The prospect of a serious fiscal crisis in South Africa has diminished. Just under two years ago, when the country lost its last investment grade credit rating, that was certainly not the case. The debt and revenue trajectories of government appeared out of control and it wasn’t clear that National Treasury would be able to resist demands from all quarters that it keep spending.
The problem is that such a risk is self-reinforcing. Because companies’ investment decisions are all about the future, they factor in the possibility of a collapse of government’s finances. That would inevitably trigger a wider economic crisis, leading to major shocks to all companies. A year-and-a-half ago, many businesses would have balked at making large multi-year commitments to invest. The result was lower economic growth, government revenue and employment.
But National Treasury is keeping to its word, and business is starting to regain trust. The Medium-Term Budget Policy Statement two weeks ago showed more evidence that debt is being brought under control and that Treasury is keeping a firm hand on spending. This is all the more important because the calls for Treasury to open the taps, particularly on welfare spending, have been loud and incessant. It has also had to impose wage restraint on a civil service that had become used to real increases annually. Being able to hold the line was an important signal to business that Treasury remains firmly on top of government finances.
Ironically, this is critical to embedding a sustainable solution to the welfare needs of large parts of our population. While Treasury could have simply acquiesced to demands for programmes with annual costs ranging from R50 billion to multiples more, that could only have ever been short term. Such demands would have had to be funded and the only choices are higher taxes or more debt. Both would have been a serious blow to business confidence, with taxes potentially a serious shock to disposable income in the economy (though somewhat counterbalanced by increased spending from welfare recipients) and increased debt again destabilising government’s financial position. It would have put us back on the road to financial ruin.
Instead, Treasury has been able to improve the fiscal outlook from where we were in February thanks to an unexpected windfall from mining taxes. This R120 billion in extra collection has enabled it to fund the special Covid grants instituted during the lockdowns to support the most vulnerable, as well as to increase debt repayments. As a result, the debt outlook foresees government achieving a primary surplus (which excludes debt-related costs) in 2023/24, which will mark the point at which overall debt levels start to decline. The minerals windfall has been rightly seen as a short-term boon that won’t hold for the long term.
Economic growth is the only sustainable solution to the poverty facing many in our country. That requires businesses to be confident that the fiscal position is not at risk. Growth has a double impact on poverty: it creates revenue that government can then use to fund enhanced welfare, and it creates jobs that diminish the need for welfare in the first place. This is what we achieved in the decade to 2008 – a period of growing business confidence, investment and employment, while government’s welfare programme expanded dramatically without undermining the state’s financial health. We should be doing everything possible to repeat that performance.
We will start to see the fruits from the recovery in business confidence. For example, many companies are preparing multi-billion rand investments in energy generation, an important element for long-term energy security. More will come as Treasury beds down the fiscal outlook. We are also making slow progress toward much wider infrastructure investment, from ports to bulk water.
An obviously important further signal will be the February Budget, and Treasury will have to show it continues to hold the line then. Should it succeed, it will add positive momentum sparked by the vaccine programme and structural reforms ranging from energy to broadband spectrum. These will all push growth levels higher.
One aspect of the medium-term budget that I was disappointed in was that small businesses had little to cheer. I remind the minister in Business Day of his address to the Sunday Times Investment Summit in September, when he said: “We have got to make it really easy to do business.” I have no doubt that he will follow through, but it would have been nice to have found a way to give the small-business sector, which has felt the impact of the pandemic more than most, an immediate boost.
We’re in an emergency situation with load shedding severely damaging our strained economy and we need to do everything possible to accelerate getting new energy developed and on grid. What worries me, though, is that we’re not seeing enough of a sense of urgency. Why haven’t we started bid window 6 yet, or scheduled bid windows 7 and 8 already?