MTBPS – The Bad, The Ugly And Very Little Good

An Article By Ian Kilbride.

It was always going to be ugly, but the November Medium-Term Budget Policy Statement was a stinker. The one thing markets look for, no matter how bad the budget, is a confident delivery. The MTBPS was anything but confident. In fact, it was poorly delivered, lacked confidence and conviction and left the markets and business looking for direction. At a minimum, government must lead and provide direction, particularly Treasury. Instead, business was left to take in and deal with the bad news, while reading the tea leaves of future fiscal and monetary policy. Indeed, one of the few pointers towards the February 2024 budget is R15 billion of tax increases are heading our way. With business and the tax compliant consumer already tapped out, it is difficult to see how future increases in personal income tax rates, corporate tax or VAT can be justified or sustained under current economic conditions.

But before discussing the substance of the MTBPS a few other issues bear noting. The first point to note was that it was late. Such is the state of the country’s finances, that the MTBPS was in fact due to be delivered a week earlier and was not ready. This is the first time that Treasury has missed its own delivery date and gives rise to concerns about the functioning of this critical Ministry and Department. By definition, Treasury is the core of all government business and an inability to prepare a MTBPS on time not only suggests dysfunction, but also sends a negative signal to other government departments, the private sector and international investors. Admittedly, Treasury has been without a Director General for some time and the newly appointed incumbency has had little time to imprint his authority on this key Department, but this is no excuse for missing such a critical deadline for public confidence. It must never happen again.

Relatedly, while the MTBPS serves to adjust and tweak the main budget delivered in February, this one showed that the February forecasts didn’t just hit the post, they missed the goal altogether. It defies logic that Treasury could have so misread global conditions, namely China’s sluggish recovery, sticky inflation, high interest rates, stagnant domestic growth and debilitating power cuts, as to miss all its revenue collection and expenditure targets. Moreover, the logical consequence of a stagnant economy, lower resource prices and high import costs (notably oil) leading to lower revenue collection seems to have completely missed Treasury’s frame of reference.

As for the substance of the speech it was pretty much as forecast, with very little good news. The bald statistics are eye-watering, but bear repeating. The national debt is set to rise to 78% of GDP.  The budget deficit is ballooning to almost 5% of GDP. Debt servicing now accounts for one in five rands spent by the government. To compound the problems, government is set to borrow a further R563 billion in the coming financial year. Simply put, the government is borrowing more to pay off higher levels of debt and servicing interest. And yet, the Minister essentially wrote off the monumental debt owed by municipalities to Eskom, which simply rewards bad behaviour and steals from compliant municipalities and Metros such as Cape Town, to subsidise the bad. You don’t have to be Margaret Thatcher to understand that this is bad national housekeeping cannot be sustained without reaching a crisis point. We simply must not fall off the fiscal cliff as it is hard to see exactly how our economy and country could recover from such a catastrophe, particularly with the international investor community already adopting a risk off approach to our debt and economy more broadly.

But amidst all the sobering data, there were some points for cautious optimism. The first is at least the realisation that there is no free lunch and that spending and borrowing cannot carry on unabated. Treasury and possibly government more broadly is being forced to recognise the impossibility of continuing to prop-up non-performing state-owned enterprises, and some, such as the derailed Transnet are being held to account before the promise of turn-around support. Minister Godongwana also promised to rein in public sector expenditure and my information is that this has already started to be implemented across departments. But perhaps the easiest place to show real political will is at home, by cutting the size of the Cabinet, consolidating departments, removing Deputy Ministerial posts, clamping down on wasteful and unauthorised expenditure and yes Ministers, implementing a wage freeze.

At the conclusion of his MTBPS speech the Minister lamented that his eldest born had questioned whether his Father had chosen the right career path in agreeing to accept the post of Minister of Finance. The nation is asking the same question and hopes for all our sakes that the answer is yes.

It was always going to be ugly, but the November Medium-Term Budget Policy Statement was a stinker. The one thing markets look for, no matter how bad the budget, is a confident delivery. The MTBPS was anything but confident. In fact, it was poorly delivered, lacked confidence and conviction and left the markets and business looking for direction. At a minimum, government must lead and provide direction, particularly Treasury. Instead, business was left to take in and deal with the bad news, while reading the tea leaves of future fiscal and monetary policy. Indeed, one of the few pointers towards the February 2024 budget is R15 billion of tax increases are heading our way. With business and the tax compliant consumer already tapped out, it is difficult to see how future increases in personal income tax rates, corporate tax or VAT can be justified or sustained under current economic conditions.

But before discussing the substance of the MTBPS a few other issues bear noting. The first point to note was that it was late. Such is the state of the country’s finances, that the MTBPS was in fact due to be delivered a week earlier and was not ready. This is the first time that Treasury has missed its own delivery date and gives rise to concerns about the functioning of this critical Ministry and Department. By definition, Treasury is the core of all government business and an inability to prepare a MTBPS on time not only suggests dysfunction, but also sends a negative signal to other government departments, the private sector and international investors. Admittedly, Treasury has been without a Director General for some time and the newly appointed incumbency has had little time to imprint his authority on this key Department, but this is no excuse for missing such a critical deadline for public confidence. It must never happen again.

Relatedly, while the MTBPS serves to adjust and tweak the main budget delivered in February, this one showed that the February forecasts didn’t just hit the post, they missed the goal altogether. It defies logic that Treasury could have so misread global conditions, namely China’s sluggish recovery, sticky inflation, high interest rates, stagnant domestic growth and debilitating power cuts, as to miss all its revenue collection and expenditure targets. Moreover, the logical consequence of a stagnant economy, lower resource prices and high import costs (notably oil) leading to lower revenue collection seems to have completely missed Treasury’s frame of reference.

As for the substance of the speech it was pretty much as forecast, with very little good news. The bald statistics are eye-watering, but bear repeating. The national debt is set to rise to 78% of GDP.  The budget deficit is ballooning to almost 5% of GDP. Debt servicing now accounts for one in five rands spent by the government. To compound the problems, government is set to borrow a further R563 billion in the coming financial year. Simply put, the government is borrowing more to pay off higher levels of debt and servicing interest. And yet, the Minister essentially wrote off the monumental debt owed by municipalities to Eskom, which simply rewards bad behaviour and steals from compliant municipalities and Metros such as Cape Town, to subsidise the bad. You don’t have to be Margaret Thatcher to understand that this is bad national housekeeping cannot be sustained without reaching a crisis point. We simply must not fall off the fiscal cliff as it is hard to see exactly how our economy and country could recover from such a catastrophe, particularly with the international investor community already adopting a risk off approach to our debt and economy more broadly.

But amidst all the sobering data, there were some points for cautious optimism. The first is at least the realisation that there is no free lunch and that spending and borrowing cannot carry on unabated. Treasury and possibly government more broadly is being forced to recognise the impossibility of continuing to prop-up non-performing state-owned enterprises, and some, such as the derailed Transnet are being held to account before the promise of turn-around support. Minister Godongwana also promised to rein in public sector expenditure and my information is that this has already started to be implemented across departments. But perhaps the easiest place to show real political will is at home, by cutting the size of the Cabinet, consolidating departments, removing Deputy Ministerial posts, clamping down on wasteful and unauthorised expenditure and yes Ministers, implementing a wage freeze.

At the conclusion of his MTBPS speech the Minister lamented that his eldest born had questioned whether his Father had chosen the right career path in agreeing to accept the post of Minister of Finance. The nation is asking the same question and hopes for all our sakes that the answer is yes.