Investors will be watching Budget 3.0 closely on Wednesday afternoon to see if it includes measures that will benefit the economy.
With Minister of Finance Enoch Godongwana trying this week for a third time to get Budget 3.0 passed, he has a good opportunity to introduce measures that will help to fix South Africa’s economy.
Busi Mavuso, CEO of Business Leadership South Africa, says in her weekly newsletter that it is critical that Budget 3.0 strikes the right balance of fiscal prudence.
“The growth outlook has deteriorated from February, when the budget was first tabled, meaning there will be less revenue in the form of tax collection and therefore a bigger headache on how to balance the books.
“At last week’s business/government partnership meeting, held with the president, it was clear that we must speed up reform to drive economic growth. It is time for parliament and government to show that we are capable of rallying around a coherent budget that maintains fiscal consolidation.”
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S&P Global’s rating reinforces what‘s at stake
Mavuso says ratings agency S&P Global’s recent decision to reaffirm its positive outlook for South Africa’s credit rating reinforces what is at stake. “S&P sees a potential upside that would lead it to increase our credit rating if an improving track record of effective reforms resulted in the strengthening of economic growth and reduced government debt and contingent liabilities.
“On the other hand, it notes the downside risk if ongoing economic and governance reforms do not progress, resulting in a deterioration in economic growth or a higher-than-expected fiscal deficit and interest burden.”
She points out that investors will be watching closely how politicians react to the budget speech. “National Treasury has stayed the course to ensure the budget does not worsen our debt position and I expect the budget tabled this week will maintain that.
“But in the absence of increased VAT, which has been abandoned from the first budget, we must see restraint on spending. I particularly want to see an honest reckoning with how productive distinct parts of government are, particularly outside of the main service delivery lines.
“We had a succession of administrations over the past 30 years and each one set up new public institutions and programmes. They do not all deliver value for money. As we must do in the private sector, when a budget is constrained, we must reduce spending in those areas that create the least value.”
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Budget 3.0 will affect different stakeholders
Mavuso says the problem facing our politicians is that it is very difficult to assess value for money in an objective way, given that there are different interest groups who will be affected. “That is why our constitution protects the independence of several bodies, including the Financial and Fiscal Commission, Reserve Bank and National Treasury.
“The framers of our constitutional order recognised that the financial system is technical and requires institutions that are somewhat protected from short-term political expediency. For the budget, there is a technical question that must be answered: what expenditure cuts will have the least damage on growth or service delivery?
“We must identify those purely on the evidence and follow through to reduce expenditure. This is a task best done by technocrats and our National Treasury is the institution with the right capabilities to do it.”
She says that she hopes Godongwana will be able to announce credible steps to reduce expenditure and that we quickly see the political support to do so because that is what will give comfort to investors that we are a country that can politically manage its finances appropriately.
“If we do that, we will maintain our trajectory of improving the confidence of lenders. Eventually, we will see a return to an investment-grade credit rating, which will reduce the cost of borrowing not only for the government, but the whole economy. And with lower costs of borrowing, we will get more investment and more economic growth.”
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Critical that budget increases SA’s economic growth
Mavuso notes that it is critical that South Africa increases its economic growth. “This came across loud and clear at the business/government partnership meeting that we held with the president and several government ministers last week.
“It was abundantly clear to everyone how serious our growth outlook is. We have now agreed to accelerate reforms by introducing several ‘sprint’ approaches to getting things done. We also increased the frequency of future engagements for the partnership from quarterly to every six weeks.
“This shows the impressive level of determination and engagement from the president and his team. We recognised that several issues, ranging from the global trade situation to local politics, can distract the reform effort, but we must double down and remain focused.
“No matter what happens in the international arena, our structural reforms are critical to enabling our economy. Certain reform areas, such as logistics, are lagging the initial timelines, but the meeting was clear that this must be fixed. I appreciated the urgency of fixing our country and ensuring the right policies are in place.”
Turning to last week’s unemployment figures, Mavuso says it keeps increasing. “Whether it is government trying to balance the books, or workers trying to secure a job, our economy is not delivering. We must fix it and I saw last week just how engaged and serious both government and business are about doing so.
“It gave me a new sense of optimism that South Africans are grasping the challenges and ready to implement the solutions. A finalised budget that hits the right balance of fiscal prudence will be a key enabler. Our politicians have the chance to make sure that is what we get over the next few weeks.”
