This week's Budget speech is more important than ever for business sentiment. The government's financial performance has become a significant risk, sometimes to the detriment of South Africa's investment deals. The rapid deterioration of the country's financial situation during the Zuma administration raised concerns that it was on a terminal path to bankruptcy.
One of the achievements of the Ramaphosa government has been to restore some confidence in the ability of the National Treasury to manage government finances. He reined in spending and there was a clear effort to reverse course. The problem is that our economies are not cooperating. From coronavirus lockdowns to unloading and logistics crises, growth has been consistently disappointing. This means that the government has not been able to provide enough funds in terms of revenue to fully restore its finances. As a result, the period in which income exceeds expenditure before interest payments (the so-called “primary surplus”) has consistently moved outward, while total debt as a share of GDP has continued to rise.
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This will be a key indicator that I will focus on in my budget speech. When will this level of primary surplus be achieved? It was expected to happen in the fiscal year ending now, but with earnings under pressure, success is doubtful. If they can't do that, all eyes will be on whether they can do it within the next year, and clear spending discipline will be needed.
Finance Minister Enoch Godongwana must insist that the Treasury will succeed despite the myriad spending pressures it faces, especially in an election year. There was also a lot of noise about using the country's foreign exchange reserves to relieve pressure on government finances. If this is to happen, it must be accompanied by strict and reliable conditions that make it clear that the function of foreign exchange reserves is to protect countries from international crises and maintain credibility in the international financial system. It's not a free pot of money for government relief.
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Another important issue that I will focus on is the government's efforts to encourage infrastructure investment. We've heard a lot about it over the years, but it hasn't happened yet. Public spending in particular has continued to fall throughout this period, but the private sector has picked up the slack. This is mainly due to the financial collapse of Eskom and Transnet, but investment in the core public sector has also been weak. So while we need to rein in spending, if we want to change the trajectory of overall GDP growth, we must invest in economic capacity and ensure that states can provide essential services like water and roads. That is important.
The Treasury Department is working on regulatory reforms to make public-private partnerships easier to use. This process has been going on for some time and it would be good to see regulatory changes clearly announced in the budget. This will allow the private sector to invest more actively in public infrastructure without putting pressure on government finances. We'll probably hear more about the Infrastructure Finance and Adoption Support Agency, which was announced at MTBPS but with very little detail. This could be a positive intervention to promote better use of PPPs.
Transnet and Eskom's financial woes continue to pose a serious challenge to their performance.
We have seen large sums of public money being poured into them (along with other state-owned entities), yet their performance continues to be poor. So, despite the importance of restoring financial health, I don't think the Treasury will write a blank check to either of them. We need clear conditions. It demands that giant corporations in the two states implement reforms before new funding becomes available. Without credible reform, we cannot afford to see more public money being spent. We have a plan for how to deal with the logistics crisis in the form of the Transnet Roadmap, which was approved by Cabinet and published earlier this month. This is a good plan, but Transnet needs to be fully committed to its implementation, and this also means confirming the urgent appointment of management. That should be a condition of funding for Transnet.
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Businesses are playing a role in solving the logistics crisis. He raised R120 million to help us fund the intervention by the National Logistics Crisis Committee. We stand ready to do what is necessary, working with governments and Transnet, and support reform efforts with our skills and resources. The National Treasury can support this effort as a key partner in solving the logistics crisis.
Part of Eskom's solution to the crisis will be efforts to address municipal debt. The National Treasury is implementing a debt forgiveness program with local governments. At MTBPS in November, we were told that local governments, which account for 97% of local debt for public works, had applied for debt relief. This program is not only important for Eskom’s sustainability, but also for improving municipal financial management. The relief comes with a set of conditions aimed at improving the financial resilience and revenue-generating capacity of local governments and building a culture of payment for services. We hope to be able to update you on our progress in getting local governments to continue this program.
Of course, companies will also be keeping an eye on changes in tax rates. The more taxes a government collects, the less spending and investment by the private sector. Raising taxes may seem like one way for him to restore government finances, but there is evidence that changes in behavior in response to higher tax rates hurt collections. The only tax that can be reliably raised to raise additional revenue is value added tax. This is a regressive tax that will affect the poor the most, and I don't see it happening in an election year.
I think it's important to temper your expectations of what you can do with your budget.
Gone are the days when the Treasury held not only the levers of government spending but also the levers of key policy interventions to support growth. The economy now depends on the coordination of many parts of the state apparatus, and the Ministry of Finance can only hold the purse strings. While sound fiscal management is a key element, the ultimate path out of the low-growth mess we are in is broader economic policy.
Busi Mavuso is South African Business Leadership CEO.