Looking Ahead to the MTBPS

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The recovery of the South African economy since the recession of end 2008 and early 2009 remains muted with little prospect for significant improvement. Indeed, given renewed fears around debt default and restructuring in the euro-zone, things look bleaker now than they did earlier in the year. The destiny of the South African economy is and will remain interlinked with that of the world’s.

Though the SA economy grew by 2.8% in 2010, and then accelerated in the first quarter of 2011 with an annualised growth rate of 4.5%, the second quarter of this year saw growth of only 1.3%, with agriculture as well as manufacturing output declining by more than an annualised 5%. Very few new jobs have been created in such an environment and the social and political pressure of high unemployment remains and is likely to increase.
The 2011 MTBPS will have to remain very cautious about the economic outlook and consequent tax revenue performance until at least 2014, or risk pursuing a non-sustainable spending path if things continue to go poorly. Already we have been running deficits since 2009 in order to simply maintain public spending commitments, that is keep resources available to government roughly constant in the face of dwindling tax revenues. The 2011 Budget estimated a gradual deficit decrease from 5.3% in 2011/12 to around 3.8% in 2013/14.

Under the continued difficult circumstances, further, deficits will be the order of the day all the way through the new outer year (2014/2015). Expect some criticism and some crying ‘Disaster!’ in the streets but honestly what else can we do? The alternative can only be spending cuts, which would be politically impossible and socially adverse. But the longer-term implication is that the global economy must recover or South Africa must find markedly better ways of getting value for our public money. If either or one of these does not happen we risk serious political and social turmoil as either spending is cut in real terms or we breech a reasonable debt sustainability threshold.

As the 2011 Budget articulated it, in nominal terms the cost of debt-servicing will double from its 2007/08 value to 2013/14, and debt service costs will increase by an annual average of around 16% from 2010/11 to 2013/14, or at more than double the proposed rate of increase of allocated expenditure of 7.2%. Debt servicing, in other words, is by far the fastest increasing budget item over the medium-term and the burden of debt servicing will play a larger and larger role in coming budgets, as it did in the first years of Trevor Manuel’s time as Finance Minister.

Newspaper headlines have recently been proclaiming the billions lost to wasteful or irregular expenditure by government departments.

Fortunately, from 2010 onward the fiscal authorities have been drafting budgets based on fairly pessimistic assumptions around growth and tax revenue performance. So in this MTBPS we are not having to make further downward adjustments in tax or larger deficits than those proposed in the 2011 Budget. Indeed, we will have tax revenue over-runs of a few billion: nice, but not a big deal given the very conservative tax forecasts made in February 2011. Don’t mistake these overruns for being out of the woods, but give credit to the authorities for not allowing an unrealistic optimism to dominate their forecasts.

Nothing in the global economy suggests quick recovery. The underlying narrative of the budget then continues to be, and with increased urgency, that we need to do more with less. Efficiency and effective reprioritisation must become even more important than usual.

All of which brings us back to the now familiar emphasis on getting value for money from the budget and weeding out waste and corruption. Newspaper headlines have recently been proclaiming the billions lost to wasteful or irregular expenditure, but of course the availability of this information suggests some progress in honing in on problems and some determination to do something about it.

And yet the perception of government in this regard remains a mixed one. For every serious and laudable attempt to ensure budget allocations go where they should and benefit who they should, there seem to be two more stories of money going missing, tenders oddly awarded, suspended officials still collecting their salaries years later, and so on. There is little doubt that government is losing the pereceptional battle: more citizens than ever before in democratic South Africa now believe that corruption is endemic. Equally worryingly, political office and government positions are more and more typically regarded not as means to serve the people, but to make large sums of money.

It hardly needs pointing out that the mix of shrinking resources for social spending and a government perceived to be concerned mainly with self-enrichment is a flammable one. The MTBPS needs to send a clear message in favour of budgetary accountability and service delivery. More importantly, getting more from less must be the focus of all our government departments, our democratic institutions, and citizens themselves after the MTBPS.

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– By Len Verwey, Idasa