SA Medium Term Budget Policy Statement (MTBPS)
In the midst of chaos and the exchange of stun grenades between the police and protesting students within the precinct of the Parliament, Minister Nene delivered his 2015 MTBPS. While the university students were adamant that education fees should be frozen, and even be eliminated altogether, the Minister of Finance was trying to highlight the shrinking fiscal revenue base, the deteriorating economic growth prospects, and the need for effective use of limited resources.
Predictably the National Treasury downgraded growth estimates for the current year from a 2% level in the February Budget Speech to 1.5% for this year, and only 1.7% for next year. While the Minister understandably emphasized the need for raising economic growth to offer relief to the prevailing fiscal constraints, his speech left much to be desired as regards ways and means of credible steps towards lifting the mood within the investment and business sector. In fact, apart from a vague reference to “pursuing a new growth path”, the Minister offered nothing by way of policy interventions to help reduce uncertainty or boost confidence. Reading between the lines, it was evident that politically, the Minister was treading a fine and compliant line. Clearly, his influential cabinet colleagues have differing views on how to revive growth.
From a purely fiscal perspective, it was clear that politically the Minister had few, if any, degrees of freedom to deal with the key drivers of growing fiscal expenditure over the recent past. Importantly, the two key and dominant items of expenditure, namely the welfare budget and the public sector wage bill, were pre-determined and made untouchable by his colleagues. Nowadays, 16.7 million South Africans receive monthly welfare grants – this is nearly one in every three citizens. National welfare is thus highly dependent on the continuity of this budgetary item. The government wage bill, in particular, is problematic as it has raised the expenditure baseline for many years to come. Overall, government spending is set to grow at 7.2% per annum over the medium term, staying above inflation and well ahead of the expected growth in government revenue. This trend is a sure path to growing public debt and ultimate fiscal instability, unless GDP growth picks up on sustainably higher levels.
Debt sustainability was one of the focal points of the Minister’s policy speech. To this end, the National Treasury proposes a fiscal guideline to set the expenditure ceiling in the outer year of every fiscal framework. This fiscal rule of thumb will link the spending ceiling to South Africa’s long-term economic growth projections. Estimates of real long-term growth vary. Over the past 20 years, real GDP growth has averaged 3% per year. The International Monetary Fund estimates real GDP growth of 2.6% in 2020, while the Reserve Bank estimates potential output growth at 2.1% in 2017. The expenditure ceiling has been set to grow by 2.5% in real terms in 2018/19. The long-term guideline gives expression to the fiscal principles of counter-cyclicality and debt sustainability. It will ensure that spending grows at a stable rate over the business cycle. In good times, spending will grow more slowly than the economy, and in bad times, spending will outpace GDP growth. All South Africans will be able to share in the benefits of economic expansion on a sustainable basis. Over the long term, the guideline maintains spending as a stable share of national income. However, where structural improvements in revenue are apparent, through tax policy changes, improved administration or economic shifts, a corresponding increase in the spending ceiling will be considered.
The Minister’s MTBPS underscored the need for policy coordination and the imperative of Socio-Economic Impact Assessment. Uncoordinated policies and the lack of regard for policy impact analysis have been the two issues that have bedeviled the two Zuma administrations since 2009. A recent case in point has been the introduction of a new visa regulatory regime that has caused considerable damage to the country’s tourism industry and fiscal revenue base.
While the SA economy faces a series of political economy and structural issues, it remains to be seen if Minister Nene’s diplomatic and cautious approach to the problems in hand will suffice to convince his cabinet colleagues and his party’s political bosses to alter course to reduce investor uncertainty, improve policy coordination, and avoid wasteful public expenditure.
It is clear from the policy statement that there exists a serious tension between the rhetoric of fiscal consolidation, while at the same time confirming major new spending initiatives that will structurally increase expenditure baselines, such as National Health Insurance, potential nuclear energy investment, and social security, without indicating where concomitant structural increases in revenue will come from. The contents of the MTBPS may create an impression of the fiscal adjustment’s being deferred each year, with only symbolic measures being taken (like the fiscal rule), while avoiding difficult, short-term political choices instead of using up the contingency reserve to fund pay hikes. It is not certain at all whether the MTBPS measures are convincing enough to stave off a ratings downgrade, especially in light of the recent and growing student protests.
In an effort to soften the blow dealt by the downgrading of economic growth prospects in the near future, the Minister began his MTBPS speech by listing a number of positive socio-economic indicators, such as the increased proportion of households that have access to basic electricity as well as water. However, the Minister was at pains to highlight the point that if the country’s structural ills are not properly dealt with by the current administration, if growth is not revived, SA is in danger of seeing a regression in these very same indicators that serve as a beacon of hope in an otherwise gloomy economic environment.
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