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Cape Town - Finance Minister Malusi Gigaba's first mini budget was actually a plea for more time and support to implement new economic policy, according to Arthur Kamp, economist at Sanlam Investments.
At the very least, an announcement of additional fiscal consolidation measures was expected, in his view. Furthermore, the absence of meaningful expenditure cuts to adjust to the reality of an underperforming economy, was telling for Kamp.
"(The mini budget) does not attempt to quantify the potential impact of these interventions. Rather, it shows what the budget would look like should there be no policy action and/or additional fiscal consolidation," said Kamp.
"It was never realistic to expect the minister to announce sales of state assets or plans to improve the finances of state-owned enterprises (SOEs) in the mini budget. Government’s Inclusive Growth Plan indicates an audit of non-strategic assets and plans for reform of SOEs...(which) will not be completed before March next year."
At first glance, the expected expenditure overrun in 2017/18 was surprising to Kamp, given the marked slowdown in expenditure growth in the first five months of the fiscal year.
"However, appropriations of R13.7bn have been included for South African Airways (SAA) and the SA Post Office (SAPO), a worry in that the goal of Treasury in recent years was to keep the funding of SOCs deficit neutral," said Kamp.
"This turns the focus on Eskom’s request for a substantial tariff increase next year, failing which the risk to the Treasury could increase. Meanwhile the Treasury states Denel, SA Express and the SA Broadcasting Corporation are experiencing liquidity difficulties."
Kamp explained that, historically, there has been a place for revenue increases in some fiscal consolidations, but in the end, successful fiscal consolidation usually features expenditure cuts.
"But, although the Treasury sticks to the absolute level of the expenditure ceiling more or less, the ratio of expenditure to gross domestic product (GDP) keeps increasing, which maintains pressure on the budget balance.
The mini budget indicates that a team of cabinet ministers will develop proposals to “stabilise the national debt over the medium term”. This will include proposals to narrow the deficit and ensure the expenditure ceiling is adhered to in the current year.
Asset sales are also being considered over and above additional fiscal consolidation measures. These include expenditure cuts and revenue raising measures, which are mooted for the 2018 budget.
To Kamp the mini budget numbers simply no longer reflect an intent to stabilise the debt ratio and he points to a persistent decline in government net worth, which illustrates the scale of the problem.
"Attention will no doubt now turn to the rating agencies. Given the macroeconomic outlook for the next two years we think the S&P long-term foreign currency debt rating for SA at BB+ (sub-investment grade) seems fair for now. But, the domestic currency rating is more at risk in the absence of additional fiscal consolidation measures," said Kamp.
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