Budget 2022 Analysis: Are Fiscal Consolidation & Accelerated Economic Recovery, Mutually Exclusive???

 

One of the biggest headaches for the finance minister has been our fiscal position and debt management. The problem is not so much that we are getting more debt but rather how we spend that debt has been the main problem. Since 2008, we have been increasing our debt to GDP ratio, however the unemployment rate has been on the rise (the graphs below highlight this) and economic growth has stagnated. Suggesting that we were not investing our money in places to create jobs or drive growth. This leaves us in a situation where we are not generating enough revenue to pay off the debt that we are accumulating. The revenue could have come from increased tax revenue form both the corporate income tax rate and the individual income tax as there would be more workers. As the minister stated in the speech this meant that our Debt-servicing costs were very high. Currently we were paying R330 BN annually on debt service costs which are higher than the budget for police, health and basic education separately. The more we spend on such costs lowers the states ability to take care of the poor. 

Debt-to-GDP ratio                            

 Unemployment Rate

Some Positives:

It was very important to note the following:

• ·      A projected primary surplus in 2023./24.
• ·         Debt ratio will stabilize at 75.1 percent of GDP by 2024/25.
• ·         Reducing the borrowing requirement with the extra revenue by R135.8 BN this year and R131.5 BN over the next two years.

Reducing the borrowing requirement at a time like this might seem out of touch with the average South Africans’ reality but this is necessary to signal to the markets that we are on a sustainable fiscal path in order to reduce out Debt-Service Costs, creating more space for welfare spending. However, this alone is not enough, and the finance minister stated the most important fact, which was that to be on a sustainable fiscal path, we need more revenue which is only possible through rapid economic growth.  For example, in a recent report it was suggested that, with inflation at 3%, growth of 1% and the nominal cost of debt remained at current levels then we would need a primary surplus of 2% of GDP to stabilize debt. With growth of 3% and everything else the same, then we would need a primary surplus of 1% of GDP to stabilize debt. At 3% growth, then we would need a primary surplus of 0% of GDP to stabilize debt. The more growth we have the more manageable our debt is. It would seem that debt management and economic recovery are not neccesarily mutually exclusive.

 

The debt problem can be considered a macro-outlook on the problems facing South Africa; however the problem of economic growth can be regarded as coming from the micro side of the economy. In a recent report it was found that one of the main reasons why the country has not been growing is due to lower productivity in the whole economy. Resulting from low investment rates from the private sector hence no job creation as well as low growth. The main culprit for this low productivity is the unstable electricity supply which hampers productivity across the whole economy. The loss in productivity began in network industries (Ports, Electricity) but then there was a spillover into the rest of the  economy.

Budget Speech :

One of the main government solutions is to improve the efficiency and effectiveness of the network industries (Eskom & Transet) in order to boost economic growth through an increase in productivity in the economy. The government has committed to finding solutions to Eskom’s debt problem because unfortunately, Eskom is too big to fail and allowing it to simply fail would be a huge risk to South Africa’s future. The government has lifted the threshold of embedded generation to 100 megawatts. This will reduce the load on Eskom as private firms such as mining companies would be able to produce their own electricity supply. The ability for municipalities to buy electricity directly from independent power producers is also a step in the right direction. The splitting of Eskom into three separate entities is very important for the generation of electricity to be more free market oriented.  

The emphasis of shifting focus to Public-Private Partnerships (PPP’s) is very important for the country. The main aim of  PPP’s is to transfer the project risks such as operational, technical and financial risk to the private entity. This is crucial for a country like South Africa that wants to improve its fiscal position through a job creation led economic recovery rather than through increased public spend. However, the importance of PPP’s is for the state to use the private sector expertise but to allow government to ensure that the private sector does not take advantage of the poor.

Conclusion:

In my perspective the budget speech did a great job in balancing the two areas of fiscal sustainability  and economic recovery. The steps outlined in SONA 2022 and the budget speech show that contrary to what some might argue, fiscal consolidation and accelerating economic growth need not be mutually exclusive events. Personally, I would have even gone further and offered some tax incentives in specifically labor-intensive sectors to boosts growth and job creation. I believe that the government needs to use the private sector in a strategic way to boost economic growth. Effective collaboration between the state and private sector, as well as other agents, is very important and is the only way out of this low-growth/high debt equilibrium.  

       

                                       

A.V