Mid-term budget: Godongwana urged to look at bigger picture

Finance minister Enoch Godongwana has been urged to look at the bigger picture when he delivers his Mid-term Budget Policy Statement (MTBPS) on Wednesday instead of getting stuck at agonising over the current fiscal year deterioration compared to the expectations of a few months ago.

It will also be useful to take a step back and look beyond this financial year and the continual negative revisions to the two-to-three-year medium term expenditure framework projections, Thalia Petousis, portfolio manager at Allan Gray, says.

“South Africa deteriorated the fastest among major emerging markets in terms of debt to gross domestic product (GDP) since 2018, primarily due to growth in the country’s interest bill or elevated cost of funding versus the slow pace of growth in the economy, tax revenue and the savings pool (interest on debt versus growth of national income).”

She says with a cost of debt at 11% to 13%, the only way to prevent severe fiscal deterioration in the absence of robust economic growth and stabilise our debt is to run a continual primary surplus of 1.5% to 3% GDP. 

“In simple terms: to save money to pay down the interest bill with cash each year.”

To maintain a strong primary surplus would require austerity, which is a thorny issue in a country with such high levels of social poverty, Petousis says.

“In a capital-constrained world, for local and international savers, this will be a difficult budget to fund. Fiscal consolidation remains the answer, as well as calling on international funding institutions to offer us low-cost borrowing packages.”

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Spending cuts to pay for wage bill?

She notes Godongwana’s attempt to enforce departmental spending cuts to pay for the increasing wage bill is meeting much resistance and says the fact that we are heading into an election year, which is usually associated with a large ramp-up in spending, naturally hurts his cause. 

Some parties in the market reject talk of an imminent fiscal crisis and oppose spending cuts and suggest a one-time silver bullet funding solution where the South African Reserve Bank (Sarb) realises and pays a few hundred billion rand of perceived profits into the fiscus, given the impact of the rand’s depreciation on the Sarb Gold and FX Reserve balances.

However, she says, this suggestion fails to acknowledge that when South Africa’s foreign exchange assets grow in rand terms due to foreign exchange depreciation, our foreign exchange liabilities as well as our rand import costs also increase. 

Petousis says other groups call for a wealth tax and for government to lean into short-dated borrowings to lower the cost of its debt, although these levers did not have the desired effects when instituted in other emerging markets.

She says a drastic set of cost-cutting proposals were also presented to government by other parties who argue for a reconfiguration of the public sector by scrapping several government departments and entities, closing a host of non-critical programmes, offering early retirement and voluntary severance packages for all government workers and restricting non-critical recruitment. 

In addition, National Treasury previously identified R309 billion of unfunded budget submissions and the Social Relief of Distress (SRD) grant is the largest at R140 billion. Petousis says in some circles there has been a proposal that the only credible way to fund the SRD is to raise VAT by 2% or close other social protection programmes. 

“South Africa’s financial year-to-date budget deficit (to August 2023) widened to -R238 billion (or roughly -3.4% of GDP), representing its second widest on record and R77 billion slippage compared to last year. The unsurprising culprits are the public sector wage bill, which grew at roughly 7.4% year-on-year versus +1.6% budgeted, as well as a 20% decline in corporate income tax revenue collection.” 

What will Godongwana decide? We will only know after the MTBPS.