It is widely anticipated that the 2023 medium-term budget policy statement (MTBPS) will largely centre around continued austerity measures and talk of fiscal consolidation – it is apparent that we are halfway through South Africa’s financial year, and we’re missing budgetary targets set in February.
The distinction between party and state is a precarious one; and of significant importance at this time when it will take extraordinary, pragmatic effort to grow the economy during an electioneering period. While Finance Minister Enoch Godongwana would do well to apply a stitch in time, we also foresee some shoe shining at Luthuli House, as there is a fine line to be walked in the coming days and months.
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Read: MTBPS: ‘Opportunity to build confidence on several fronts’
While South Africa finds itself in a rapidly declining fiscal position, we are of the view that this may be compounded by the fact that we are in the midst of an election year, where unpopular, austere economic policy decision is not the ruling party’s modus operandi for vote winning.
Minister Godongwana appears content to be the most loathed suit in the room, as he embarks on his task of consolidating the fiscus and reigning in public spending.
Or perhaps he understands the fiscal multiplier – for every R1 spent, our government generates 15.5 cents in economic output.
The expected 1.6% wage growth applied to the February budget has far been surpassed when negotiations were concluded in April and a 7.5% increase in the baseline compensation together with the R20 billion cash gratuity will result in a R37 billion slippage on February’s numbers.
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Small perhaps, in the context of a R2 trillion budget, but the jaws are tightening as revenue collection comes under pressure.
SA Revenue Service (Sars) Commissioner Edward Kieswetter received his accolades for the R123 billion net increase in revenue collections earlier this year, and despite his efforts with increased compliance “enforcement” to reduce the tax gap this year, and personal tax collections showing an 8% increase to date, we heed the warnings that company tax revenues are 15% below last year’s run rate.
It is a grim reality that approximately 770 companies contribute to about two-thirds of all income tax revenue in South Africa, and that each employed individual indirectly supports two people who rely on social grants.
The centre cannot hold. Seven-and-a-half million people received the R350 social relief of distress grant in 2022, as South Africa’s unemployment rate reached 32.9% in the first quarter of the year. According to Statistics South Africa, 15% of the population experiences inadequate access to food, whilst 6% of the population (roughly 1.1 million people), experiences severely inadequate access to food.
Lately, there have been troubling accounts of femicide in parts of the country such as the Eastern Cape, attributed to severe hunger being felt by the population.
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Economists typically react with concern when they see finance ministers and central bank governors at odds with one another, as disparity between monetary and fiscal policy lead to diminished policy effectiveness, but the current situation does not involve such discord.
Whilst minister Godongwana is cognisant of the fact that continued austerity has eroded the quality of public services, his hand has been forced to continue along the path of fiscal discipline, due to a lack of economic growth.
During the last decade, the state has proved itself incapable of growing the economy anywhere near the 5% targeted in the National Development Plan (NDP).
This lack of economic growth and a higher interest rate environment may necessitate a belt and suspenders approach, as the finance minister aligns his fiscal policy with South African Reserve Bank (Sarb) Governor Lesetja Kganyago’s tight monetary policy, to narrow the gaping fiscal deficit.
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10 years later: Has the NDP disappointed?
South Africa’s government debt to nominal GDP ratio reached an all-time high of 72.7% in June of this year, almost double the ratio in 2012 when the NDP was adopted by the ruling party. Eleven years later, the country has little to show for the heavy burden of debt that government has accrued.
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At the recent ANC National Executive Commitee (NEC) conference, President Cyril Ramaphosa remarked: “Fiscal discipline is not the same as imposing austerity measures that will undermine our development agenda”.
The ruling party is cognisant of South Africa’s yearning for economic expansion and progress. Regrettably, the minister does not have the flexibility to implement demand-side stimulus measures like increased public spending or above inflation public wage increases; as is preferred by the public service sector, the Congress of South African Trade Unions (Cosatu), South African Communist Party (SACP), and the ruling party in an election year.
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The minister openly rebuffed members of Cosatu on October 7th when they marched to the National Treasury to present a memorandum of demands critical of Godongwana’s austerity policies. While Cosatu appeared perturbed by what they perceived as disrespect, their threats of boycotting elections are losing impact, as they recognise that their fate is increasingly becoming intertwined with the ANC’s political survival.
The ruling party would do well to pay attention to political analyst, Frans Cronje, who highlights the fact that the ANC achieved its most favourable election results during its more centrist, pragmatic and fiscally disciplined periods.
The fiscally conservative approach of both Nelson Mandela and Thabo Mbeki’s governments were heavily criticised by leftists in the tripartite alliance, and both heads of state were accused of “betraying the revolutionary agenda”.
The policy of financing social development through growth and not through borrowing resulted in government debt to GDP being cut in half between 1995 and 2008. During its first three terms in government, the ANC rolled out the largest social welfare program in the developing world and succeeded in lifting millions of people out of poverty. It was also during this period that Trevor Manuel realised a budget surplus.
Despite these early successes, which in our opinion, the ANC does not get enough credit for, South Africa’s GDP per capita has stagnated over the last decade.
Whilst Mbeki’s administration reaped the benefits of the commodity supercycle starting in 1999 and lasting through the entirety of his two terms in the Union Building, the current version of the ANC is unable to maintain the railway infrastructure that transports our export-bound commodities to our three largest ports, all of which rank among the worst in the world according to a report released by the World Bank.
Critics of austerity argue that austerity is pro-cyclical in nature, and that it may lead to less economic growth, and higher levels of inequality.
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In a paper published by Guilherme Klein Martins of the University of Massachusetts Amherst, it was found that contractionary fiscal shocks of more than 1.5% of GDP generate a negative effect on GDP of more than 3%. As we approach a fiscal cliff, it is crucial for the minister to be mindful of the speed at which fiscal discipline is implemented, so as not to disrupt our already fragile economic growth.
In addition to considering the socioeconomic consequences of austerity measures, minister Godongwana will be keenly mindful of the rising borrowing costs that may accompany the deterioration of the county’s fiscal position.
The medium-term expenditure framework released by National Treasury indicates that more money will be spent on debt servicing costs in the coming three years, than on any other policy function. Additionally, the Sarb has noted in its Financial Stability Review that it is becoming increasingly concerned about the country’s financial stability as local investors continue absorbing new issues of South African Government Bonds, as there has been declining appetite by non-residents.
Although fiscal discipline may be a drag on development, a credible budget relies on a capable state. Whilst minister Godongwana will attempt to apply a stitch in time, the threads are destined to unravel without a clear and credible growth path.
- Kyle Coertze is an investment analyst at Cartesian Capital.
