MTBPS: the scary and worrying parts

The MTBPS had some scary and worrying parts, especially when it comes to government spending and government debt, mainly pushed up by public servants insisting on salary increases.

Professor Bonke Dumisa, an independent economic analyst, says it is worrying that the South African government spends above R366 billion a year, or over R1 billion per day, or about 17 cents per R1 just on servicing the cost of government debt, just on paying interest and related costs before paying the actual principal loan/debt.

“The South African government currently has a total debt of about R4.8 trillion and says it will need to borrow R553 billion per year, each year up to financial year 2025/2026. This means government will have a total debt of R6 trillion by the year 2026. This is totally unsustainable.

“This means we will bequeath our future generations with debt instead of national wealth. It is therefore very disappointing to hear some people with parochial selfish views that they want government to give them more at the expense of everyone else.

“The MTBPS clearly showed yesterday that the 7.5% salary increases for public sector workers actually increased total government debt, which means they pushed up the inflation rate while complaining about increases that are not in line with the rising cost of living.”

Elna Moolman, economist at Standard Bank, says there was a clear focus throughout the budget review on the crowding out impact of the sharp increase in debt-servicing cost in recent years, which underpins government’s intent to achieve a primary surplus to support debt stabilisation.

“Our initial impression is that the assumptions underpinning the fiscal forecasts are largely credible, except for likely sizeable fiscal support for Transnet in due course that is not yet incorporated. The fiscal risks clearly remain biased to the downside though.”

Lullu Krugel, chief economist at PwC South Africa, says government spending only makes a small direct contribution to overall economic growth, but public sector expenditure is at the core of economic development and socio-economic upliftment.

“In addition, public services provide the basic hard and soft infrastructure needed by the private sector to grow their business and employment. These are key reasons why the R56.8 billion shortfall in 2023/2024 fiscal revenue and the mitigating measures needed to close this gap, raise concerns about the short-term health of the South African economy.”

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MTBPS gave more realistic picture of SA’s economic situation

Citadel’s chief economist and advisory partner, Maarten Ackerman, says Godongwana painted a more realistic picture of the country’s precarious economic situation than in February’s budget and this was both good and bad news for the country.

“The budget has two sides, revenue and expenses and we know that in the current situation we are faced with a concerning budget deficit, because the government is spending too much. Given local structural issues and external factors like the commodities cycle and South Africa not getting the tax revenue we hoped for, the right message would have been austerity and cutting back. Some of this was mentioned, but unfortunately the current government has not demonstrated that they can cut back on expenses – especially not ahead of the upcoming elections.” 

Some of Ackerman’s greatest causes for concern were the minister’s silence on how government will fund Transnet, the Covid-19 Social Relief of Distress grant, which is extended to 2025 and the proposed National Health Insurance, which parliament is still pushing through.

“What is also concerning is that the government is not cutting wages and instead focuses on trimming non-wage spending, which is always tricky. Writing off municipal debt is also a serious risk to the market and sets a negative precedent. The state of our municipal audits and service delivery has been deteriorating and the grace that is now extended to our defaulting municipalities also sends the wrong message to other indebted SOE’s.”

Kim Silberman, economist and macro strategist at Matrix Fund Managers, says the MTBPS shows that Treasury is doing its best to hold the line against rising political pressure to increase spending. “Godongwana was decidedly candid in his speech, stating that SA’s fiscal situation is unsustainable and explaining that government spending is unproductive.”

Angelika Goliger, chief economist at EY Africa, points out that although no specific tax instruments were discussed, the MTBPS further outlines clear points to pre-empt tax changes in Budget 2024.

“The Covid relief grant will be financed for an additional year, but Treasury was at pains to highlight that extending it will need an additional revenue source for government or reprioritisation of current expenditures, making the point that real trade-offs will need to be considered when making this grant a permanent feature.”

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Economic stagnation is core problem due to lack of good governance

The economists at the Nedbank Group Economic Unit noted that the MTBPS proposes significant expenditure restraint to reduce the country’s fiscal vulnerabilities, but while this appears to be the only option available over the medium term, the core problem is economic stagnation, caused primarily by government’s failure to restore good governance to critical state-owned enterprises and the sharp deterioration in the quality of essential government services.

“Rising public debt in a savings-poor country not only crowds out the private sector from the capital markets but also renders many capital projects unviable, as the fragile fiscal situation lifts the expected return required to compensate for the inherent risks and elevated costs attached to operating in the country with diminished state capacity.

“As the private sector retreats and the public sector swells, economic stagnation deepens and the social burden intensifies, while the tax base narrows and tax revenue weakens even further. As the deficit widens, debt service costs run amok, reducing the funds available to spend on economic and social priorities.”

Ultimately, the group warns, hard choices must be made.

“We repeatedly chose consumption over capital expenditure, short-term compensation over long-term empowerment and vested interest over national interest. In so doing, we are slowly descending into a classic debt trap, placing an unfair burden on future generations. It is not too late to turn the other way.”

The MTBPS stressed that the government intends to accelerate macroeconomic reforms by consolidating its operations. It will scale down programmes and entities that do not significantly contribute to service delivery due to the duplication of functions, the group points out.

“The private sector and international players will be crowded into finance and execute large infrastructure programmes, while Treasury will adopt strict fiscal anchors to manage the increase in public spending.

“These measures, if implemented swiftly, would go a long way to help reverse the path to fiscal malaise. They would raise the country’s potential growth rate, which in time would lift employment, create more taxpayers and ultimately strengthen the country’s fiscal position and government’s ability to raise the living standards of citizens.”