PETER ATTARD MONTALTO: Still at the fiscal cliff edge

A few facts seem lost about the medium-term budget policy statement.

It passed through successive cabinet subcommittees and the main cabinet. It has the backing and collective responsibility of the entire government. For all the barbs thrown at the cabinet and government, they are often misunderstood.

They can ultimately listen to expert advice (perhaps a little late), and they are far more fiscally conservative than many people understand. While this column and many other reams of analysis have laid out faults, problems and errors of policy and judgment in so many other areas — the fiscal policy history of SA in the past 30 years does not make sense if you assume that the cabinet is a rabid, left-wing, spendthrift, Reserve Bank-nationalising, soak in the rich-tax bunch of politicians pushing the accelerator on fiscal policy.

Now many on the Left perhaps might like to make out that it’s all Treasury’s fault, or perhaps even in more crazed moments that the rest of the ANC is under the Treasury’s spell (as if ministers didn’t have the ability to weigh evidence and decide). Given the wider civil society, communist and unionist forces and leftist think-tanks circling the ANC it would seem odd that all these people cannot get something else out of those in charge. How have they still not got a basic income grant through? If it is policy then why not just replace the finance minister and senior people in the Treasury so that they can conform with such pressures?

All this sounds a bit mad — but how else do you explain the medium-term budget we got last week? It was a remarkably conservative document. Even before you consider the risks in implementing it, it was surprising that it could be put forward in the first place, unless you think the cabinet has a conservative core.

The cabinet it seems is rightly scared of running out of cash, of the threat of SOEs landing uncontrollably back on the state (something the DA seems less concerned about), of the risks to creditworthiness and loss of credibility.

Cuts offset

We will see if the ANC caucus in parliament is feeling revolutionary and will break such a long-standing tradition of making no substantive amendments themselves to budget bills — or if they will follow the bizarre lead of their secretary-general who seemed to break all protocol by giving a public press conference during the Treasury’s media lock-up in the hours before the medium-term budget — to tell us what we ended up getting were considered and marginal cuts. Clearly he backs this medium-term budget as well.

Ultimately, the Treasury’s job was made easier by having a strategy. While there are huge gross cuts in the medium-term budget this year and for the coming two years, they are offset strategically with legacy support for the president in terms of his presidential employment stimulus and youth employment initiatives, and coverage for labour-intensive provincial spending areas such as health and education to shield them from the wage bills settlement, and the extension of social relief of distress (SRD) or an SRD-like or sized grant for the coming two years. This leaves net cuts much smaller.

Still there are huge gross cuts this year of R21bn (albeit most of this is from belt tightening and underspend) and R64bn next year and R70bn of cuts vs previous baselines the next two years. Someone out there is going to have to “give up” this money they thought they otherwise had. Panjandrums, cadres and deployees are about to lose their free lunches through these and future cuts as the state is rationalised. Just as what happened with the wage bill and the Treasury’s ability to significantly deviate from the previous, unsustainable path of spending on compensation, so the machete is swinging more widely now.

All this raises the question of how one can disagree with the forecasts in the medium-term budget. We are left with a problem — a long-standing view that the primary balance would not get significantly into positive territory — yet there is such a strong statement of intent in the medium-term budget and they have such an immediate political backing, in particular from the president.

Sink in

Herein is the other lost fact about the medium-term budget.

Cutting intrayear underspending and belt tightening is one thing — but the cuts pencilled in for the future will only sink in the coming month as the Treasury sends out budget planning letters for the year ahead to accounting officers and the true impact hits home — of departmental cuts at the centre and of top trimming pushed down to lower levels of government already teetering on the edge with less money and worse service delivery outcomes.

It hasn’t broken yet, but there is a sense that before an election surely something must give and at budget or if not after the election a ballooning back of spending and a switch in the president’s support away from the Treasury will follow.

Herein then is the clash to come inside the minds of the cabinet itself — they are macro-fiscally conservative and have agreed to a rising primary surplus path towards 2%, yet they cannot naturally take difficult micropolicy decisions, prioritisations or trade-offs. The medium-term budget did not contain this beyond the headline wage bill, presidential initiatives and SRD vs other spending tilt. There was no choice to cut this programme and one agency vs another one yet. That comes next.

And this is where it could all go wrong if political will crumbles pre-elections, say on some bad polling, or if a smattering of spending baubles (for which small space has been left) becomes a destabilising avalanche — or after the elections when everyone might take their eyes off the ball and short-term relief at the failure of extreme coalitions to occur is misread as breathing space for fiscal recklessness.

Yet last week is our starting base and why we viewed the medium-term budget as solid, because it provides an important high-water mark for what needs to come next and the risks of deviating — in an environment that will still be stressed in terms of revenue (even if we see a touch more than the Treasury is pencilling in) and high offshore interest rates with a limited domestic savings base that the Treasury is already including in this medium-term budget’s funding framework and for all the talk of cuts — having to plunder for R40bn-R50bn extra-long dates paper a year than previously expected.

Runaway train

And this is the last overlooked fact. While this was a great medium-term budget from some perspectives we are nowhere near out of the woods yet at all regarding the fiscal cliff edge risks. Indeed, the extra long-term rand funding will severely test the market.

With just some marginally different assumptions we cannot get debt levels to stabilise let alone fall. And all this is before we consider the Transnet bailout imperative juggernaut hurtling towards the fiscus like a runaway train that the previous management left without brakes on. The budget will then have to deal with this as well as strong pressures for slippage from this high-water mark, and even before considering the wide social wage pressures such as national health insurance (NHI) which is another unworkable and poorly costed and poorly through-funding model policy.

Interest rates throughout the yield curve are still far too high and a result due largely to long-run fiscal concern from markets that have not got worse but have not improved either.

The levels at which medium and long-term bond yields trade are a public good that affect the whole economy and are an underappreciated (even by many in business) component of kick-starting a faster-growing economy with more investment, job creation and ultimately revenue.

The medium-term budget was therefore just the start of a long road away from the fiscal cliff edge.

Peter Attard Montalto leads on political economy, markets and the just energy transition at Krutham (formerly known as Intellidex), an SA research-led consulting company.

This article first appeared in Business Day.