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The MTBPS: What to expect and what to watch out for

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The Medium Term Budget Policy Statement (MTBPS) will be released by the Minister of Finance on Wednesday. While this is often presented as a ‘mini-budget’ it differs substantially from the annual budget released at the beginning of the year.

The biggest difference is that the MTBPS is not an opportunity for the Minister to raise taxes. There will be little talk of tax thresholds and sin taxes over the next few days.

The MTBPS is an opportunity for the National Treasury to review economic trends, revenue targets and set out changes in government spending (and intentions) over the next three years.

Of central importance is how the economy can be stimulated over the medium term, how state expenses can be curtailed and how the activities of government will be re-prioritised to meet growth objectives. National Treasury has to show it can balance competing pressures against a tight budget.

South Africans will also see  to what extent economic stagnation has affected tax revenue and how the available revenue will be used to stimulate the economy while buffering citizens from the economic hardships brought on by recession.

 

Stimulating the economy calls for large scale investment in infrastructure and a business-friendly tax regime. These, respectively, require increased state revenue and reduced taxation levels.

However shielding citizen from the recession calls for increased expenditure on social services and household grants. This requires either higher taxation (which will dampen investment) or increased borrowing by the state. The Minister faces a balancing act because higher tax levels needed to pay for social grants or stimulus packages may well drive the economy deeper into recession.

Furthermore the Minister will face a political backlash if he tries to cut the public service wage bill or social grants. This is something he will be loathe to do less than a year before the next national election.

The middle path is for government to borrow money to fund activities and programmes. While borrowing on international markets may seem attractive it is made risky by volatile exchange rates and our poor sovereign credit rating. Moreover over the past decade public debt has risen to uncomfortable levels.

Currently public debt is valued at almost half the annual GDP (i.e the total value of all goods and services produced in the country last year). Public debt as a percentage of GDP is already higher than it was during the economic crises that preceded the 1994 election.

This said local public debt, in contrast to international loans, are denominated in Rands and can always be honoured by the government printing more money. Unfortunately increasing public debt is inflationary.

Economists will be examining the MTBPS for hints that the Minister is considering this option. Despite the debt ratio rising to near record levels National Treasury indicates that the rise will continue. The Minister projects that Gross public debt will rise to 60% of GDP in 2023/4.

 

The Reserve Bank exerts some control over inflation level through its ability to influence interest rates. As the reserve bank is an independent entity with a primary mandate to limit inflation economists will be looking to see what happens after the MTBPS.

In particular they will look for signals that inflation targeting is de-emphasised or the independence of the Reserve Bank is undermined.  Indeed  questions have been raised about the ownership of the Reserve Bank and the role it plays have recently been raised.

Altering the role or structure of the reserve bank could suggest that government may intends to rely more heavily on public debt to stimulate the economy through inflationary practices.

The key items that will be of interest in the MTBPS will thus include:

Is tax revenue within the targets envisaged by the budget?

Will spending on the public servants wage bill be curtailed?

Are significant increases in public debt levels envisaged?

How much money is to be directed to stimulus packages?

Are there any hints of changes in policy relating to the Reserve Bank?

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