The 2009 MTBPS: Managing a fiscal calamity

The 2009 MTBPS: Managing a fiscal calamity

The Medium-term Budget Policy Statement released yesterday is probably as good as one could expect under the circumstances.

It faces the realities posed by the economic recession and the expectation of a subdued recovery in economic activity over the next three years, it avoids promising more than what is achievable, it maintains a commitment to fiscal discipline, it confirms stewardship of macroeconomic policy making while avoiding being dogmatic and acknowledging the need to engage with the critics of current policies, and it rightly points out the need for the public sector to get to grips with the constraints imposed by the fiscal calamity of 2009 (the consequences of which will continue to be felt beyond the end of the stated three-year budget term.)

But one cannot help but to detect some expressions of frustration in the statement, with the repeated comments about the enduring consequences of the recent above-budget salary and wage increases standing out. The budgeted growth of 6,6% p.a. from 2009/10 to 2012/13 in the compensation of government employees will hardly be achievable without a reduction in the size of the civil service.

The extent to which the achievement of the budgetary goals as set out in the MTBPS is beyond the control of the National Treasury also serves to demonstrate the limits of its powers. Making this budget a reality and staying the course over the next couple of years will require a collective effort from Government as a whole.

The revised estimates for 2009/10 are as expected, with the budget deficit increasing to 7,6% of GDP. However, the pace at which the deficit is projected to decline over the next three years is disappointingly slow, with the primary balance remaining in deficit, although it is projected to decline from 5,2% of GDP in 2009/10 to 1% in 2012/13. The result is a sustained increase in the debt-GDP ratio to 41% in 2012/13. If the contingent liabilities deriving from government guarantees to e.g. Eskom are taken into account, this will take the total burden precariously close to the informal limit of 50% set by the National Treasury.

But perhaps the saving grace for the MTBPS lies in its rather conservative macroeconomic projections, with its forecast for GDP growth being substantially below consensus (the MTBPS, for example, forecasts growth of 1,5% for 2010, compared with the consensus of 2,5%). The MTBPS’s forecast for final consumption expenditure by households appears to be particularly conservative, with much emphasis on the debt overhang without any reference to an expected improvement in disposable incomes. If growth is to be higher than assumed, tax revenue will recover more rapidly, resulting in the budget deficit, debt ratio and the cost of servicing the debt improving more rapidly than currently expected.

With government expenditure rising to 35% of GDP in the current fiscal year and remaining high in future years, the risk of increased taxes down the line cannot be ignored. Although the MTBPS states that a broadening of the tax base and improved tax compliance will go some way to addressing the need, it nevertheless refers to possible new taxes and, as further evidence of the frustration referred to above, the inevitability of an increased tax burden if the rate of increase in the public sector wage bill does not slow down.

The MTBPS was accompanied by a number of welcome statements on macroeconomic policy in general. The Minister removed any doubt that he and his department are in charge of macroeconomic policy, inter alia with his statement that he does not see a need at the moment to change the inflation targeting regime, although acknowledging the international debate on the merits of inflation targeting.

What he should have added, of course, is that the international debate is focused on whether inflation targeting caused interest rates to be too low, rather than too high as proposed by local critics of inflation targeting. And the Minister’s comment that he has agreed with the Reserve Bank, including the new governor, that they should take growth and employment into account in their deliberations, sounds like nothing more than the Reserve Bank’s often-stated approach of being “flexible inflation targeters” rather than “inflation nutters”.

Perhaps the biggest surprise in the MTBPS was the announcement regarding the relaxation of exchange controls and the indication that the Reserve Bank will be allowed to build South Africa’s foreign exchange reserves more rapidly. Most of the measures announced, e.g. scrapping the requirement for companies to convert their foreign exchange earnings into rands within 180 days, will do more to alleviate the volatility in the exchange rate by enhancing the two-way trade in the rand. Others, such as increasing the limits on off-shore investment, are apparently aimed at trying to weaken the rand. Whether South African companies and individuals will oblige by utilising these concessions is a different matter.

To summarise: all in all the MTBPS looks to be an exercise in the possible, given the political constraints. It is nevertheless disturbing that South Africa’s public finances has deteriorated to such an extent within a matter of one year, bearing in mind that the current recession is indeed mild when compared with the previous one in the early 1990s. Clearly the required degree of discipline on the expenditure side was just not politically feasible.