The fiscal position has become profoundly unsustainable and a debt crisis is almost certain

Source: Financial Mail


Finance Minister Tito Mboweni delivers the medium term budget policy statement in parliament on October 28 2020. Picture: ESA ALEXANDER

There is one key metric against which to measure the 2020 medium-term budget policy statement (MTBPS): does it move SA closer to the fiscal cliff or has it bought us a bit more runway?

It could be argued that despite its attempt to strike a more realistic balance between austerity and growth than June’s 87% debt target, finance minister Tito Mboweni actually made things worse last week.

It’s not that I disapprove of his decision to spread the fiscal adjustment over five years instead of three, which shifts out the debt stabilisation target to 95% of GDP by fiscal 2025, from 87% by fiscal 2023. Consensus was building that the adjustment required to arrive at 87% was too large to be politically feasible and so was patently unrealistic. It had to go.

The main problem with the new plan, which requires cutting public expenditure by roughly R300bn (previously R400bn) over the next three years, is that now public servants are expected to bear more than half of that pain through a three-year wage freeze.

This means SA’s fiscal framework — and the avoidance of a debt crisis — now depends almost entirely on the state securing the co-operation of the ANC’s trade union allies. This is seen as highly improbable and will likely result in huge strikes, heated service delivery protests and maybe even more court challenges, which could drag on for the better part of next year.

The upshot is that the MTBPS has elevated the uncertainty over SA’s fiscal and economic outlook as well as raised the political temperature, and this at a most inconvenient time given the looming local government elections next year and the ANC elective conference of 2022.

There is a real risk that public sector workers could form a mass coalition with a growing chorus of civil society groups that reject fiscal austerity as a betrayal of the poor and working class. Since their arguments resonate with many in the ANC, it raises the question as to whether the ANC will self-destruct if it implements the MTBPS. Certainly, President Cyril Ramaphosa won’t easily be able to implement it and stay in power.

So one has to ask: why did Mboweni take the huge gamble of staking SA’s fiscal future on public sector wage restraint? Was he completely out of options? The short answer is: yes. It was either cut wages or cut infrastructure and/or pro-poor spending, which would have been altogether worse.

And since stabilising debt without growth will be impossible, Mboweni chose to shift what little spending remains towards capital investment, honouring the commitment at the heart of  Ramaphosa’s economic recovery plan.

The bottom line is that after a decade in which public spending has been allowed to exceed annual revenues, SA’s fiscal position has become profoundly unsustainable. Wits associate professor Michael Sachs puts it well when he says: “Debt is now unsustainable because growth is low, the interest rate is too high, and the primary balance needed to prevent a debt explosion is not politically feasible.”

Though Sachs feels that the MTBPS was a step in the right direction, he still doesn’t see how the adjustment can be plausibly achieved and, therefore, that SA is facing “an almost certain fiscal crisis”.

All of which raises the question of whether there isn’t some third way, somewhat less austere than the 95% scenario, that would still allow SA to avoid Armageddon. Certainly, SA could continue to muddle through for a year or so, as long as global financing conditions remained supportive. But the interest burden would quickly become intolerable and bond investors increasingly skittish, until even the die-hards bolted for the exit.

SA is now looking to Ramaphosa’s much-vaunted social compact with labour and business to deliver a way out, and is about to discover that it has been one grand fudge. Labour certainly didn’t sign up for this. SA has been let down by its leaders. All of them.

• Bisseker is a Financial Mail assistant editor.