Poor old Tito, poor old us: The budget had no room to wiggle
The medium-term budget policy statement was hard to swallow and it doesn’t taste good
After the Ramaphoria and the talking-up of government plans to revive the economy comes a dose of reality: the medium-term budget policy statement is hard to swallow. It doesn’t taste good.
The most positive part of the picture is that the Treasury has avoided creating new problems by sticking to its self-imposed expenditure ceiling. That way, it is hoped, it stays onside with credit ratings agencies and doesn’t allow the country to dig itself deeper into the dwang by taking on more debt. But that decision notwithstanding, the way the numbers in this particular budget policy statement stack up means the deficit blows out beyond the projections made in February anyway, as does the debt-to-GDP ratio.
The difference in the projected stabilisation of the fiscal framework compared with the budget numbers tabled in February is profound, and was not anticipated by analysts or ratings agencies. In February it was envisaged that the budget deficit would come in at 3.6% in 2018/19 and then drop to 3.5% two years later. But now the deficit is projected to be 4% in 2018/19, rising further in 2019/20 to 4.2% and falling back to 4% in 2020/21.
When it comes to the debt-to-GDP ratio it had been anticipated in February’s budget that this would stabilise at 56.2% in 2022. Now, the new projection is that stabilisation takes place only in 2024 at a higher ratio of 59.6%.
There are two reasons this happened at a time when spending was contained. The first lies in the revision of the revenue figures, which were unexpectedly revised downwards by the sizable amount of R27.4bn. Most economists had been anticipating a shortfall of only a few billion.
There are two factors at play in the revenue picture. The first is VAT, where two problems have been detected. The first is a buildup in the backlog of VAT refunds with the credit book, which officials say should sit at about R19bn, having grown to R30bn in the Tom Moyane era. Whether this was a bad habit or an intentional ploy to make revenue collection look better than it was, acting commissioner Mark Kingon would not say. “What I will say, is that it is wrong,” he said. Now he is cleaning up, with the result that a once-off payment of about R11bn will be paid out of this year’s tax take to catch up on the backlog.
The second VAT problem relates to an overestimation in the tax take from VAT over the three-year medium-term period. A revision of the estimates slices another R9bn off tax revenue over the next three years.
The second issue with taxation is the lower-than-estimated collection from company and personal income tax. This lops another R7.4bn off the tax estimates and is in part a reflection of the poor state of the economy, with profits and dividends from large companies under pressure, and part a result of falling tax buoyancy.
The higher deficit leads to a later consolidation of debt, and more debt. This is because debt levels were also adversely affected by the weaker rand. Even though only 10% of SA’s debt is foreign denominated – about $22bn – movements in the rand nonetheless had a big effect. In February the Treasury assumed a rand-dollar exchange rate of R12.68, which has now had to be revised to R14.28. What this means is that since February the exchange rate inflated SA’s debt by R35.2bn.
This set of dynamics led to the Treasury having even less fiscal room to manoeuvre than it did in February. But while it has stopped things from getting worse, it has not been able to make them better. It is unable to negotiate a way out of the trouble the economy and public finances are in. The budget remains skewed towards consumption spending, and the Treasury is not able to significantly reallocate funds to growth-friendly areas of investment. It has pinned its hopes for growth on the theory that structural economic reforms will bring greater private investment.
At the centre of this dynamic is the public sector wage bill, which has been declared pretty much out of bounds by politicians. President Cyril Ramaphosa has committed to no retrenchments in the public sector, and even the small hope that there would be voluntary severance packages for workers close to retirement is diminishing. No provision is made for such packages in the medium-term budget policy statement and the debate is turning towards slowing wage growth in the public sector by dealing with what is known as automatic pay progression – annual pay increases for seniority – rather than reducing the head count.
A key decision by the Treasury was not to allocate departments any more money to enable them to pay for the higher salaries negotiated in June without having to cut other budget line items. Across the government over the next three years this amounts to R30bn. Public sector managers will have to make do, which means the squeeze provincial health and education departments have been under for the past four years will only intensify. Officials will be faced with little other option but to cut jobs by stealth or, far more likely, steal money for salaries from budget allocations for medicines, hospital linen and beds and, in the case of education, from learning materials and office and school supplies.
It is this cycle of robbing Peter to pay Paul that has thrown the public health system into disrepair and dysfunction. After a meeting with the provincial premiers earlier this year, the extent of the crisis dawned on Ramaphosa, with the result that he immediately ordered the purchase of more hospital beds and linen as a part of his fiscal stimulus package. Also as part of the stimulus package, additional funds were allocated to building toilets in schools. It is worth recalling, though, that the school improvement budget was one of those slashed in February as the Treasury scrambled to find money to pay for free higher education. In other words, this time around, Paul was robbed to pay back Peter.
Very little time and space in the statement is expended on a strategy to get growth going. Apart from the reiteration that better – that is, less wasteful and less corrupt – investment spending is vital, the statement again restates the importance of the structural reforms. These include the regulatory changes in mining and energy and the reform of state-owned enterprises with a view to bringing administered prices under control. While this looks quite thin as a strategic plan, the reality is that with the fiscal space as tight as it is, there is not much more the Treasury can do. It is now imperative that the rest of the government starts working.