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Cape Town - What is of concern regarding the mini budget, is that interest service cost estimates are probably still underestimating the impact from factors like the rand levels, more SA Reserve Bank interest rate hikes to come and risks regarding Federal Reserve decisions, according to emerging markets economist Peter Attard Montalto of Nomura.
"Overall, the National Treasury has been largely successful in keeping the broad framework under control, but at the expense of smaller primary surpluses and probably some overestimation of nominal GDP and underestimating of debt service costs, not to mention other holes such as nuclear and National Health Insurance," said Montalto.
A key concern for him is the abnormally low levels of contingency reserves within the budget framework now. Normally, around R40bn to R50bn would be allocated. In terms of the mini budget there is no reserve level for 2015, R2.5bn for 2016/17 and R9bn and R15bn for the following two fiscal years after that. At the budget in February the contingency reserve was R5bn for the current fiscal year and then R15bn and R45bn for the years following.
"This is, in part, how the wage bill is being paid for. The public sector wage settlement led to a compensation line having a shortfall of R12.2bn this fiscal year, R20.6bn in 2016/17 and R31.1bn in 2017/18. This shows the scale of adjustment occurring below the surface in this MTBPS," explained Montalto.
On the other hand, bright spots for him as seen in the mini budget, are the very sharp contractions in real expenditure growth of non-interest items next year, as line departments are squeezed to account for higher wages.
"However, given that average employment growth in the public sector has been around 3.3% over the past six years, and with higher wage growth, there is a big potential hole here if it cannot be followed through," warned Montalto.
He also pointed to strong procurement spending savings and savings in current expenditure on consumables and travel as something with which "decent progress" has been made.
"The deficit blows out, however, in the coming years from the previous forecast, given that expenditure is still increasing slightly in absolute terms whilst revenue falls. We still believe that in the long run the government will struggle to get the deficit below -3.5% even with higher taxes. Those will simply be used for new spending such as NHI, expanded benefits and higher education support," said Montalto.
"We think the government will in the future struggle to get above a flat to very slightly positive primary fiscal balance. Indeed, we think it would be politically unacceptable to do so. It would be a big negative step, however, to abandon such a policy. If this does happen, say, at the mini budget next year, it would fast track downgrades by Moody’s, in our view."
Sanisha Packirisamy, economist at MMI Holdings, said onerous debt costs crowd out more preferable forms of expenditure.
"Due to the increase in government borrowing, debt-servicing costs are expected to remain the fastest-growing expenditure item," said Packirisamy.
"The rapid rise in debt-servicing costs is crowding out other - social and growth-enhancing - spending priorities and has been raised as a key concern by the rating agencies in the past."
