PETER ATTARD MONTALTO: Budget is already under pressure

Posted in: Economics, i-Blog, Politics, South Africa on March 15, 2021


Student protests are a live example of the politics of austerity in action.

This column was first published in Business Day.  

Student protests in emerging markets are an emotive issue. Overexcited analysts love jumping to Arab Spring analogies.

Yet young people undergoing political awakening, mingled with raised expectations through the end of the Zuma administration of what was possible from university education, is a potent mix as it crashes into the brick wall that is the fiscal reality.

This is a live example of the politics of austerity in action — less than a month after the budget.

The political awkwardness of the fact the students’ demands are not affordable has been swept under the carpet and funded with “reprioritisation”. This is a euphemism. Actually, what will happen is not just cuts elsewhere, but double cuts given the pressure the February budget was already bringing to bear on higher education funding cuts and infrastructure spend cuts. There are no simple choices — only the least politically painful.

Protests will probably grow this week and continue until the term has got fully under way and so more “reprioritisation” (that is, cuts elsewhere) will be required.

So we will probably get some salami slicing — maybe Technical and Vocational Education and Training (TVET) colleges; some infrastructure projects; or slow the pace of new student accommodation. The salami slicing will find its way to areas we don’t even think about: administration, research, maybe even filling vacant posts. They will alight in places that don’t make a noise until later down the line when quality and service delivery suffer.

The Treasury has little option here but to force intra-departmental budget shifting, but this is not efficient. The slicing might be better in, say, provincial administration budgets or SOE transfers or inefficient incentive schemes rather than from one area of higher education to another.

But we don’t know because expenditure reviews, zero-based budgeting and the challenging conversations over priorities are not had in cabinet. A serious debate to be had is what reduces inequality by more over time — more people going through universities or TVETs?

I don’t claim to know the answer to that but the biggest differences to unemployment and inequality come at the boundary between the informal and formal sector. It’s an incredibly important thing for the government to have a view on.

Higher education budgets have increased by 50% in the past four years. Surely at some point enough is enough, but students have political power and will end up being successful. The bigger fiscal issue is the crystallisation of student debt which Treasury might be forced to bail universities out of. The figures may be too large in a given year. Let’s not forget there was a student debt write-off of just under R1bn at the start of 2019. Another this year of about R750m believed to be outstanding starts to become problematic every two years.

The central issue here is that after #feesmustfall in the 2015 period through to the flurry of reports on funding that came out in 2017, there was no firm choice made about funding models. There was an increase in grants paid out (made suddenly at that moment by then president Zuma) but no shift to income-contingent loan repayments or a graduate tax. Income-contingent loan repayments in particular could see a state issuing entity place social bonds directly into the capital markets in a self-funding (government-guaranteed) entity.

The promised funding assessment to be undertaken between now and the October medium-term budget policy statement (MTBPS) cannot come up with any new options as all were on the table in 2017. One simply has to be chosen.

The student protests, however, place in sharp relief the lack of much outcry at all since the budget on the real-term cut in grants or indeed the general lack of more than a whimper from the Left about the grants cuts, the public sector wage bill freeze or the deeper salami slicing cuts pushed down below the surface through government. The same is true of the 15.63% rise in Eskom tariffs to come shortly.

Why the silence? The Left normally loves bashing the Treasury for being this all-powerful neoliberal enclave with a secret basement room in Pretoria’s Church Square where Treasury officials are bashing the poor like a piñata to get something sweet to feed to the rich. Yet in the face of understandable, yet genuinely questionable and debatable, policy choices made two weeks ago, we get a wall of (near) silence.

The Treasury has again triumphed on command and control of the process against a backdrop of the ANC not knowing what it wants and the cabinet not having difficult discussions.

But looking back, this is normally how budgets work. We see February and October budgets as the Treasury performing “well” within the political space afforded to them.

It is the major blowouts in between budgets that periodically happen — the higher education spending commitments in 2017 (and before), the VAT debacle of 2018, and the Eskom special appropriations bill of 2019 that all grew midyear.

This cycle will be similar as demands will be built before this MTBPS with politically loud elements. There are also risks around the public sector wage bill. The big one to land of course is the basic income grant in the next year or so, which could cost as much as R100bn a year.

With the recovery looking a little better, budget estimates likely to be even a little low on revenue and nominal GDP in the short term, political decisions to spend that little bit more will be easier to make. This is why I think a primary surplus is impossible to ever see.

Let us see in the months ahead as Eskom tariff hikes hit, public sector wages are frozen and social grants fall behind inflation; and as food and lower-income inflation spikes higher for the rest of the year. If there is still only a whimper from the Left, then the Left will be dead. There is no other real threat on the horizon — especially if the local elections see a shock, with more voters staying away as opposed to voting against the ANC.

But the mistake the markets have made — and similarly much of the comment after the budget — is to think that this is an optimal outcome. It isn’t.

Attard Montalto is head of capital markets research at Intellidex, a South African research-led consulting house.

 

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