The minister of finance will on Wednesday table the 2024/25 budget in a challenging global and domestic environment. These challenges necessitate hard choices and trade-offs that will be complicated by the upcoming general elections.
Let’s begin with the external environment, where economic growth is slowing owing to the high interest rates imposed by governments to bring down the post-pandemic surge in inflation. Growth is also slowing because of high geopolitical uncertainty brought on by the ongoing war in Ukraine and the Israel-Hamas conflict, as well as the potential policy implications of more than 70 countries holding elections this year. The combined impact of wars and uncertain electoral outcomes diverts what could have been outbound capital destined for Africa to other destinations and enterprises.
While South Africa’s direct contribution to the global challenges of wars and elections is zero, there are two things we do that are negative for the domestic economy and invariably complicate fiscal policy choices. First, we did not build enough buffers to cushion the economy from the economic effects of the geopolitical fallout. Second, South Africa appears to be domesticating potential global geopolitical risks on the basis of foreign policy positions that appear at odds with our economic interests.
Domestic constraints on the economy include insufficient energy; substandard rail, ports and water infrastructure; inadequate safety and security; and poor educational outcomes, among other issues. What, then, should we expect from the budget speech?
Historically, the state of the nation address (Sona) described the government’s main achievements over the past year and its priorities for the coming one. Sona’s priorities for the coming year provided clues as to what the finance minister will be required to commit funding for. However, this year’s Sona read like an election campaign speech and provided very little that we can look forward to in the budget. Instead, the two aspects that featured prominently were the NHI Bill and the possibility that the social relief of distress grant could be reformed into a basic income grant (BIG). Both of these are negative policy reforms from a fiscal sustainability perspective, given the country’s low economic growth and tax revenue constraints.
His leaves another traditional option — ramping up economic reforms that can boost future growth and tax revenue collections — as a possible source of income.
Looking at the fiscal deficit going back to 1999, no obvious populist budgeting is apparent, except for the 2009 and 2019 general elections, where the fiscal deficit widened. The 2009 deficit widening was a response to the global financial crisis, which every country had to respond to, and thus the 2019 general election year was the only one in which the fiscal deficit increased in the absence of an economic shock. This, however, does not detract from the government’s general inability to ensure fiscal restraint, as seen in the budget over the long term, which is evidenced by persistently rising social spending without an accompanying permanent revenue source — leading to unsustainable debt levels.
The two difficulties for the finance minister are his inability to raise significant new taxes, owing to a shrinking tax base and low growth, and the difficulty he would face in cutting spending during an election year. This leaves another traditional option — ramping up economic reforms that can boost future growth and tax revenue collections — as a possible source of income. This, though, will not be a quick fix, and thus there will be no immediate change in fortunes.
Promising reforms without implementing them no longer means anything to investors. Only the evidence that something is being done, be it removing restrictive legislation and regulations or granting licences to private businesses to allow them to operate, will show the necessary resolve and change investors’ minds about the direction in which the economy is headed. Thus, the budget must fund growth-boosting structural reforms and not simply authorise spending whose impact on productivity is low or even negative.
The list of infrastructural reforms needed is well known: rail, roads, ports, and water, among others. None of these is constrained by technology. Railway track designs are centuries old and still in use the world over, so the government must replace the stolen ones and secure them. Filling potholes in roads is easy, so the government must do this. Water pipes all have the same design, so the government must replace the broken ones. All these initiatives require funding, and if the government is constrained it must call upon the private sector to do the job in partnership with the state — and profitably.
• Mhlanga is chief economist and head of research at Rand Merchant Bank
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