Thumb_Tito Mboweni
Posted on 28 February 2020 by Sean Gossel
Political Economy

Mboweni's 2020 budget speech draws the battle lines

With the economy on its knees, government’s latest budget speech expects unionised labour to share the pain. If history is a guide, the plan is unlikely to yield the desired results.


With the economy on its knees, government’s latest budget speech expects unionised labour to share the pain. If history is a guide, the plan is unlikely to yield the desired results.

It was never going to be a business-as-usual budget where the can just gets kicked down the road in verbiage of silver linings. The major announcement of Budget 2020 was the plan to reduce the public sector wage bill by about R160 billion over three years in order to decrease the deficit. This will entail cuts of R55 billion in 2021 and R68 billion in 2022 when the new three-year wage settlement is negotiated from June 2020. But whether or not the state will be able to follow through on this proposal, remains to be seen. Even before Finance Minister Tito Mboweni made his announcement, COSATU threatened on Tuesday night to strike and “collapse” the public service if government failed to honour the current public service agreement. Considering the previous failed attempts to reign in the wage bill or enact layoffs in the public sector and SOEs over the last decade, the results are once again likely to be underwhelming.

No doubt Moody’s were considering the implications closely. South Africa has been moving closer to the edge for years, and now we have our toes dangling over the precipice. It was clear that to avoid a downgrade, a significant policy shift was needed to signal that SA is serious about reforming our public finances and restarting inclusive growth — but a lot of these policies won’t be popular with the factions of government and its alliance partners. Moody’s had already lowered its economic growth forecast to 0.7% for 2020 from 1%, which sent a message that it was not holding out much hope for the budget. Many analysts and market commentators have said that a downgrade is already priced into the market but the Minister’s admission that national debt is not expected to stabilise appears to signal defeat. In addition, if government and the unions wage negotiations become as disruptive as in previous rounds, then it is possible that the country’s economic growth may enter a recession. Consequently, with a budget deficit above 6%, a debt to GDP ratio that is projected to exceed 70% in 2022/2023, and the likelihood of disruption to economic growth, a downgrade either in March or November this year seems inevitable.

The budget was however realistic about the inability to raise revenue from increased taxes. The country is at the crest of what’s known as the Laffer curve, where an increase in taxes potentially leads to a decrease in tax revenue collection, rendering new taxes on the middle and upper classes as moot. To put this into perspective, of the R1.6 trillion that the government has budgeted to take in during the current tax year, R547 billion, or around 35%, is expected from 7.5 million registered taxpayers. In addition to the obvious increases in the fuel levy, and sin taxes (with the exception of African beer), the other alternative was a further hike to the VAT on consumer goods. However, with poor consumer demand and low economic activity, government wisely chose the path of caution and thus didn’t change the VAT rate. This was yet another sign that with the economy on its knees, government has finally reached the point where it has no choice but to demand that unionised labour share the pain.

At the end of the day, the Minister has an impossible and unenviable task. He has to commit to cutting R160 billion in expenditure over the next three years, getting public debt levels under control, and adopting workable measures to stimulate growth. At the same time, he has to placate an increasingly frustrated tax base and burgeoning desperate disenfranchised population, while appeasing the competing government factions and alliance partners; all while hoping that Moody’s doesn’t finally downgrade our sovereign rating. Politically, this means that over the next year Mboweni, Gordhan and Ramaphosa will be at the centre of a storm of competing motivations as the Zuma remnants, trade unions, SACP and opposition parties jostle for power. We can only hope that Ramaphosa’s consensus-seeking leadership style holds sway.

Associate Professor Sean Gossel is Research Director at the UCT GSB and lectures Public Sector Finance on the MCom (Development Finance) programme, the Emerging Markets Economic Development elective on the MBA programme, and Macroeconomics on the EMBA.


MORE ON Political Economy

Tito Budget - Media
Political Economy

Mboweni says he has hope, but without critical reforms this is likely to fade fast

Even before the onset of the health crisis, SA’s economy was already hurtling toward disaster. But the move to zero-based budgeting and limiting endless SOE bailouts provide possible silver linings.

Read Article
Posted on 25 February 2021 by Sean Gossel
Ghai - media
Political Economy

Yes, there is unity in diversity, and talking about it makes us strong

UCT GSB MBA alumnus, Shivani Ghai, says creating a safe space for talking about difficult topics is an important way to foster unity in a divided world.

Read Article
Posted on 7 August 2020 by Shivani Ghai
IE_Media_8Aug2020_lats tap into
Political Economy

Let’s tap into the defiant optimism of our young people this Youth Day

As protests around structural inequality and racism rage across the world, we need to re-ignite efforts to give young people a voice at all levels of society, but especially as leaders.

Read Article
Posted on 15 June 2020 by Camaren Peter
ramphosa
Political Economy

More broken promises and unmet plans will not deliver the country we need

Ramaphosa has little room to manoeuvre, it’s true. But without bold leadership at this juncture, SA is on the road to nowhere.

Read Article
Posted on 17 February 2020 by Athol Williams
Climate change action starts with each one of us
Political Economy

Climate change action starts with each one of us

Climate change is a global emergency and citizens must play a bigger role in addressing it.

Read Article
Posted on 16 September 2019 by Catherine Constantinides
Business As Usual Wont Fix Youth
Political Economy

Business as usual won't fix youth unemployment, poverty and inequality

Young people are growing tired of vague targets and empty promises made by successive governments since 1994. Now we need decisive leadership and quick action to drive change.

Read Article
Posted on 13 June 2019 by Athol Williams
Brexit Crisis Offers Key Lessons Media
Political Economy

Brexit crisis offers key lessons and opportunities for Africa

The lessons of Brexit warn us that unless the benefits of economic integration are understood - are experienced - by the average African citizen, Africa’s Continental Free Trade Area initiative is doomed to failure.

Read Article
Posted on 29 May 2019 by John Luiz