PETER ATTARD MONTALTO: Zoom out of the budget to see context

Posted in: Capital Markets, Economics, i-Blog on November 8, 2021


This column first appeared in Business Day. 

Events regarding the budget and medium-term budget policy statement lead to a kind of political madness.

There is an expectation — raised in various places in the past week, such as in the cabinet statement — that somehow this is a chance to lay out economic policy and solve issues holding back the recovery. “The [medium-term budget policy statement] is a call to action for all sectors of society.” This seems to miss the current context the budget fits in.

A medium-term budget policy statement is a “mark-to-market” on the revenue situation (taking into account new growth forecasts) but does not announce new revenue measures (that is the February budget). It includes a peppering of financial sector policy reforms (firmly under the Treasury’s purview), and the key focus is on expenditure.

People seem to forget that the point of a medium-term budget policy statement is the culmination of a five-month negotiation process in the government to decide on expenditure for the next three years.

No-one seems particularly happy with where we have ended up — as cabinet-level demands about medium-run spending steadily mount (many reasonable, some not), there are short-run revenue boons from the mining terms of trade, yet these are unsustainable, and neither will be cheap interest rates (in SA or globally), which have slowed but not halted the pace of increase of debt service costs in the fiscal framework.

There is no capacity for proper zero-based budgeting. The accounting and planning capacity within departments and most other spheres of government is weak so as to not really be able to engage with expenditure restraint. The cabinet is unable to fully engage in prioritisation and trade-offs.

The Treasury is often depicted as somehow being happy with the status quo — I don’t believe that is the case. It would be far better to have a cabinet prioritising and making active difficult trade-offs and waiting for structural reforms to bear fruit rather than passively having them imposed by pushing down more uniform top-trimming of expenditure.

Political calculations

The terms of trade boon is likely to allow some pause in the pressures for significantly more top-trimming in the short run but it does not remove the problem of the lack of active trade-offs being decided on by the cabinet.

Such trade-offs require political calculations and often political capital, something that is likely to be even harder after the disastrous municipal elections for the ANC. Some of the risk aversion might be fair. The sequencing and timing of wider important social security reforms, for example, that have to wait until the economy is in better shape is clearly deeply challenging in this environment. But some — such as state-owned enterprise spending, SAA, Eskom bailouts that shouldn’t be made if decisions over debt deleveraging were actually taken — should not be challenging and should not have negative effects on the electorate.

The medium-term budget policy statement is too early after the elections to see any changes now. But the budget in February is sufficiently far away for the full force of the internal political blowback within the ANC, the culmination of the basic income grant debate and a looming public wage round.

More fundamentally, we are likely to see a test of whether politicians believe in a budget constraint. So much of the debate about the basic income grant or the contestation over solving unemployment or inequality crises becomes unbridgeable because some people believe in a budget constraint and others don’t, that busting through it in a low-savings economy with a free-floating economy would have negative consequences, or not. Those proposing a step up in debt financing can’t explain who exactly is meant to do it, and at which interest rate, using which funds.

The ANC could well be tempted to test the limits of the budget constraint more fully than it has done previously — or bust through it — with an eye on 2024.

SA has historically been an oddity in this regard — in many emerging markets we see strong fiscal cycles with spending heaped out the door before elections. While SA may well struggle with keeping to a consolidation path, it has not had these cycles before at the macro-fiscal level.

These are all choices, however, for February, not so much for now.

Supercharge spending

There is another scenario. The ANC has a tendency to curl up and die inside after losses. We saw that in the Western Cape 12 years ago. The national executive committee could simply become increasingly head-in-the-sand and the status quo-binding nature of the budget constraint could be kept wrapped firmly around pandora’s box by the Treasury. Yet this would not be an optimal outcome without more prioritisation and trade-offs.

The stunning news in the last week of a political declaration around a $8.5bn climate finance facility reinforces a key point. More money (revenue or foreign concessional finance) is needed to supercharge more spending. The market still doesn’t understand that the climate facility is for doing crucial Eskom decommission, social planning and transmission investment spending that wouldn’t otherwise be possible or fundable.

This is precisely why business has called for progrowth reforms to drive more revenue increases to be able to spend more on social policy, education and health in a sustainable way that doesn’t raise interest rates.

What links all this together is a difference between what is good within the current constraints but is really suboptimal when one zooms out — versus what is actually required.

We should remember that in the week ahead as we see what the market is likely to interpret as a “good” medium-term budget policy statement that uses some short-run flexibility from the terms of trade boon to revenues and sees less of a future increase in debt issuance than was previously pencilled in. Is this really what the Treasury would want an optimal budget to look like under the current constraints, if trade-offs and reforms were possible?

• Attard Montalto is head of capital markets research at Intellidex, an SA research-led consulting company.

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