becoming a moribund economic condition for the country.
It is quite clear we have a runaway debt that is pushing us to an uncontrollable fiscal deficit. It seems National Treasury has lost control of our fiscal policy and that is a scary realisation.
Revenue collection targets are not met by alarming margins, economic growth forecasts are revised (downward) as routine exercise of late, projections of containment of the rising debt to GDP ratio are decimated by realities of a country living beyond its means, and lastly, unemployment remains stubbornly high at 29.1% with no end in sight for this state of hopelessness.
Effectively, Treasury cannot by any reasonable means claim to be on a good path towards fiscal consolidation.
We are on autopilot, hoping to avoid crash-landing by miraculously repairing some of our faults.
It will be miraculous because there is no demonstrable intent by government that they can surgically repair our ailing economy.
Government’s policy articulation lacks coherency, consistency and a clear vision for society, taking away any confidence one had invested in this government turning our fortunes around.
Somebody (an economist) said to me: “I think Treasury has chosen to be more politically correct than to be economically correct … in a normal world, Treasury is meant to talk sense to politicians.”
This is partly true in that the 2020 Budget Speech did not upset the ordinary citizen through increases in tax, as some pundits had predicted.
Such is the order of the day, even pundits can’t be trusted much because we are all reading a defective script padded with mis-truths masquerading as sound projections.
Take the issue of the public wage bill.
Mboweni stood before parliamentarians on 20 February 2019 and made the following remarks: “The public wage bill is unsustainable. We must shift expenditure to investment. National and provincial compensation budgets will be reduced by R27 billion over the next three years.”
Without even accounting on this promised reduction in the previous financial year, Mboweni went on to deliver a bolder and dare I say audacious target as part of the necessary baseline spending reductions.
He said: “The second part is adjustments on the wage bill by about R160 billion over the medium term [next three years].”
Given poor success with what was a conservative 2019 commitment, it beggars belief that this new target increased eightfold can or will be achieved.
Mboweni’s conservative reduction of R27 billion over three years announced in 2019 was well understood because the wage bill is a hot political potato.
It pits government against the public sector unions.
This political risk has major implications for South Africa’s prospects towards fiscal consolidation in the next five years.
Effectively, Mboweni and team believe they can peg their hopes in achieving 61.3% of their proposed spending reductions in the medium term on such a politically messy aspect of the budget.
This is calamitous reasoning when it is quite clear that there is no social compact in place to even remotely achieve this.
COSATU, an alliance partner of the governing party, has already found this policy position to be provocative to workers.
A public sector unions’ shutdown is not off the table.
Government will have to come up with a wild card to convince unions that they can forego salary increases for three years while some constructive retrenchments (through voluntary early retirement) are implemented.
If Mboweni and the ANC-led government lose the fight against unions on this point, the entire 2020 Budget Speech will collapse flat on its belly.
What complicates issues for the government is that they wish to make savings of “R37.8 billion in the next financial year”.
This can only be possible if the promised wage increase for 2020 agreed upon in 2018 is not implemented or is significantly reduced.
The showdown will be on at the Public Service Coordinating Bargaining Council when government’s proposal to discuss “containment of costs in the final phase of implementation of the current wage agreement”.
Why does government seek to renege on this current wage agreement?
Either it was not signed in good faith, government committed to avoid a showdown ahead of the 2019 national and provincial elections or the fiscal health of the country has deteriorated so badly that the assumptions used to calculate the agreement back then simply no longer hold.
What a gamble government is taking.
In the Mid-Term Budget Policy Statement of 2019, Treasury made a staggering admission that even though “government remains committed to fiscal sustainability … there has been significant fiscal deterioration since the tabling of the 2019 Budget”.
Basically in a space of eight months the economic and fiscal policy outlook of South Africa had turned for the worst in a way that government was unable to contain.
Are we in free-fall or are we directing the pace of decline? It seems we are on autopilot and even if we closed the government there would be no major impact to our fortunes.
In 2015, then Minister of Finance, Nhlahla Nene delivering the budget speech told us that the budget was “constrained by the need to consolidate our public finances, in the context of slower growth and rising debt”.
Five years later the situation is bleaker without any visible resolution towards a new path.
It is true that our economy needs a jump-start, but what Mboweni believes will be causes of this is simply misplaced.
Also, we need this jump-start sooner than 18 months’ time.
Mboweni believes that the following will be the cause of our jump-start:
1. The fruits of the reform agenda led by the President.
2. Lower inflation.
3. The interest rate reduction earlier this year.
4. The recent gains in platinum group metals prices.
5. The impending change to the electricity regulatory framework; and
6. The tax proposals we are setting out today [in the 2020 budget].
The South African economy needs a target stimulus package that will inject new money, causing a deliberate deficit spending for investment coupled with unlocking the potential of pension funds (public and private) towards investment in the economy. Not to pay debt.
Towards what can we invest as a country?
Beyond agriculture and tourism, we can revamp and resuscitate the rail freight system to increase the current carrying capacity and use towards reducing usage of roads to move cargo.
New investments can be in strategic public transport systems that integrate modernised rail transport networks with buses, bringing train stations closer to places of work or into the communities people live in, doing away with the tendency of train stations that are on the periphery.
We need to roll out spectrum with great urgency and have a state-led company playing in the mobile network and telecommunications infrastructure space, before we bother ourselves with a state bank that will, as its architecture, be that of a retail bank operating under commercial principles.
We need to invest in building (hopefully with precision) renewable energy plants for Eskom that will be run separately from the current generation portfolio in order to accrue value and returns to the investors before a complete handover to Eskom.
Eskom cannot be left behind in the building of renewable energy generation infrastructure.
Budget 2020 then, is effectively one big political gamble.
Nobody knows the true extent of it if the risk manifests and government is unable to make the savings it hopes for through the public wage bill.
The biggest problem we face is depressed economic growth.
Our focus must be visited to this area with a degree of seriousness.
Without growth, there will be no reduction in unemployment, no growth of SMMEs and no new investment in public goods such as social infrastructure.
We are no longer at a crossroads as previous budget reviews have pronounced.
We are now nearing an economic abyss.
We need to admit to the crisis and come up with a multi-sectoral effort to tackle this malady facing our economy.
– Lukhona Mnguni is a PhD intern researcher in the Maurice Webb Race Relations Unit at the University of KwaZulu-Natal