Wednesday, January 26

South Africa faces a chronic fiscal crisis that is slowly getting worse

The South African National Treasury has done an excellent job in 2021 Medium Term Budgetary Policy Statement balancing the fiscal and political pressures imposed by economic stagnation and the incoherence of government policy. Capital markets cheered For two reasons. First, the revenue figures were substantially better than those presented in the February 2021 budget. This created a potential fiscal space of approximately R132 billion in the current year, and R64 and R59 billion in the next two years, respectively. .

Second, Finance Minister Enoch Godongwana resisted political pressure for substantial commitments for permanent spending increases. Around R60 billion (or 1% of GDP) was added to the spending ceiling in 2021 and R30 billion in each of the next two years, less than half the value of the revenue improvement. The Treasury was also mistaken for being cautious when projecting economic growth and fiscal buoyancy, which leaves a substantial margin for higher revenues and a smaller deficit. Fiscal buoyancy it is a measure of the relationship between total tax revenue collection and economic growth.

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The spending increase is dominated by three headings: salary increases for civil servants, the extension of the social distress relief grant, and the President Cyril Ramaphosa grant. public works program. While the Treasury presented each of these as temporary, in all probability amount to permanent increases in spending. Instead of acknowledging this reality in advance, the fiscal framework builds large pools of unallocated funds.

By withholding some of the increased spending in reserve, the Treasury deftly provided space for political leadership to make decisions and face real rewards while clarifying the Treasury’s own view of the fiscal constraints within which this debate should take place. .

Cabinet caught in the headlights

An improved fiscal outlook that adapts to spending pressures is encouraging, but there are two caveats. First, the chronic situation of the country’s public finances continues to deteriorate. This can be seen in various metrics. Growth remains well below interest rates and GDP per capita is expected to remain stagnant. Debt service costs they are displacing social spending.

The money owed by provincial governments to providers (mainly for essential medical products) is increasing at a rapid rate. Most of the municipalities are in financial difficulties, with uncollected revenue reaching R232 billion. The local government’s fiscal crisis fuels the bankruptcy of public services, and the latter show no signs of abating.

As long as the Cabinet seems caught in the headlights, unable to offer a program to overcome the serious operational and financial crises in the provision of municipal services, electricity, water, construction of roads and passenger rail, statements that “There will be no rescues” are applying. The continued destruction of value must be reflected somewhere on the national balance sheet, even if it is not recognized in the budget.

Second, the Treasury’s strategy to overcome this chronic fiscal crisis is based on highly uncertain political and economic foundations. The proposed strategy has a profound impact on public spending executed during the next two years, from 2022 to 2023. In real terms, basic spending will contract by 4% each year. This equates to a reduction in real per capita spending of more than 10%.

The 2021 medium-term budget policy statement tells us that after this short and abrupt shock in government consumption, the period of fiscal consolidation will end. Once a primary surplus is reached, the national debt will stabilize and spending increases will resume on a prudent path.

Credibility of the fiscal framework

This strategy depends on a large reduction in real income of public servants and fall in public employment. But the plan to keep salary increases low this year has not worked. Public servants negotiated an effective average salary increase of more than 5%. This is in line with inflation. Additionally, the number of employees has increased during the COVID-19 crisis, especially in the healthcare sector.

The idea Accepting the 1.5% budgeted salary increases in 2022 and 2023 by public servants may be a good negotiating tactic, but it undermines the credibility of the fiscal framework.

This year, South Africa is recovering from the impact of COVID-19 and its economy is fueled by a commodity boom. Public spending has also grown, albeit at a very low rate, providing some support to aggregate demand. In the next two years, by contrast, the Treasury is proposing a big negative fiscal boost. In his forecast, a recovery in investment and sustained household demand will offset this fiscal contraction, which will translate into an expansion of domestic spending.

But if these countervailing forces disappoint, the proposed fiscal shock may be pro-cyclical, slowing growth and increasing unemployment. This would be the case if, for example, the recovery in capital formation fails or world events (such as the slowdown in China and the tightening of global monetary policy) turn out to be more adverse than is currently assumed.

It is true that a debt crisis and associated high interest rates slow South Africa’s growth and point to the need for fiscal consolidation. But it is also true that a large and sustained consolidation, which is reducing public deficits and the accumulation of debt, will impede recovery.

The consolidation proposed in the medium-term budget policy statement will also have problematic consequences for the supply side and long-term growth. These depend on the effective provision of basic education, criminal justice, and medical care. The deeper and more intense the spending contraction, the more it will permanently mark these services. Public service reform is much needed to improve value for money, and it can well be argued that higher spending will not lead to better social outcomes if the public service remains inefficient. But this says nothing about the impact of spending cuts.

The last ten years of corroded spending cuts show that those with organized interests in income distribution across the budget (public sector unions, business interests, and the political class) are quite capable of defending their share of the pie and passing the real costs of spending restriction on to they are voiceless or disorganized. The temptation to engage in false economies, temporary measures, and unsustainable spending cuts will be enormous over the next two years.

In theory, we could plan for a consolidation that is “growth friendly” for the economy and limits the permanent damage of austerity on public services. But neither the Treasury nor any other component of the government has suggested such a program. Therefore, it would probably be prudent to assume that it does not exist. The budgetary instrument used by the Treasury is forceful, the capacity of public administrators to handle the coup is weaker than ever, and the unintended consequences will be widespread and debilitating.

The Finance Minister proposes a decisive course correction in the fiscal accounts, followed by a firm path of prudence in spending. In the context South Africa faces, it makes sense for the Treasury to move forward on this clean and brilliant solution. It will help negotiate the difficult decisions facing the government in the next two years. These options include issues on which President Ramaphosa continues to hedge his bets for obvious political reasons: the public sector wage deal, the permanent extension of basic income support for working-age adults, and the resolution of the operational and financial crisis. of public services. .

The outcome is likely to lie somewhere between the Treasury’s bargaining position and the imperatives that will define policy options. These options will emerge as various factions fight for supremacy in the 2022 ANC elective conference and the 2024 general elections. The most likely prospect remains a continuation of the current path of economic stagnation and a slow worsening of the fiscal crisis. chronicle of South Africa.

A version of this article, MTBPS clears some fiscal space, but it’s still a path through a swamp, was first published by Icon3x3.

Michael sachs, Assistant professor, University of the Witwatersrand

This article is republished from The conversation under a Creative Commons license. Read the Original article.

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