This week’s budget speech should provide for surprisingly better headlines about the short-term state of the fiscus compared to previous expectations as higher growth from the bullish commodity markets boosts state coffers, making it unlikely that finance minister Tito Mboweni will have to increase taxes.
But despite the better headline numbers as investors talk about the possibility of a return of the super commodity cycle, the hippo’s mouth is still wide open, even if slightly less than expected — and will remain so. We need to address the widening trajectory between revenue and expenditure. Structural economic reform to drive higher levels of growth is the only sustainable long-term solution.
While the boon in commodity markets is a welcome short-term relief for our strained fiscus, we cannot rely on it to lift us out of our economic malaise. It is only through structural economic and fiscal reform that we can ensure a sustainable turnaround in our fortunes. The improved terms of trade from the commodities boon, driven by a supply deficit and increased Asian demand, should be treated largely as a one-off.
The quality and composition of government expenditure is poor and we have yet to make a breakthrough in the impasse over the public sector wage bill, though the government is standing firm that the wage agreements of years past are not sustainable.
The expenditure on some of our state-owned enterprises (SOEs) is still a weight on the fiscus against a backdrop of slow economic growth. While we saw a healthy recovery in the third quarter of last year, the second wave in the pandemic and stricter lockdown measures watered it down as tourism revenues plummeted. With the rollout of vaccines in its nascent stage, a third wave in mid-2021 is all but a certainty.
There is still much to do to stabilise the country’s finances almost a year after our credit ratings fell into junk status, something that is often lost in the necessary focus on the health and economic devastation that this pandemic has caused.
To ensure that we deliver on President Cyril Ramaphosa’s widely endorsed Economic Reconstruction and Recovery Plan, we are going to need the state to spend, but only in key areas that generate sustainable economic growth. And it needs to cut expenditure elsewhere. The overall objective is to foster an environment of higher growth mainly through the infrastructure programme that will stir activity in the private sector.
While we call for greater focus on growth initiatives, we urge fiscal prudence with a focus on reducing the sovereign risk of our state-owned enterprises such as Eskom, SAA and Land Bank. We need fiscal certainty and a strong Treasury to lay the foundation for an improved business environment.
Over the years, the battle lines have been pitched in a manner that suggests that as a business community our ultimate goal is for a smaller state through less spending. Given the scale of the state spend in the SA economy and the decades-old infrastructure backlog, that could not be further from the truth. What we have lamented is the quality, efficiency and effectiveness of government expenditure.
We need to direct spending towards areas where we need positive outcomes and which will boost productivity and growth, such as infrastructure, quality education and skills development. Health also needs to be a priority: the pandemic has exposed inequality in many facets in our society but particularly in health care, where greater spending will be needed over the years to shield us against any future pandemics. Growth-enhancing expenditure is achievable on a sustainable basis only if we finally reign in wasteful expenditure and cut unnecessary SOE spending.
Given our narrow tax base, the idea that taxes should simply be increased to fund deficits would only further weaken business and consumer confidence, which have been measured at lows last seen in the mid-1980s, according to the SA Chamber of Commerce and Industry. A better proposition is for business to pay more tax through higher profits in a reforming and faster growing economy. You simply cannot slap higher taxes on low profits and expect to generate more tax revenue.
Rising commodity prices combined with a stronger currency, as well as recovering global markets with improved sentiment towards emerging markets, have somewhat eased short-term pressure on our national budget, but our overall trajectory on debt-to-GDP levels (or the hippo’s jaws) remains unsustainable.
This short-term benefit should not change the state’s resolve: our underlying risks remain and these can be overcome only by a commitment to structural economic and fiscal reform.
This column was written by Busi Mavuso and was first published in Business Day.