Keeping the mouth of the GNU closed

A Government of National Unity can deliver a better fiscal consolidation

The fiscal position is, as we know, not great. It has been nearly four years to the day since Tito Mboweni warned of gaping hippo jaws . The two jaws were rising expenditure as a share of GDP and falling revenue as a share of GDP. As a result, the deficit as a share of GDP was rising inexorably.

We have moved on from hippos to GNUs, which are really just wildebeest, but the challenge is the same. The state has been consuming far too much.

Source: DALL-E

In the long years since, the National Treasury had made significant progress in closing the hippo jaws. This is in part due to Mboweni’s decision to freeze government wages - in 2020, the salary bill was rising at an alarming rate and taking up an increasing share of income. The unions were, of course, bitterly unhappy. But without that decision it is almost unimaginable to think where we would be fiscally today.

The hippo jaws are closing

Of course, the long-term solution is to structurally raise revenue, and for that you need growth. Once this has been achieved, expenditure can naturally start trending upwards and all manner of things can be paid for.

But this may take some time. Until then, the government of national unity will need to keep a tight fiscal position.

Both the ANC and the DA are keenly aware of this. The most recent Budget tabled by the Ramaphosa administration stuck to the narrow path of a slow fiscal consolidation, focusing on reducing expenditure as a share of GDP and very mild tax increases. The DA’s Framework for Multi-Party Government, which forms the basis for their negotiating position essentially asks that the Treasury stick to this fiscal path. Indeed, the DA has given the GNU a little bit of wiggle room even - Treasury’s plan is for a deficit of 3.2 per cent of GDP by 2026/27, whereas the DA’s request is for a deficit of 3.5 per cent of GDP.

But the GNU agreement (being hammered out as we speak) is still silent on the how of fiscal consolidation.

Here there are three key principles, that to my mind, will deliver a healthier consolidation:

• Principle 1: In the short-term, education and health budgets should be ringfenced. The fiscal consolidation has been unnuanced and spending on health and education has slowly been eroded. Growth in spending on basic education has risen by 3.9 per cent and health care by 3.8 per cent, less than CPI inflation of 5 per cent. This had long-term implications for service delivery and long-term growth.

  

  Source: Sachs et al (2023, p. 12)

• Principle 2: Smaller state-owned enterprises need to be closed. A key part of the success in China was “grasping the large, letting go of the small”, essentially state-owned enterprise reform that saw smaller, unnecessary state-owned enterprises closed.
  

  In the 2024 Budget Review, Treasury carried a box titled “How state-owned entities have become a drain on the fiscus”, making the obvious points about how SOEs have drained money away from service delivery. SAA has received a total of R48.2 billion over the last six years. More recent example, include Denel getting allocated R3.4 billion, and the South African Post Office R2.4 billion.

• Principle 3: There needs to be a thorough review of the Treasury debt management strategy. With debt levels rising significantly over the past number of years, a number of market participants have highlighted that improved debt management could save significiant interest costs. These include a reducing the long dated maturity profile and better use of cash balances and a less-than-optimal debt structure. This is partly a capacity issue - National Treasury has a small debt management team that is part of a much bigger team that also does state-owned entity oversight. Many other countries have a dedicated Debt Management Office (DMO) at arms’ length from the Ministry of Finance which is staffed by debt experts.

These three simple principles could go a long way to a more effective fiscal consolidation and a happier GNU.