The medium-term budget policy statement (MTBPS) tabled on Thursday had no surprises, after all. Finance minister Enoch Godongwana remarked that the only difference between him and former finance minister Tito Mboweni was that he had better shoes. Indeed, Godongwana has R120bn more revenue than Mboweni’s February budget, thanks to a cyclical commodity recovery and higher global economic growth and demand.
The bond markets are happy as the rand appreciated and 10-year bond yields declined. The unions, proponents of a big state and socialists are livid over three consecutive years of cuts in government spending. The big picture is that the budget was pragmatic and realistic.
There is always some nervousness when a new finance minister is appointed because of a risk of a radical change in policy, and Godongwana was no exception. When he was appointed, many well-informed people raised questions and failed to look at the facts of his track record, particularly over the past five years.
Godongwana is the longest economic policy intern to become finance minister, given his role as head of the economic transformation committee of the ruling party for more than a decade. His maiden policy statement has several aspects that demonstrate that public finances are in steady hands, backed by a competent and dynamic team of bureaucrats at the National Treasury.
Here are the main points from this week’s MTBPS:
The macroeconomic projections are largely in line with market expectations, with economic growth forecast for 2021 at 5.1%. This is much higher than the 2.9% expected at the time of the budget in February, thanks to stronger global growth and demand, and higher export commodity prices that boosted the domestic mining sector’s profitability and the overall economic performance.
This robust growth might have prompted politicians to push for more social spending, with support from unusual bankers for the introduction of the universal basic income grant and the possible extension of the R350 a month Covid social relief of distress grant. Godongwana convinced the government to delay making those decisions to the February 2022 budget, a good outcome in my view.
Beyond 2021, economic performance returns to its low-growth trap of the pre-pandemic years, forecast to average 1.7% between 2022 and 2024, much lower than the International Monetary Fund’s (IMF’s) forecast for emerging markets and developing economies of 4.9%. After all, few structural economic reforms have been implemented to expect any improvement in growth trends relative to pre-Covid growth, when the economy was in a technical recession.
One question that arises from this low growth is whether the Treasury believes in the government’s economic reforms. There are two aspects to this view.
Announcement of policies is usually not followed by quick implementation
The first is that the government’s track record to implement its policies is poor. Announcement of policies is usually not followed by quick implementation. If there is implementation, it is often done inefficiently.
The second point is that it is unwise to project higher growth based on yet to be implemented reforms, especially given the government’s poor track record. Therefore, the low medium-term growth forecast is realistic based on the current policy mix.
If reforms in the water sector, telecommunications, the rail system and the visa regime are implemented in 2022, as this week's MTBPS commits, business confidence and investment will likely improve and boost growth rates to higher levels. That will create more room for the fiscus to support the economy to create jobs.
One of the reasons the market liked this budget is that the right restructuring of spending is visible, with government spending contracting and investment accelerating over the medium term.
A look at the expenditure components shows three aspects of the growth drivers over the medium term.
First, household consumption expenditure recovers in 2021 to 5.7% before moderating to 2% over the medium term.
Second, general government spending contracts for three consecutive years after real growth in recent years, by 1.4%, 2.9% and 0.1% in 2022, 2023 and 2024, which affirms that the government is sticking to its fiscal consolidation framework as tabled in the 2021 budget in February.
Third, a change in the fixed investment trend is projected. After several years of contraction, the growth in gross fixed capital formation is expected to accelerate by 3.1%, 3.4% and 3.5% in 2022, 2023 and 2024.
On the public sector side, part of the investment goes to economic development, which includes economic regulation and infrastructure that is projected to grow by an annual nominal average of 9.7% between 2021⁄2022 and 2024⁄2025. This is in line with restructuring government spending away from current spending towards investment. The unions should be happy about this because ultimately this is where jobs and new members for them will come from, rather than from a ballooning social wage.
The consequence of robust growth this year is that tax revenue will be better than the February budget by R120bn. A significant part of that has been used to cover the R20bn unplanned spending on public sector wages and R33bn social relief after the July unrest and the third wave of Covid.
We can only imagine how much better the fiscus would have been without the July riots. Those funds, along with the insurance and reconstruction costs, could have been used for other productive spending.
We can only imagine how much better the fiscus would have been without the July riots.
The debt ratio stabilises at 78% of GDP in 2024⁄2025, which demonstrate that the consolidation path is longer than ideal. Debt service costs continue to grow, from R269bn in 2021⁄2022 to R366bn in 2024⁄2025, larger than the health and police budgets. As a percentage of GDP, that equates to moving from 4.4% to 5.1%. This means that more still needs to be done to reduce the interest costs that crowd out necessary public spending. The options on the menu are still too luxurious and need to be brought within what is affordable; that will require hard trade-offs.
Apart from the numbers in the budget, there are two other aspects worth noting. First is that the decision to extend the R350 Covid grant has been pushed to the 2022 budget. So has the decision on the universal basic income grant. The government made it clear that the decision to implement any of these two will depend on the improvement of the tax revenues and the fiscus in general. This conditionality is an important strategy. After all, we can’t spend what we don’t have.
Second is the timelines provided for the implementation of several economic reforms. The visa regime for tourism and skilled immigrants, private sector players on Transnet’s railway lines, the release of telecom spectrum and single-use water licensing are all scheduled for implementation in 2022.
These reforms are where the growth story resides and they will provide a yardstick for measuring the government’s implementation. If the government fails to meet its own timelines, its credibility — the little it has, anyway — will be significantly reduced. The consolidation project and turning around the economy and job creation will once again suffer.
The government must make hard trade-offs and implement its reforms and show evidence of doing so, and persuade the private sector to come to the party.
• Mhlanga is chief economist at Alexander Forbes and a fellow of Economic Research Southern Africa (ERSA)
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