Mini-budget not bold enough
23 October 2015
Posted by: Author: Claire Bisseker
Author: Claire Bisseker (Financial Mail)
The mini-budget is an attempt by national treasury to maintain fiscal discipline despite the growth slowdown, an outsize public sector wage settlement and a R35bn shortfall in tax revenue.
But it may not go far enough to appease the credit rating agencies. It certainly wasn’t enough to appease thousands of chanting students who stormed the parliamentary precinct demanding a fee standstill.
Against the backdrop of screams and the percussion of stun grenades, finance minister Nhlanhla Nene stuck doggedly to his speech in which just one paragraph addressed the situation in higher education.
The medium-term expenditure framework holds the line by sticking to the existing expenditure ceiling. But it falls short of the austerity budget that several economists were calling for.
It does not propose further belt tightening in the form of higher taxes and/or outright spending cuts in anticipation of a lengthy period of low, stagnant growth.
Treasury's GDP forecasts have been slashed to 1,5% in 2015 and 1,7% next year but at 2,6% in 2017 and 2,8% in 2018 still remain above those of the SA Reserve Bank, the International Monetary Fund and the national consensus.
Economists have questioned the wisdom of treasury repeatedly building an automatic growth upswing into its budgets. Treasury’s growth forecasts have had to be revised down for the past five years in a row.
Despite the strong likelihood that growth will again disappoint, consolidated government spending is set to grow by 1,6% after inflation over the next three years. Though it’s a steep slowdown from previous years, real expenditure growth remains positive.
"It it realistic for the minister to announce no real increases or a real decrease in funding to universities?” asked the head of the budget office Michael Sachs in a technical briefing with the Financial Mail. "I think it’s better to have debt stability over time and I think the rating agencies will agree.”
But it means the consolidated fiscal deficit will fall more slowly than national treasury’s previous forecast.
It is now projected to come in at 3,3% of GDP next year (against 2,6% budgeted for) and to reach 3% only in 2018/2019, assuming real GDP growth rebounds to 2,8% in that year.
This means gross debt stabilises a year or two later and at a higher level than budgeted for, just inside 50% of GDP.
National Treasury acknowledges this "fiscal slippage” in the medium-term budget policy statement, but says what really matters is that debt remains on a stabilising path and its commitment to the spending ceiling, resolute.
"I do not expect a [sovereign credit] downgrade,” Nene told journalists during a mini-budget briefing, "As we’re in a position of stabilising our debt and as we continue to stay the course in terms of fiscal consolidation, there’ll be no reason for one.”
The spending ceiling has not only been maintained over the next three years, he says, but strengthened through the introduction of a new fiscal guideline.
It requires that spending remain stable as a share of GDP over the medium term unless financed by a permanent increase in revenue.
This will prevent politicians going on a spending spree should the economy improve, say budget officials. It also means that in an environment of low growth, new policies will have to be funded by new taxes.
This was a central message in Nene’s speech to parliament. "Without economic growth, revenue will not increase. Without revenue growth, expenditure cannot increase,” he said, repeating this refrain four times.
Budget officials stressed that while additional taxes will be needed to fund government’s ambitious policy agenda, "they will be approached with caution, given weak economic conditions”.
No decision has been made on whether to raise the Vat rate from 14%, Nene says, but it remains an option.
"The door has always been open on Vat and is open for any other tax measures,” he told journalists. "If further steps are needed to protect the public finances, we will take them. We are staying the course.”
This article first appeared on financialmail.co.za.