Thought Leadership

BLSA CEO’s Newsletter – 19 February 2024

19/02/2024 | By Busiswe Mavuso

The budget speech this week is more critical than ever to business sentiment. The financial performance of government has been a material risk that has at times damaged South Africa’s investment case. The rapid deterioration of the fiscal position during the Zuma years triggered fears that we were on a terminal path to bankruptcy.

One of the achievements of the Ramaphosa government has been to restore some trust in the ability of National Treasury to run the finances of government. There has been a clear effort to rein in spending and turn the trajectory. The challenge is that our economy has not cooperated. From the Covid lockdowns to load shedding and the logistics crisis, growth has consistently disappointed. That means the revenue side of the equation has not been able to deliver enough money to fully restore government finances. As a result, the time at which revenue will exceed expenses before interest payments (the so-called “primary surplus”) has consistently drifted outward, while gross debt as a percentage of GDP has continued moving upward.

This will be a key indicator I will be watching in the budget speech. Just when is this point of primary surplus going to be achieved? It was meant to happen in the fiscal year ending now, but with revenue under pressure there are doubts it will succeed. If it does not, eyes will turn to whether it can in the year ahead, requiring clear spending discipline. Finance minister Enoch Godongwana must make the case that Treasury will succeed, despite the myriad spending pressures it faces, especially in an election year. There has also been much noise about using the country’s foreign reserves to help relieve pressure on government finances. If that is going to happen it must be with strict and credible conditions, that make clear that the function of foreign reserves is to protect the country from international crises and maintain its credibility in the international financial system. It is not a free money pot for government bailouts.

Another important issue I will be watching for is government’s efforts to drive infrastructure investment. We have for many years heard a lot about it, but it still isn’t happening. Public spending in particular has continued to decline throughout the period, while the private sector has been picking up the slack. That is largely a result of the financial collapse of Eskom and Transnet, but core public sector investment has also been weak. So, while spending needs to be constrained, if we want to turn the trajectory of overall GDP growth, it is important that we are investing in our economic capacity and ensuring the state can provide essential services like water and roads. Treasury has been working on reforming the regulations for public-private partnerships to make them easier to use. This process has been going on for some time, and it would be good to see clear announcements of changes to the regulations in the Budget. This would enable the private sector to become much more active in investing in public infrastructure, without putting government finances under strain. Perhaps we will hear more of the Infrastructure Finance and Implementation Support Agency that was announced in the MTBPS but with little detail. This may be a positive intervention to promote better use of PPPs.

The financial predicament of Transnet and Eskom continues to be a serious issue for their performance. We have seen a great deal of public money put into them (as well as other state-owned entities) and yet their performance continues to be weak. So, I do not expect Treasury to write any blank cheques for either, despite the importance of restoring their financial health. We need clear conditionality: requiring the two state behemoths to deliver on reforms before new funding is made available to them. We cannot afford to see more public money going into them without credible reforms. We have a plan on how the logistics crisis should be dealt with in the form of the Transnet roadmap that has been approved by cabinet and made public earlier this month. It is a good plan, but Transnet needs to be fully committed to its implementation, which also means confirming the urgent appointment of its executive team. That should be a condition of any Transnet funding.

Business is doing its part in resolving the logistics crisis. We have raised R120m to help fund interventions by the National Logistics Crisis Committee. We are ready to work with government and Transnet to do what is needed, backing the reform effort with skills and resources. National Treasury can aid this effort as a key partner in resolving the logistics crisis.

A part of resolving Eskom’s crisis is the effort to deal with debt owed to it by municipalities. National Treasury has been running a debt forgiveness programme with municipalities. We were told at the MTBPS in November that municipalities representing 97% of the municipal debt owed to the utility had applied for debt relief. The programme is important for Eskom’s sustainability, as well as improving the fiscal management of the municipalities. Relief comes with a set of conditions that are aimed at improving the financial resilience of municipalities and their ability to generate revenue, as well as building a culture of payment for services. I hope we will hear of the progress in getting municipalities to stick with the programme.

Business will of course also be watching for changes to tax rates. The more tax government collects, the less there is for spending and investment by the private sector. Increasing taxes may seem to be one way to restore government finances, but the evidence is that behavioural shifts in response to higher tax rates undermine collections. The only tax that can be reliably increased to raise additional revenue is VAT, a regressive tax that affects the poor the most and I can’t see that happening in an election year.

I think it is important to temper expectations of what the Budget can do. Gone are the days when National Treasury simultaneously held the levers of key policy interventions to support growth, as well as the levers of government spending. The economy now depends on many parts of the state machinery pulling together, with Treasury only able to hold the purse strings. It is broader economic policy that is the ultimate way out of the low growth mess we are in, even though sound fiscal management is a critical part.

BLSA is a business organisation that believes in South Africa’s future and shares the values set out in the Constitution. BLSA is committed to playing its part in creating a South Africa of increasing prosperity for all by harnessing the resources and capabilities of business in partnership with government and civil society to deliver economic growth, transformation and inclusion.