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The MTBPS clears some fiscal space but it is still a path through a swamp

- Michael Sachs

Treasury did the best it could in this month’s Medium Term Budget Policy Statement. Half the revenue windfall was used for fiscal consolidation and the other half on spending increases. But real cuts to expenditure are still pending, and cabinet backing is yet to be negotiated. Achieving consolidation next year will be even harder as the commodity boom wanes and election politics wax.

In the 2021 MTBPS, Treasury did an excellent job of balancing the fiscal and political pressures forced on it by the incoherence of government policy. Capital markets cheered for two reasons. First the revenue numbers were substantially better than those presented in the February budget. This created potential fiscal space of about 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 to permanent increases in spending. About R60 billion (or 1% of GDP) was added to the spending ceiling in in 2021 and R30 billion over each of the next two years, less than half the value of the revenue improvement. Treasury also erred on the side of caution in projecting economic growth and tax buoyancy, which leaves substantial room for higher revenue and a lower deficit.

The increased spending path is dominated by three items: wage increases for public servants, the extension of the social relief of distress grant, and the President’s public works programme. While Treasury presented each of these as temporary, in all likelihood they amount to permanent increases in spending. Instead of conceding this reality in advance, the fiscal framework builds in large buffers of unallocated funds. By holding back part of the spending increase in reserve, Treasury deftly provided space for the political leadership to make choices and confront real trade-offs while simultaneously clarifying Treasury’s own view of the fiscal constraints within which this debate should take place.

An improved fiscal outlook that accommodates spending pressures is encouraging but there are two caveats. First, the chronic position of the country’s public finances continues to worsen. This can be seen in several metrics. Growth remains far below interest rates and GDP per capita is expected to continue stagnating. Debt service costs are crowding out social spending. Money owed by provincial governments to suppliers (largely for essential medical goods) is rising at a rapid rate. Most municipalities are in financial distress, with uncollected revenues reaching R232 billion.

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This article was first published in Econ3x3