What matters are the credibility gaps, not the fiscal measures that the Treasury announces.
This column was first published in Business Day.
We’ve been here so many times before. A crucial budget, big decisions, big announcements expected, reform, consolidation.
The public conversation around a budget event — let us not forget these have been going on twice a year for over 20 years — always seems to get it wrong.
First, the fiscal path that the Treasury announces is not what matters. It is instead the gap between what is announced and what it is (more) likely to be based on the policy measures announced and expected growth. In other words, budget events fundamentally rotate around the credibility gap that exists around the forecast.
This is more important than ever now as we hurtle towards a “debt crisis” (in the finance minister’s own works). Given the track record of revenue underperformance versus forecast over history, and how the economy generally reacts after past shocks since 1994, it would seem better to err on the side of caution than to try to game a deficit and growth forecast for an easy political ride.
For credibility’s sake, the Treasury has to toe what might well be an impossible line. Having debt stabilise too fast, and the measures required to get that won’t be credible. Having debt stabilise too late would imply a funding programme that wasn’t credible over time. Goldilocks can be found somewhere in the middle.
The former scenario is only possible with a political capital deployment never seen before, the latter possibly only by crowding in credibility enhancements — like international funding institutions’ conditionality funding and using a fiscal rule (which the Treasury seems, despite it offering a degree of free lunch if done right, to be completely allergic to).
Second, the centre of gravity of economic policy power no longer resides within the Treasury. This fact seems to disappoint many investors and is much to the delight of those on the Left, and it is a crucial point. The Treasury’s power waned through the Zuma presidency as such networks were contracted back and institutional capacity both outside and inside the government were destroyed. The centre of gravity left the Treasury and moved towards the presidency, but it never quite arrived.
In the public debate, there is normally an odd mood before a budget event; a feeling that the Treasury will magically have delivered all necessary reform and everything will be fine. This is certainly not to say that the Treasury doesn’t have all the right ideas on structural reform. They do, they are there in the “Tito Paper”. The problem is others have to do the implementing, not the Treasury.
We are seeing this around the “phase 3” reform package at the moment. A huge amount of contestation is ongoing, with little to show for it yet; an entire reinvention of the wheel in government when the correct ideas are already on the table.
There is often a view that Zuma left the government fundamentally weakened and lacking capacity. This is true at a profound level, I believe. However, it also combined with mistakes around capacitation at a higher level under this administration to enable implementation. It is not that nothing is happening (to think this would be a mistake), but that there isn’t enough happening fast enough to reach escape velocity.
So the problem this week will likely be too high a set of expectations around the Treasury delivering structural reforms. The Tito Paper can be reiterated, but we shouldn’t be blind to the fact that long-term potential growth currently looks no higher than zero in per capita terms, and now from a lower base.
The third issue, which is a mix of the two above, is the expectation that if the Treasury says something, it will be true. So, promising fiscal consolidation is not going to happen if you don’t have wider buy-in.
The Treasury finds itself in an unfortunate situation this week. Infighting within cabinet has meant that the government has not been able to outline a more detailed, credible set of recovery reforms and growth-boost proposals ahead of the budget. And the president in parliament last week was rather flat precisely because there isn’t that agreement behind the reforms that he wants to make. He was stymied by the usual suspects such as energy policy (nuclear) navel-gazing.
The infrastructure forum on Tuesday will be a test, but we’ve been here many times before on infrastructure with nothing to show for it. Will this time be any different? The risk here is if it misses the mark, it will leave a sour taste into the budget.
So we find ourselves at the cliff edge, with most people in government not realising that. Finance minister Mboweni and his staff certainly realise that. As such, this week is far from “normal” and we should gird ourselves against the same mistakes each time we have a budget event.
• Attard Montalto is head of capital markets research at Intellidex.