Tito Mboweni’s first mid-term budget speech needs to answer the following questions

 ·24 Oct 2018

Tito Mboweni’s first Medium Term Budget Policy Statement (MTBPS) on Wednesday (October 24) is a critical opportunity for the new finance minister, who gained much respect in his previous role as governor of the Reserve Bank, to instill confidence and provide South Africa with some desperately-needed policy certainty, says Chris Eddy, senior investment analyst at 10X Investments.

Budgeting, like all other financial planning, requires honest evaluation of the current situation before targets and a plan of action for reaching them can be defined, he said.

The first question to ask is: Where are we now? Then: Where do we need to be. And finally: How will we get there?

In terms of outlining the context and setting out clear steps forward, it won’t be much of a stretch for Mboweni to improve on Malusi Gigaba’s 2017 statement, the analyst said.

In October of last year Gigaba, the second to last finance minister, said: “The most urgent task before our nation is to ignite inclusive, job-creating economic growth. [Yet] government remains committed to a path of fiscal consolidation. We will take steps to narrow the primary budget deficit and stabilise gross public debt, while protecting social spending and investments supporting economic expansion.”

Gigaba’s 2017 MTBPS answered the first two questions, Eddy pointed out. It highlighted the current precarious situation relating to revenue under-collection and a resultant increase in the forecast budget deficit to 4.3% of GDP and where we needed to be, as outlined in his statement.

However, it lacked any substance as to how that goal would be achieved, the analyst said.

“After falling into a technical recession in the first two quarters of 2018, it is expected that National Treasury will revise its 2018/19 GDP forecasts downwards. Lower GDP has the potential to translate into lower revenues for Government through lower tax collections. This means that there is less of the pot to go around and finance government spending,” Eddy said.

This is the current situation.

Ultimately, government needs to create an environment that is conducive to creating jobs and enabling economic growth, whilst reducing the budget deficit and stabilising the debt-to-GDP levels. “This is where we, as a country, need to be,” said Eddy.

“If revenue expectations are revised lower, for government to maintain spending levels, National Treasury would have to borrow more money. And with any form of borrowing, while it will plug the hole today, it will increase the future interest expense that the government, and ultimately South African taxpayers will have to foot.

“To ensure a stable fiscal outlook and avoid ballooning debt, spending would need to be reined in.”

This is something that the ratings agencies monitor closely, he said.

In the context of lower growth, and potentially lower revenues, all eyes will be on Mboweni to see if he can manage to balance the budget – especially given the recent announcement of the Economic Stimulus Recovery Plan by president Ramaphosa, the analyst said.

In announcing the stimulus plan, Ramaphosa committed to ensuring that the plan was budget neutral – this means reprioritisation of spending, rather than additional spending, he said.

“National Treasury will need to find R50 billion from elsewhere in the Budget to finance these growth initiatives. By continuing to underwrite state-owned enterprises, the government’s ability to finance growth initiatives and social grants is constrained. Reprioritising spending from “nice-to-haves”, such as SAA, to necessities would be welcomed.”

These growth initiatives, combined with actual details of government policy to address the structural challenges that are constraining economic growth, will be important to instill confidence in the South African Government’s ability to create inclusive economic growth whilst stabilising the debt-to-GDP ratio over the medium-term.

These details will answer the question of how will we get there? It is only clarity of policy and the action of implementing these policies that will allow South Africa to realise its potential, Eddy said.

Read: 5 key things to watch out for in Wednesday’s mid-term budget speech

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