The real cost of Mboweni’s budget
The austerity measures in the 2020 budget will have implications down the line for provincial and social services, and will probably plunge South Africa into full-blown recession.
Author:
5 March 2020
Finance Minister Tito Mboweni’s budget will accelerate the decline of the South African economy, which has entered its third recession since the start of the global financial crisis of 2007 to 2009. If implemented, the cost of the budget’s austerity measures, a term that refers to tax increases and budget cuts to reduce national debt, will be experienced down the line. This will be evident in the agonising fraying of families and communities as they deal with the inevitable social conflict that comes with increasing levels of unemployment and poverty.
In the 2020 budget, Mboweni announced cuts to previously planned expenditure, as forecast in the 2019 budget, of R261 billion. This included a R160.2 billion cutback in the public-sector wage bill and R100 billion that will be slashed from previously planned programme expenditures. The government will offset this with additional spending of R111 billion, R60.1 billion of which has been set aside for state entities Eskom and South African Airways (SAA).
Over the next three years, the government will transfer R112 billion to Eskom and R16.4 billion to SAA. The net result, according to the National Treasury’s Budget Review publication, is that “as a major step towards fiscal sustainability, government has reduced the main budget expenditure baseline by R156.1 billion over the next three years in comparison with the 2019 budget projections”.
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However, in a statement echoing that of a previous head of state who said HIV does not cause Aids, President Cyril Ramaphosa denied that the budget contains austerity measures. He should read his own budget, which says that the reductions in non-interest expenditure will be R8.8 billion in 2020-2021, R60.9 billion in 2021-2022 and R86.5 billion in 2022-2023. “Over the next three years, consolidated non-interest expenditure will contract at an annual real average rate of 0.4%,” the Budget Review says.
Busi Sibeko, a researcher at think-tank the Institute for Economic Justice, says this is equivalent to an annual average per capita decline of non-interest expenditure of 2.2% a year, if one also takes into account the growth of the population. The Budget Justice Coalition (BJC), which represents organisations wanting to build people’s understanding of and participation in South Africa’s planning and budgeting processes, says: “This austerity will deepen the economic stagnation the country has been in and out of for the past decade, and plunge us into a full-blown recession.” Treasury director general Dondo Mogajane says: “Reductions of this magnitude will inevitably have negative consequences for the economy and social services.”
Bad faith
The Budget Review says public-sector wage bill reductions will be R37.8 billion in 2020-2021, R54.9 billion in 2021-2022 and R67.5 billion in 2022-2023. “The proposed wage reductions will see consolidated compensation contract by 1% in real terms over the medium term.”
In 2020, the wage bill was an estimated R638.9 billion or 35% of total government expenditure. In 2011, the ratio was exactly the same. This means that the public-sector wage bill is not the reason for the increase in the debt-to-GDP or gross domestic product ratio over this period. Sean Muller, an economics lecturer at the University of Johannesburg, says the budget proposals “amount to the Treasury wanting public servants to pay for Eskom bailouts directly from their current and future salaries.”
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In his medium-term budget policy statement at the end of October 2019, Mboweni said the government had identified savings of R50 billion in the areas of goods and services and transfers. It had to find additional measures of more than R150 billion to meet its austerity targets. “How will we do this? We will need to deal with the challenges of the wage bill. We look forward to robust discussions in the relevant bargaining structures and with other stakeholders to achieve a sustainable arrangement,” Mboweni said in October.
He had all the time in the world to table the issue at the Public Service Co-ordinating Bargaining Council (PSCBC), but the government ambushed the unions by going to the council only the day before releasing the budget. The government acted in bad faith. It was irresponsible and reckless. Also, Ramaphosa addressed the Cosatu Central Executive Committee the day before the PSCBC meeting and said nothing about the government’s plans to slash the wage bill.
There is an existing three-year agreement that expires in 2021. For the final year until 2021, the lowest-paid public servants, at salary levels one to seven, will receive an increase of the projected consumer price index (CPI) of 4.4% plus 1%. Workers at levels eight to 10 will receive an increase of the projected CPI plus 0.5%. Those at levels 11 to 12 will get an increase that is equal to the projected CPI. The minister of finance decrees an increase for public servants in the senior management service, those at salary levels 13 to 16, after consulting with the minister of public service and administration.
The budget has proposed a 1.5% increase in the public-sector wage bill for 2020-2021, which is equivalent to a real reduction of 2.9% after taking into account projected inflation. The chances of this happening are close to zero. So, the planned R37.8 billion of savings will not materialise. All other things equal, the budget deficit will increase to R408.3 billion or 7.5% of GDP as opposed to an estimated R370.5 billion or 6.3% of GDP.
Provinces tighten their belts
The government plans to achieve the second part of its austerity measures by further emaciating the capacity of provincial and local governments and the Public Rail Agency of South Africa (Prasa) to deliver services to poor people, which will suffer R100.1 billion in cuts to planned expenditure. It will take R18 billion from provincial conditional grants that are meant to deliver housing, roads and education and health infrastructure.
Other allocations to provinces will be pared by R7.3 billion. It will also slash R18.5 billion from local conditional grants that are meant to be invested in public transport, urban settlements and municipal and water services infrastructure. The government will reduce allocations to Prasa by R8.6 billion.
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The BJC says: “Whose needs did Minister Mboweni’s budget prioritise? Not those of people awaiting access to adequate housing, as R13 billion was cut from housing development programmes. Not the needs of children being taught in oversized classes with leaking roofs and dangerous pit latrines, as R1.9 billion has been cut from the Education Infrastructure Grant. Nor for the 83% of people who rely on public health services with R4 billion cut from health funding and a delay in implementation of the National Health Insurance.”
After two recessions in two years, Ramaphosa’s economic record is abysmal. Despite two investment summits, where companies pledged more than R600 billion, gross fixed capital formation, a measure of investment in the economy, has declined for two consecutive years since he became president, according to Statistics South Africa’s latest GDP release. There have been six out of eight quarters of declining investment.
As load shedding intensified after the start of the year, GDP growth will probably decline again during the first quarter of 2020. Mboweni’s austerity budget will add to the misery. Austerity does not work because it reduces GDP growth, which results in a rising debt-to-GDP ratio. “This is why the logic of austerity fails and is self-defeating as a budget policy. Growing the economy must include a targeted social and economic stimulus plan,” says the BJC.
Correction, 5 March 2020: The annual average per capita decline of non-interest expenditure of 2.2% a year was previously reported as 1.8%.
