ANALYSIS | Mboweni delivers a brutal budget: Minister warns SA needs deep spending cuts or risk ‘bankruptcy’
If anyone had expected that finance minister Tito Mboweni might try to gild the fiscal lily a little when he presented his emergency budget on Wednesday, that was not what happened – at least not when it came to the numbers for the current, Covid-hit year.
And he sounded a blunt and brutal warning of the perils of the debt crisis SA would probably face within the next three years – unless the government makes deep cuts to its spending. If the government did not address this, it was on a path to bankruptcy, Mboweni warned, one that could eventually see the gains of the democratic era lost.
And the nub of Wednesday’s budget is that he has gained cabinet approval, he said, for an “active scenario” in which instead of allowing the debt to balloon to sovereign debt crisis levels, the government will stabilise its debt level – by slashing R250bn from its spending over the next two years and implementing fresh tax hikes two years hence, once the economy starts to recover.
Whether markets will believe that is a question. What’s not in question though is the tough fiscal path to which the government is now committed, details of which are promised in October’s medium-term budget.
With February’s budget having had to be all but binned given the damage the Covid crisis has done to the economy, Mboweni pencilled in a 7.2% economic contraction for this year – which is more optimistic than many private sector forecasts. But his expectations for the next three years are bleak – he sees the economic recovery yielding no more than 2.9% growth next year, followed by 1.5% in each of the following two years.
And his expectations of government revenue for this year are even more bleak – he has pencilled in a R302bn shortfall compared with February’s budget target. And that, together with extra money allocated to healthcare and other parts of the Covid relief package, brings the consolidated budget deficit for the current, 2020/21 fiscal year to 15.7% – worse than many economists had expected.
The market had already been softened up a bit for a dire deficit by Mboweni’s leaked presentation to Nedlac on Friday, which indicated a 14% main budget deficit – more than double February’s 6.8%. But in his speech on Wednesday he chose to highlight the broader consolidated deficit (which includes the Unemployment Insurance Fund’s R40bn in Covid relief).
And in particular, the minister highlighted SA’s ever-deepening debt crisis and the ever-steeper costs it is imposing on the economy and the quality of life for all. The jump in the deficit means government’s debt as a ratio of gross domestic product climbs to 81.8% – compared with the 65.6% expected in February – and keeps climbing.
Slashing government spending will itself weigh on consumption and public sector investment just as the economy is recovering.
Already, Mboweni pointed out that 21c in every rand of tax collected goes to service the government debt – so that money is going to pay bondholders, rather than to fund social services or infrastructure. Already, the government is spending almost as much on the interest bill as it is on healthcare.
It can only get worse – the issue is how much worse. Wednesday’s budget outlined a “passive scenario” in which government does nothing to avert the debt crisis and the debt ratio climbs to 106% in 2023/24 and keeps climbing, to 140% within a few years. That’s the sovereign debt crisis scenario that Mboweni has been warning of. On Wednesday he drew on biblical quotes about wide vs narrow gates that SA could choose to go through. And he said: “If we remain passive, economic growth will stagnate. Our debt will spiral inexorably upwards and debt service cost will crowd out public spending on education and other policy priorities ... Eventually the gains of the democratic era would be lost.”
A sovereign debt crisis would see the country unable to pay back the interest or principal on its borrowings. “If we do not act now, we will shortly get there. The results are devastating,” said Mboweni, pointing to the way a debt crisis would skyrocket interest rates and drive up inflation across the economy, as in Argentina and Zimbabwe.
Clearly he managed to persuade the cabinet of the devastation – and the need to opt instead for the “active scenario” in which the deficit is brought down in the next couple of years and the debt stabilises at 87.4% in 2023/24.
That is going to need the “zero-based budgeting” Mboweni has spoken of, in which government departments get rid of projects and programmes that aren’t priorities or are wasteful or unworkable. It’s going to need firm commitment on the part of the government that it hasn’t shown until now – which is why many may be sceptical about its ability to do so.
Only way out
But it’s going to be tough medicine not just for government but for the economy – slashing government spending will itself weigh on consumption and public sector investment just as the economy is recovering. So too will the R40bn of tax hikes which Mboweni has pencilled in for two years’ time, though there will be no tax hikes now.
But SA has little space to do much else. The only real way out of the fiscal disaster is to embark on the structural reforms the government has long promised. Crucially, too, it will have to make sure to make it attractive for the private sector to do the infrastructure spending which this week’s Sustainable Infrastructure Symposium showcased.
Meanwhile, Mboweni made it clear that Wednesday’s budget was simply a “bridge” to October’s more detailed medium-term budget. And he clearly didn’t give into pressure to dish out goodies to the likes of SA Airways or other state-owned enterprises with the begging bowl out. The exception was the Land Bank, which was recapitalised to the tune of R3bn, in an effort to ensure it can continue to support SA’s food security.
And on the spending side, there was some detail on the R145bn of direct government spending that is part of the R500bn Covid relief package announced by President Cyril Ramaphosa in April. Mboweni has found about R100bn of “reprioritisation” to fund the package, more than R20bn of which goes to Covid-related healthcare.
And though the higher debt will mean the government has to borrow an extra R300bn or so on the market this year, about $7bn (almost R100bn) of that is likely to be in the bag from international financial institutions, most notably the International Monetary Fund, with whom the government has been in “tough” discussions, Mboweni said.