By Prof. Busisiwe Mavuso
Budget 3.0 is expected this week, and it is critical that this one strikes the right balance of fiscal prudence.
The growth outlook has deteriorated from February when the budget was first tabled, meaning there will be less revenue in the form of tax collection, and therefore a bigger headache on how to balance the books.
At last week’s business/government partnership meeting, held with the president, it was clear that we need to speed up reform to drive economic growth.
It is time for parliament and the government to show that we are capable of rallying around a coherent budget that maintains fiscal consolidation.
The decision by ratings agency S&P Global over the weekend to reaffirm its positive outlook for our credit rating reinforces what is at stake. S&P sees potential upside that would lead it to increase our credit rating if an improving track record of effective reforms resulted in the strengthening of economic growth and reduced government debt and contingent liabilities. On the other hand, it notes the downside risk is if ongoing economic and governance reforms do not progress, resulting in a deterioration in economic growth or a higher-than-expected fiscal deficit and interest burden.
Finance minister Enoch Godongwana is delivering the speech this week, but investors will be watching closely how politicians react to it. National Treasury has stayed the course in ensuring the budget does not worsen our debt position and I expect the budget tabled this week will maintain that. But in the absence of increased VAT, which has been abandoned from the first budget, we must see restraint on spending.
I particularly want to see an honest reckoning with how productive distinct parts of government are, particularly outside of the main service delivery lines. We have had over the last 30 years a succession of administrations, each of which has set up new public institutions and programmes. They do not all deliver value for money. Like we must in the private sector, when a budget is constrained, we must reduce spending in those areas that create the least value.
The problem facing our politicians is that it is very difficult to assess value for money in an objective way, given that there are different interest groups that will be affected. That is why our constitution protects the independence of several bodies, including the Financial and Fiscal Commission, Reserve Bank and National Treasury.
The framers of our constitutional order recognised that the financial system is technical and requires institutions that are somewhat protected from short-term political expediency. For the budget, there is a technical question that must be answered: what expenditure cuts will have the least damage on growth or service delivery? We must identify those purely on the evidence and follow through to reduce expenditure. This is a task best done by technocrats, and our National Treasury is the institution with the right capabilities to do it.
I hope that the finance minister will be able to announce credible steps to reduce expenditure, and I hope that we quickly see the political support to do so. That is what will give comfort to investors that we are a country that can politically manage its finances appropriately.
If we do that, we will maintain our trajectory of improving the confidence of lenders. Eventually, we will see a return to an investment-grade credit rating, which will reduce the cost of borrowing not only for the government but the whole economy. And with lower costs of borrowing, we will get more investment and more economic growth.
One of the challenges the budget has to contend with is that the growth outlook has deteriorated from February when it was first tabled. That means there will be less revenue in the form of tax collection, and therefore a bigger headache on how to balance the books. It also makes clear, though, how critical it is that we get our economic growth up.
This came across loud and clear at the business/government partnership meeting that we held with the president and several government ministers last week. It was abundantly clear to everyone how serious our growth outlook is.
We have now agreed to accelerate reforms by introducing several “sprint” approaches to getting things done. We have also increased the frequency of future engagements for the partnership from quarterly to every six weeks.
This shows the impressive level of determination and engagement from the president and his team. We recognised that several issues ranging from the global trade situation to local politics can distract the reform effort, but we must double down and remain focused.
No matter what happens in the international arena, our structural reforms are critical to enabling our economy. Certain reform areas, such as logistics, are lagging the initial timelines, but the meeting was clear that this must be fixed. I appreciated the urgency of fixing our country and ensuring the right policies are in place.
We also had data out last week which showed that unemployment figures continue to creep upwards. Whether it is government trying to balance the books, or workers trying to secure a job, our economy is not delivering. We must fix it, and I saw last week just how engaged and serious both government and business are about doing so.
It has given me a new sense of optimism that South Africans are grasping the challenges and ready to implement the solutions. A finalised budget that hits the right balance of fiscal prudence will be a key enabler. Our politicians have the chance to make sure that is what we get over the next few weeks.
Image: BLSA
