The Medium Term Budget Policy (MTBPS) to be delivered by the Minister of Finance on Tuesday, 25 October 2011, will take place against the backdrop of a fiscal crisis in Europe.
As a result of an era of fiscal responsibility implemented by the former Finance Minister, Trevor Manuel South Africa was in a very favourable position at the start of the financial crisis. Unfortunately, South Africa has run out of fiscal space and we have no ammunition left to counter act the consequences of a looming crisis if we see another financial crisis developing. Therefore, COPE would like the following to be addressed in the MTBPS:
Firstly, Minister P. Gordhan needs to show South Africa and the international markets that he has got a firm grip on government finances. Many economists are of the opinion that National Treasury’s grip on government finances has slipped in the transition from the former President, Thabo Mbeki, to President Jacob Zuma. Min. Gordhan needs to prove the contrary.
Secondly, the International Monetary Fund (IMF) has warned that South Africa’s current fiscal position is not sustainable and that a moderate fiscal consolidation is required. The government debt should stabilise on 40% of GDP by 2012/13, but according to National Treasury this will only be achieved by 2015/16. The Minister must address this issue and confirm the correct data. In order for this stabilisation to transpire by 2012/13, the adjusted primary budget balance (the pure deficit after deducting interest payments) will have to move to 2.6% of GDP over the 10 year period 2010 - 2020. However, according to Jac Laubscher from Sanlam, this is much more than the envisaged figure in the current medium term budget. If we take the expected increase in spending on pension funds and healthcare into account the primary budget balance will increase to 4.3% of GDP. This figure is higher than the highest average primary budget balance South Africa was able to sustain in any past 10 year period. This casts doubt on its feasibility. If the interest rate falls short of the growth rate, then primary budget deficits are indeed feasible in the long run. Conversely, if the interest rate exceeds the growth rate, then primary budget deficits cannot be sustained. One must expect that primary budget deficits push up the interest rate. This raises the questions whether the interest rate can really stay below the growth rate. This is not happening. We are already paying 9% on a 30 year term bonds. Interest payments are on the increase year on year, despite the fact that the repo rate is at an all time low of 5.5%. The market is struggling to absorb the between R1.5bn and R2bn worth of government bonds currently made available by National Treasury. Clearly there is no ammunition left to take care of an impending crisis. If there is any indication that South Africa will go beyond 40% of GDP in terms of government debt, Standard and Poor’s will most likely consider downgrading South Africa’s BBB+ rating. If this happens it will be harmful to our economic growth and reflect negatively on revenue collection. We accept that the current fiscal position is still sound, but there is no room for further increase in the budget deficit and government debt. According to the Minister of Finance net loan debt is forecasted to surpass R1 trillion by 2012/13. This does not auger well for our future economic outlook.
Thirdly, the Auditor General’s (AG) damning report showed unnecessary expenditure across many state departments. This is alarming. We need National Treasury to restore strict discipline and to prioritise government spending. Measures taken by the Finance Minister on Tuesday will be vital for the future.
Fourthly, if the economic growth remains around National Treasury’s forecast of 3.4% this year, we will have no problem. We are however of the opinion that the estimate should be closer to 3% and we would like to see an adjustment made by the National Treasury. The forecast for 2012/13 of over 4% is too optimistic. The South African Reserve Bank (SARB) has already lowered their economic growth expectation. The estimate of government revenue must be downwardly adjusted. We want to see clear measures from the Minister showing that he has a tight grip on state department expenditure.
Fifthly, it is clear that the government will have no choice but to broaden the tax base. We expect some sort of indication from the Minister for higher taxes in 2012. Now is not the time to send such a message. This will impact on our economic growth which is something we cannot afford.
Finally, National Treasury and the Minister of Finance must realise that the sustainability of our debt level is linked to production and growth potential. For us to embark on a slippery road of less fiscal responsibility, it is important to realise that once you are in trouble, it is difficult to escape. If the ruthless judgements by the markets start doubting National Treasury’s grip on government finances, things can go wrong very quickly.
If the situation prevails, government will have no more ammunition. The spinoff will be an increased decline in the value of the Rand. This will further fuel inflation and threaten food security. South Africa, a country with such a high unemployment rate cannot afford this. It is therefore back to basics of responsible fiscal policies and control.