MTBPS: Will Mboweni be able to close the mouth of the hippopotamus?

Finance Minister Tito Mboweni’s medium-term budget policy statement (MTBPS) on Wednesday is likely to be a stark and honest portrayal of South Africa’s difficult economic situation.

While there is little unknown about this, confirmation from the government is likely to be shocking, nonetheless, says Andrew Duvenage, managing director of NFB Private Wealth Management.

Dr Elna Moolman, head of macroeconomic, fixed income and currency research at Standard Bank South Africa, says it is unlikely concrete new measures will be announced that directly affect consumers. “Any specific tax decisions will likely only be expected in the 2021 Budget and the government has already signaled its intent regarding future social grants and employment support.”

Prof Jannie Rossouw, interim head of Wits Business School, says the MTBPS will show South Africans the economic growth expectations of the South African government over the next three years and he expects it to give a clearer picture of the economic damage of Covid-19.

Plans to revive the economy

The financial implications of the president’s plans will be clearer from the MTBPS, Rossouw says. Moolman expects more detail about the traction with the growth-supportive interventions underway and/or planned. “If the plans are implemented as planned, I do expect a trend boost to economic growth, although this will take time.”

Government debt

While Moolman expects an increase in government debt, as well as a higher government debt-GDP trajectory than in the Supplementary Budget’s “active” scenario, she says it is arguably more important whether the government can credibly signal that debt will stabilise in the medium term than the exact level where it will peak.

Shortfall in tax collection

All three economists agree there will be a shortfall in tax collection. Duvenage says the question is what that shortfall will be and whether it will exceed estimates of R300 billion. “Over the years the government has allowed tax collection to skew towards personal income tax as the primary source of tax collection.

“However, having shed over 2 million jobs, this source of revenue has been significantly impacted. As the finance minister conceded in the March budget speech, the government will not be able to tax its way out of this crisis, ao it remains to be seen whether it does try to increase the tax rates of an already over-burdened and highly concentrated tax base.”

Public spending

Rossouw hopes to see a reduction in public spending. “If not, we are in deep trouble. The government has to spend less in view of less revenue.” Moolman expects the government to be largely successful in achieving savings set out in the Supplementary Budget.

Duvenage points out that Mboweni has frequently spoken about the need to reign in public expenditure. “However, there has been much criticism around what is being considered his austerity orientated approach based on the argument that austerity during an economic crisis causes significant economic pain and does more harm than good.”

Fiscal sustainability

Moolman also expects tougher measures to achieve fiscal sustainability. “In my view the focus in the first part of the forecast period will be on spending curbs; thereafter, it hinges on growth reforms. In the Supplementary Budget, we were encouraged by the government’s focus on the aspects of the budget over which it has the most control – namely, spending.

“While it is important that the MTBPS signals confidence in, and commitment to, growth reforms, the credibility of the fiscal consolidation agenda requires a pragmatic longer-term growth assumption. Put differently, the fiscal consolidation plan will only be credible if it does not assume unduly optimistic growth forecasts.”

Rossouw emphasises that as South Africa has reached a fiscal cliff, it is necessary to show how fiscal sustainability will be restored.

Fast-tracking growth

Rossouw says the MTBPS will show the financial and fiscal impact of the government’s recovery plans. Moolman expects more detail around some of the interventions under way and/or planned and perhaps an update of Treasury’s estimates of the growth lift these interventions will support.

Will Mboweni stick to his guns to cut spending?

Duvenage says although Mboweni has been vocal about “closing the mouth of the hippopotamus” – the widening deficit – it is unlikely this will be possible to an extent that prevents debt being needed to plug the gaping hole in the fiscus.

Moolman doubts the government will achieve its “active” scenario in the Supplementary Budget. “However, we estimate that it could achieve the bulk of the savings for a fiscal trajectory that is somewhat worse than set out in the aforementioned scenario, but we expect a clear signal of an intention of fiscal consolidation.”

Measures to reverse poverty and inequality

For Rossouw, social grant payments are an important policy measure aimed at addressing poverty and inequality. Moolman says she does not expect any new measures to be announced. “Presumably, all these interventions were already revealed by the president in his recently unveiled growth plan.”

Duvenage says in these constrained circumstances it’s going to be very difficult to implement any measures that reverse poverty and inequality. “The reality is that the only way to deal with these twin issues is to create consistent and sustainable economic growth – something which has been absent for a long time in the local context.”

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