No ‘holy cows’ in state budgets as Treasury warns of debt increase

National Treasury has emphasised the need to arrest growing state debt, warning that a default or fiscal crisis could see the South African economy lose an estimated R2 trillion by the end of the decade.

On Tuesday it released technical guidelines that must be followed by government departments and public institutions as they prepare their medium-term budget estimates for the 2021 budget.

The process is in line with Finance Minister Tito Mboweni’s earlier instruction that public institutions adopt a zero-based budgeting approach to ensure the effective use of shrinking state resources.

The document, which details the country’s growing and unsustainable fiscal debt profile since 2008, states that there should be no ‘holy cows’ and that “no spending items will be automatically protected from possible downward adjustment” as departments compile their budget submissions ahead of Mboweni’s mid-term budget policy statement presentation in October.

Pandemic

The state’s net loan debt has increased six times in the past 12 years – from under R500 billion in the 2007/2008 fiscal year, to close to R3 trillion by the end of 2019/20, said Treasury.

The impact of the Covid-19 pandemic has caused a sharp deterioration in South Africa’s already-fragile public finances.

The budget deficit for 2020 has more than doubled since the February budget to 15.7% of GDP (gross domestic product), while the economy is expected to contract by 7.2%.

Government’s borrowing requirement has increased as the country is expected to miss its tax revenue target by R304 billion due to the lockdown, which limited economic activity in an effort to slow down the spread of the virus and better prepare the health system.

Treasury said gross national debt is expected to reach 82% of GDP in the current year and, if left unchecked, would breach the 100% ceiling in 2023.

“This will signal the emergence of debt distress episodes as a vicious cycle of high borrowing rates and low growth lead to ever deeper debt spirals, lower investment and lower economic output,” it said.

“Targeting sustainable public finances is also critical for maintaining policy flexibility and sovereignty, as harsher measures will be required by lenders of last resort,” it added.

But the government has chosen a more active approach, involving structural reforms and fiscal consolidation in order to stabilise the debt at 87% in 2023, after which it is expected to steadily decline.

“With savings levels quite low, high government deficits will expose the country to higher borrowing risks, push interest rates upward and extract from growth through lower private sector investments,” said Treasury.

“In the event of a debt default or fiscal crisis, the National Treasury has estimated that this would cost the country at least R2 trillion in lost economic activity by the end of the decade.”

Spending reviews

National departments and public institutions are expected to conduct a series of spending reviews where expenditure will be analysed.

Institutions are supposed to provide a rationale for spending items, signal how spending is linked to mandates and policies, and indicate where cost reductions can be made and how this will affect service delivery.

“This analysis aims to provide a thorough understanding of baselines and a strong empirical base for clear recommendations to decision-makers,” said Treasury.

It said that due to the deteriorating economic and fiscal outlook no additional resources would be provided for the 2021 medium-term framework – and that if departments or institutions require additional funding for programmes, such funding should be sourced through reductions to other programmes “either within the department’s budget or from other departments’ budgets”.

Beyond fiscal consolidation, the 2021 medium-term budget framework also intends to “change the composition of spending towards spending that stimulates economic growth” – such as investments in infrastructure.

Key to this is a reduction in the public sector wage bill.

Treasury said the contested R160 billion provisional wage reductions announced in the February budget have already been applied to the baseline budgets of departments and institutions.

It said departments should “implement stringent compensation containment measures”, including providing employees with the option of early retirement without penalty and actively managing performance bonuses in line with relevant Department of Public Service and Administration circulars.

Compensation for overtime and progression payments should also be actively managed where possible, while new applications for costs related to early retirement will be processed through normal budgetary processes.

This article first appeared on Moneyweb and was republished with permission.

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