Avoiding a fiscal crisis in SA ‘down to public sector wage talks’

The finance minister’s budget statement to Parliament his week “distils the success, or otherwise, of South Africa meeting medium-term debt targets down to public sector wage negotiations”, according to Chris Eddy, Head of Investments at 10X Investments.

Commenting on Tito Mboweni’s Medium Term Budget Policy Statement delivered in Parliament on Wednesday, Eddy said: “Whilst the proposed spending cuts are not as aggressive as the special adjustment budget in June, National Treasury have taken a firm stance by not increasing expenditure, but rather re-prioritising spending to drive fiscal consolidation. 

“The largest re-prioritisation to rein in spending is the proposed freeze on public sector wages. If implemented, this could narrow the budget deficit and bring debt-to-GDP under control over the medium term.”

Eddy said National Treasury had painted an honest picture of just how badly government finances have deteriorated over the last number of years. This has accelerated in 2020 due to the impact of Covid-19, with interest payments making up an ever-larger proportion of government spending. 

“The proposal to contain the public sector wage bill while protecting funding for infrastructure investment indicates a marked shift away from consumption spending to investment and infrastructure spending.”

However, reminiscent of so many key moments in Cyril Ramaphosa’s presidency, the statement suggests a clear understanding of what has gone wrong and how it needs to be fixed yet leaves doubts about implementation.

Eddy says National Treasury’s plan of targeting the public sector wage bill as the primary driver of narrowing the budget deficit is a high-risk strategy that may not be achievable. 

He said: “Mboweni has rolled the dice, delivering an unpopular budget as promised. If implemented, it could see South Africa controlling debt-to-GDP to 95% over the medium term.”

Is it enough? Is it too late? 

“The speech certainly suggested that National Treasury knows what the problem is and what needs to be done. What remains to be seen is if the proposal is politically palatable and whether it gets overruled by cabinet,” says Eddy. 

He noted that Mboweni had again spoken to the fact that South Africa’s fiscal multiplier had declined from about 1.6 times in 2009 to less than 0 in 2019. That means that in 2009, every R1 spent by government generated R1.60 of GDP; today government spending doesn’t contribute significantly to growth. 

He said that talked to “all those people saying the government should spend their way out of problems” and it meant that “currently every Rand of spending from the government doesn’t really create any stimulus”.

Eddy acknowledged that a big part of that would have been corruption, “money that found its way out of the economy, stolen through state capture”. 

Consumption spending typically has a lower fiscal multiplier than infrastructure spending so if the proposed consolidation can be executed, Eddy said, it augurs well for future economic growth. 

Another point that came through loudly in the budget statement, he said, is “clear recognition from National Treasury that they can’t tax their way to higher revenue, and that any significant increases from this point would be counter-productive”.

The projected R5bn increase in taxes next year and R10bn a year for the next two years is “relatively small, and talks to potentially bracket creep, sin taxes and fuel levies”, says Eddy, with no real increase in tax on the horizon.

“On the whole, the need to fast-track structural reforms had been highlighted,” says Eddy, “a move away from consumption spending to infrastructure spending to increase the impact of the fiscal multiplier and GDP growth, as well as not looking to tax South African individuals or businesses significantly. This all talks to the right issues.”

But questions remain:

• Will public sector wage spending cuts be achieved?
• Will the oft spoken about structural reforms be implemented?

If the answers are yes, a fiscal crisis can be avoided, says Eddy.

“Ultimately this budget statement has shown what needs to be achieved and really distils the success, or otherwise, of South Africa meeting medium-term debt targets as coming down to public sector wage negotiations. 

“If we don’t act, the picture frequently painted – where we spiral into a debt trap where the debt burden starts to crowd out government spending – looks more likely,” says Eddy.

Much ado about nothing

In a separate point in the statement (although it is only a small jump from the spectre of a failed South Africa to the terror around rumours about prescribed assets) National Treasury has again confirmed that talk of prescribed assets is much ado about nothing, says Eddy.

“As has always been maintained, Government have initiated a process to review Regulation 28 of the Pension Funds Act [which limits the extent to which retirement fund savings may be invested in particular assets or asset classes].”

The budget statement made it clear that the “proposed change would be to allow pension funds to invest more in infrastructure should the board of trustees opt to do so”. 

“The intention seems clear that any change would not be to force the investment in infrastructure, but to allow funds to increase their current limited exposure to it.”

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