It is difficult to remember a time when economists and commentators were so off the mark when making forecasts about what a Finance Minister would announce in his Budget as they were regarding Finance Minister Tito Mboweni’s February 26 address. The discrepancy between those predictions and reality was almost as glaring as the diverging lines on the graph published in Chapter One of the Budget Review 2020, depicting South Africa’s updated gross debt:gross domestic product outlook relative to the far more benign forecast contained in the 2019 Budget.
There are arguably only two plausible explanations for the gap, which arose despite Mboweni providing a strong signal in his Medium-Term Budget Policy Statement, in October, as to the stance he was likely to adopt.
The one is that relationships between senior officials at the National Treasury and the mostly private-sector economists who provided the commentary are not as close as they once were when there were far fewer pundits and it was possible for the National Treasury to keep most of them well informed.
The second is that the political risks associated with the decision to reduce expenditure rather than raise tax rates were assumed to be far too great for Mboweni, President Cyril Ramaphosa and the rest of Cabinet to bear – more so because taking an aggressive posture on the wage bill was not likely to be enough to stave off a downgrade by Moody’s, owing to the fact that the 2020 Budget also incorporates a blow-out in the fiscal deficit to a peak of 6.8% and does not foresee a stabilisation in debt even by 2022/23.
In reality, both explanations are probably partially true, but it’s the second one that will occupy the attention of South Africans in the months ahead. While a hike in the value-added-tax rate would have been unpopular, it would have been a damn sight easier to implement than the proposed net reduction in expenditure of R156-billion over the coming three years relative to the baseline outlined in the 2019 Budget.
Already there are signs that the public-sector unions will fight tooth and nail to prevent government from implementing wage-bill cuts of R160-billion, which make up the lion’s share of the overall forecast reductions of R261-billion to 2022/23, offset by new allocations of R111.1-billion.
To make this politically palatable, Mboweni should heed the advice of Michael Sachs, who is currently an adjunct professor of public economics at the University of the Witwatersrand, but who previously served as deputy director-general in the National Treasury’s Budget Office. In a recent presentation, Sachs called for a “real set of compromises”, which would spread the burden of South Africa’s current fiscal crisis across constituencies. Such a compromise would couple a public-sector compact on wages with a private-sector compact, where firm commitments are made to mobilise resources in support of the adjustment.
Indeed, unless there is a feeling that this burden is being shared, the implementation risks associated with the 2020 Budget may well become insurmountable.