The extent to which the government is prepared to face economic reality will be evident next month when Finance Minister Tito Mboweni presents the Medium Term Budget Policy Statement. It will also show the degree of Mboweni’s influence within government and the African National Congress (ANC) alliance.
Mboweni has lost an early round in the run-up battle to the presentation to Parliament in October. In a tweet earlier this week he said being part of a team meant that you lose some battles. So the government will bail out South African Airways (SAA) with a further R10.3 billion to allow it to emerge from business rescue. That means a crucial battle has been lost, and this sets a dangerous precedent for continued bailouts of SAA and most of the state enterprises.
The Medium Term Budget Policy Statement gives an indication of the government’s taxing, spending and borrowing intentions over the next three years. It will be closely watched by the markets, the International Monetary Fund (IMF), and the credit rating agencies. A commitment has been made by the Treasury to bring down debt from 87.4 percent of GDP in 2022/23. That means deep spending cuts will have to be made or else there is a real risk of default.
There are two big current budget battles that go to the heart of the power play over the country’s economic future. The first is over bailouts to state enterprises and the second is over public sector compensation. Ending bailouts and controlling public sector wages and salaries are key to achieving any control over the budget deficit and stabilising public debt. This is a case of the party and the elite and organised labour defending their interests against the technocrats from the Treasury, certain business interests, and international markets. With state spending in South Africa undermining rather than enhancing growth, it is also a battle that pits the public good against narrow interests.
Bailouts to state-owned enterprises
One third of the deficit in the last fiscal year, 2019/20, was due to bailouts to state-owned enterprises, mostly to Eskom, according to the IMF. Compensation, subsidies, and interest costs made up the remaining two thirds of the budget deficit.
Wages and salaries took up about 34 percent of total spending and about 50 percent of tax revenue in the last fiscal year, which is high by international standards. Interest costs – which, due to the enlarging deficit since 2008, require ever greater borrowing to finance – are the fastest growing part of the budget.
Control the big two items of compensation and bailouts and the path could be far clearer to a lower deficit, reduced borrowing and less of an interest burden. But, politically, this is most difficult to achieve.
The state corporations have long been a source of patronage, and are viewed by some as a crucial means to black economic advancement. For a party that favours a large role for the state, being forced to liquidate or sell off public enterprises would damage its pride. It would be an admission of failure because the state corporations have been given endless bailouts.
Union membership in the private sector has been contracting due to the decline in mining and manufacturing, but has been growing in the public sector. The unions are having to fight their corner in the public sector.
The Department of Public Enterprises’ argument for the SAA bailout being key to saving South Africa’s aviation industry is invalid. Why can the private sector not be the means to salvation of the sector?
The other argument the department uses is that preventing liquidation of SAA means the government does not have to pay out exit costs and guarantees of about R30bn. The problem with this line of argument is that it supports the ‘sunk cost’ fallacy. If a higher return can be generated from investing in other ventures, the rule is to dump the loss maker and go for the higher return. Over the years of state capture and beyond, the airline has been heavily subsidised. It is simply not worth saving. Paying the R30bn to be done with the disaster is the most convincing argument. The latest R10.3 billion will not be the end of the lifeline as the lifeline is likely to be endless.
Other glamour projects
The Treasury will have to find other items to cut to subsidise SAA and other glamour projects. Simply cutting total spending by the amount of the bailout and leaving SAA in private hands would be more growth-enhancing. Reprioritising spending to give leeway to loss-making state-owned enterprises will be a drag on the budget and the country’s economic growth.
The government’s intention not to give civil servants previously agreed-upon wage raises of between 4.3 and 5.4 percent is being challenged in the Labour Court. If the government is to meet its debt-stabilisation target there is no space for pay rises. The Treasury has insisted that the government cannot afford raises agreed on in an economic environment which has severely deteriorated. Moreover, the public service has received years of above-inflation pay increases. This has resulted in South Africa being one of few countries where average compensation in government is now above that in the private sector.
The Treasury is having to take on an ANC ally on an issue that goes to the heart of its union interests. If the Treasury is forced to give way in this battle, it might well lose the war to contain public spending.
Ultimately labour will have to take a hit that will be much harder than the present one. A default would mean the government might be forced to massively reduce spending. The unions recently called for a massive government stimulus package, which shows a vast gulf with the Treasury.
Far more leverage
The president will soon come up with a recovery plan based on what has emerged from labour and business in Nedlac. One component is a larger Expanded Public Works Programme. Labour, clearly unwilling to compromise on an extension of the programme’s minimum wage of R11.42 to the private sector, has suggested this as a substitute. There would be far more leverage for job creation and the economy in allowing the private sector to pay what the government pays, and saving the money on the public works programme.
The October Medium Term Budget Policy statement will be viewed as the final sign on whether the government can deal credibly with the economic crisis. Budgeting during the Zuma years, and more recently under President Cyril Ramaphosa, has been an exercise in kicking the can down the road rather than getting to grips with the country’s worsening fiscal problems.
The credit rating agencies have already said they do not expect that South Africa has the immediate political room to get to grips with its problems. The October statement will test this view to the possible deep cost of the economy.
[Picture: World Economic Forum, https://commons.wikimedia.org/w/index.php?curid=22087397]
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