By Jac Laubscher, 29 October 2015
The frustration expressed at the above-budget public sector wage settlement in the MTBPS and in the Minister of Finance’s budget speech is unprecedented. It should not be necessary for the Minister for all intents and purposes to publicly criticise a decision that could only have been taken by the cabinet collectively. (If not, then who took the decision and why?) Surely the Minister would have sounded that same stern warnings about the implications of this decision within government at the time it was taken, but clearly he was shouted down or just ignored.
It is furthermore striking that in his budget speech Minister Nene no fewer than four times stressed the binding relationship between economic growth, revenue growth, and the affordability of government spending, making it almost sound like a cry of desperation. He repeatedly said that “without economic growth, revenue will not increase. Without revenue growth, expenditure cannot increase”.
To whom were his remarks addressed? To the general public to tell them they have to lower their expectations of what the government can do for them? To his immediate audience, the members of parliament, to set the tone for their scrutiny of the budget for its acceptance by parliament? To his colleagues in the cabinet to put it on record that they have been warned? To the ANC leadership who repeatedly demand new initiatives from Government regardless of their affordability?
The bottom line is that the credibility of the National Treasury, the Minister of Finance, and the National Budget is being undermined. If the budgeted increase of 6,6% per annum in public sector remuneration (which was approved by the cabinet as a collective) can so easily be brushed aside, why should we take the path of fiscal consolidation as set out in the MTBPS seriously? If the Minister of Finance could not hold the line on the public sector wage agreement, how is he to succeed in persuading parts of Government to reduce their staff numbers, as he has been reported in the media to have suggested?
To undermine the credibility of the budget is at all times unwise, but to do so at a point in time when the future financing of the budget and its cost are at risk could turn out to be suicidal.
The National Treasury cannot be turned into a combination of bookkeepers and fund raisers. Of course it cannot alone determine the priorities in spending (although its warning on the need for the composition of expenditure to support economic growth should be heeded), but it should have the last word on the total amount of resources available to Government. Government expenditure should be determined within the constraints spelled out by the National Treasury and not as if the revenue side of the budget were characterised by unlimited flexibility.
In effect Minister Nene has informed everybody who cares to listen that policy initiatives that are already in the pipeline are unaffordable without increasing the tax burden and that the latter can be self-defeating because of its negative consequences for economic growth. There is after all little doubt that a further transfer of resources from the private to the public sector will result in less efficiency.
What will give, government expenditure or the tax burden? Judging by recent history, it will be the tax burden. It is doubtful whether the Davis Tax Committee can stem the tide ̶ as in the past Government will probably cherry-pick from its recommendations what suits its agenda and ignore the rest.
Already the spending ceiling has been adjusted “technically” to exclude expenditure financed by earmarked taxes, opening up space for further pressure in this area. The possibility of closing the gap in higher education finance by the introduction of a dedicated tax (e.g. a graduate tax) has already been mooted.
This is in spite of the opposition expressed by the National Treasury to earmarked taxes because of the silos they create in public finances. To this can be added that expenditure financed in this way escapes regular reconsideration and competing for the available resources against other spending priorities. For example, if the SETAs had been financed by general taxation instead of a special levy, their role would probably have been drastically scaled back already or scrapped outright.
South Africa also needs to reconsider the unemployment insurance fund that is holding large surpluses. The main use of unemployment insurance is to deal with cyclical unemployment, viz. by tiding workers who have lost their jobs over their temporary difficulties until they find new employment, while South Africa mainly has a structural unemployment problem.
To think that introducing a wealth tax, as predictably suggested by Prof. Thomas Piketty during his recent visit to South Africa, will provide us with a painless solution (except for the few rich people who will bear the brunt of any new tax) is illusionary. It is not the first time a fly-in international luminary pontificates on what South Africa should be doing without first getting to know the facts. And as Prof. Piketty himself concluded in his book, Capital in the Twenty-First Century, a wealth tax would only be effective if it is adopted globally, the chances of which he admits are close to zero.
Those of us who have grasped at Prof. Piketty’s “recommendation” should perhaps just note that he did not propose a wealth tax as a revenue-raising instrument but as a way to gather statistics on the distribution of wealth in South Africa for academics such as himself to use in their studies. According to him such a tax should be introduced at a low rate (equal to the cost of administering it and ensuring compliance, which would be revenue neutral?), which can be regarded as the equivalent of raising the budget for StatsSA.
As much has been made of the possible reaction of rating agencies to the MTBPS this commentary will be incomplete without a few thoughts on this topic. For a start, rating agencies take their own decisions according to their particular methodology and I will therefore not try to second-guess them. The bottom line is that whether we like it or not or agree with it or not many investors outsource the credit research function to the rating agencies and the latter’s pronouncements play an important role in the availability and cost of finance to rated entities.
It is therefore unwise to risk a possible downgrade to non-investment grade even if the threat is not immediate, especially at a time when the cost of funding is already increasing and set to increase further because of market forces.
In its recent Global Financial Stability Report the IMF again refers to the increased correlation in pricing between global asset classes and points out that it is in particular applicable to the markets for junk bonds and emerging-market debt because of both these types of assets being regarded as relatively risky. It will therefore pay to watch the junk-bond market (especially in the USA) for possible trends ̶ already there are indications that risk premiums are normalising in spite of the US Fed not having embarked on its tightening cycle yet and the search for yield.
To conclude: if South Africa is to avoid a trajectory of continuously rising government debt and debt-servicing costs there is no alternative to disciplining government expenditure through reprioritisation. As difficult as it may be the public sector wage bill will have to be reduced - the SA government has dug itself into a hole that only it can dig itself out of.
As pointed out in the MTBPS “The resources available to the fiscus – which depends directly on revenues generated by the economy – are expanding too slowly to meet the country’s development requirements. Faster growth is … a necessary condition to raise the resources needed to support social and economic transformation. To overcome the economic inertia it currently faces, South Africa needs to reconstruct social consensus behind a path of accelerated economic growth.”