Tito Mboweni’s first Medium Term Budget Policy Statement (MTBPS) on October 24 is a critical opportunity for the new finance minister, who gained much respect in his previous role as governor of the Reserve Bank, to instil confidence and provide South Africa with some desperately-needed policy certainty.
Budgeting, like all other financial planning, requires an honest evaluation of the current situation before targets and a plan of action for reaching them can be defined.
The first question to ask is: Where are we now?
Then: Where do we need to be.
And finally: How will we get there?
In terms of outlining the context and setting out clear steps forward, it won’t be much of a stretch for Mboweni to improve on Malusi Gigaba’s 2017 statement.
In October of last year Gigaba, the last finance minister but one, said: “The most urgent task before our nation is to ignite inclusive, job-creating economic growth. [Yet] government remains committed to a path of fiscal consolidation. We will take steps to narrow the primary budget deficit and stabilise gross public debt while protecting social spending and investments supporting economic expansion.”
Gigaba’s 2017 MTBPS answered the first two questions. It highlighted the current precarious situation relating to revenue under-collection and a resultant increase in the forecast budget deficit to 4.3% of GDP. It also described where we needed to be, as outlined in his statement above. However, it lacked any substance as to how that goal would be achieved.
After falling into a technical recession in the first two quarters of 2018, it is expected that National Treasury will revise its 2018/19 GDP forecasts downwards. Lower GDP has the potential to translate into lower revenues for Government through lower tax collections. This means that there is less of the pot to go around and finance government spending. This is the current situation.
Ultimately, government needs to create an environment that is conducive to creating jobs and enabling economic growth, whilst reducing the budget deficit and stabilising the debt-to-GDP levels. This is where we, as a country, need to be.
If revenue expectations are revised lower, for government maintain spending levels, National Treasury would have to borrow more money. And with any form of borrowing, while it will plug the hole today, it will increase the future interest expense that the government, and ultimately South African taxpayers, will have to foot. To ensure a stable fiscal outlook and avoid ballooning debt, spending would need to be reined in. This is something that the ratings agencies monitor closely.
In the context of lower growth and potentially lower revenues, all eyes will be on Mboweni to see if he can manage to balance the budget – especially given the recent announcement of the Economic Stimulus Recovery Plan by President Ramaphosa. In announcing the stimulus plan, Ramaphosa committed to ensuring that the plan was budget neutral – this means reprioritisation of spending, rather than additional spending.
National Treasury will need to find R50 billion from elsewhere in the Budget to finance these growth initiatives. By continuing to underwrite state-owned enterprises, the government’s ability to finance growth initiatives and social grants is constrained. Reprioritising spending from “nice-to-haves”, such as SAA, to necessities would be welcomed.
These growth initiatives, combined, with actual details of government policy to address the structural challenges that are constraining economic growth, will be important to instil confidence in the South African Government’s ability to create inclusive economic growth whilst stabilising the debt-to-GDP ratio over the medium-term. These details will answer the question: How will we get there? It is only clarity of policy and the action of implementing these policies that will allow South Africa to realise its potential.
Much like retirement planning for individuals, successful budgeting at a national level requires an honest interrogation of a few basic questions:
Where are we now?
Where do we need to be?
What are the steps that will allow us to get there?
The first two questions, as shown by Gigaba’s statement are easy to establish, but what is really difficult is implementing a plan to achieve our goal, as it would often entail difficult decisions, such as prioritising what we are spending our money on and how much credit we use to finance our spending.
Only through the implementation of a clear plan that reduces our level of borrowing and prioritises our spending away from “nice-to-haves” towards necessities, will the majority of South Africans’ individual goals be achieved.
Let us hope that Minister Mboweni is prepared and able to provide clarity on the way forward to ignite the South African economy for the benefit of all South Africans.
*Chris Eddy heads up 10X’s investment team. Prior to joining 10X, Chris gained experience in global asset allocation working for a family office. He as a Masters in Investment Management from UCT and is a Chartered Financial Analyst (CFA).
