Sound fiscal policy versus an election win?

AFTER the last cabinet meeting, the mood of the finance minister, Enoch Godongwana, was one of uneasy resignation. His colleagues in the executive authority did not want to listen to his understanding of South Africa's balance sheet. In the past few days, Godongwana and the president have tried to downplay the rift, but there can be little doubt that their differing opinions on fiscal policy represent competing regimes, and this is causing great tension in cabinet meetings.

The medium-term budget that will be delivered in just over a month, coincidentally in the week of the African Growth and Opportunities Act  summit in South Africa, will be the line in the sand between Cyril Ramaphosa and Godongwana, but also between the treasury and the cabinet. That this dispute in the executive authority has now been referred to a committee of officials not only confirms that it exists but is clearly an attempt by ministers to delegate the treasury's responsibilities.

Since his appointment in August 2021, Godongwana has made it clear that state and government spending is unaffordable. His efforts to apply strict fiscal control could not have come at a more politically awkward time for the ANC. The party plans to fight the 2024 election by launching as many social projects as possible, but with corporate taxes under pressure, commodity prices trending downward and an economy struggling to catch fire, Godongwana and the Treasury have little to no wiggle room. There is no way the government wants to or can cut the two biggest government expenditures: civil service salaries and social grants.

Also, the international financial system, including the major credit rating agencies and the International Monetary Fund (IMF), will be damning in its response if Godongwana's warnings about overspending and increasing debt are swept under the rug with next year's elections in mind. The president knows this, but the ANC simply cannot take risks with the 2024 elections.

The misunderstanding between Godongwana and the rest of Ramaphosa's cabinet started during the Brics summit when the finance minister threw cold water on his colleagues' naivety regarding an alternative currency to the US dollar. Godongwana's contradictory stance in the engine room of the summit was an unpleasant embarrassment for Ramaphosa. As far as Godongwana is concerned, South Africa's economy is rooted in Western financial systems and this reality cannot be undone by new geopolitical agreements. Ramaphosa has on several occasions referred to the value of a competitive alternative to the US financial regime, an opinion that aligns with the geopolitical aspirations of Xi Jinping, general secretary of the Chinese Communist Party.

In the same week that Godongwana sent a memorandum telling  government departments to limit spending on unproductive programmes and stop underspending or return unspent money to the appropriate revenue funds, he was told by a junior cabinet member, human settlements minister Mmamoloko Kubayi, that his instruction was irregular. According to her, such drastic policy steps can only be the function of the ANC president. She therefore talks about government affairs in her capacity as head of the ANC's economic transformation committee, and presumably she already has the president's support for her misconception regarding financial management.

Godongwana still remembers how Trevor Manuel was able to convey the sensibility of a responsible budget to Thabo Mbeki's cabinet, without contradiction and with the support of the president. While junior cabinet ministers now challenge Godongwana's authority with populist confidence, he, like so many South Africans, must by now doubt whether Ramaphosa has the leadership qualities to guide his comrades in the Union Buildings across the Rubicon to South Africa's fiscal realities.

Like Godongwana, Tito Mboweni, his predecessor as finance minister, wanted to tackle the thorny issues of the state's salary bill and the annual bailouts for state entities, but without the support of his cabinet colleagues and the president this would almost always have been an impossible task. Mboweni once sarcastically said: “I am not the minister of bailouts," but unlike Godongwana he did manage to limit the state's salary bill, at least temporarily.

It is also true that with Mbeki and Manuel at the helm, the economy experienced a growth phase, the national debt burden was under control, inflation trended downwards, and with it came the relief of falling interest rates. In contrast, Godongwana, like Mboweni, has had to manage a national debt burden moving closer to R5 trillion while also dealing with an inflation rate that was exposed to international as well as national factors. Rising inflation led to the Reserve Bank being forced to step in with increased interest rates, all while the economy showed almost no signs of growth and state and government spending continued to increase. Godongwana's understanding of these realities puts the ANC's preparations for the 2024 election under immense pressure.

The medium-term budget speech was listed in the national legislature's calendar for November 1. As things stand, Godongwana does not have the support of the president or the cabinet for a budget of financial austerity. Ramaphosa argued earlier this week that cuts are not the only way to make the budget numbers add up. The only other way is through economic growth in order to improve tax collection, but there is a general consensus that the outlook for growth is bleak.

In fact, the economic growth outlook has deteriorated significantly relative to the expectations set out in Godongwana's February 22 budget speech. After the speech, economists pointed out that Godongwana's optimistic expectations did not take into account the impact of load-shedding or restrictions on cargo and port logistics. Perhaps the minister could not necessarily have foreseen that corporate tax income (-20%) and mineral royalties (-40%) would plummet by the last quarter of 2023.

Godongwana claimed in February that South Africa's real GDP growth between 2023 and 2025 would be an average of 1.4%, which was already lower than the 1.6% he forecast in October 2022. However, South Africa's real gross domestic product (GDP) grew by just 0.6% in the second quarter (April to June) of this year. This followed a rise of 0.4% in the first quarter. Why South Africa's finance ministers try to present unsubstantiated expectations as reliable budget numbers, no one knows.

With the 2024 elections in mind, the ANC and Ramaphosa are convinced a permanent social grant is vital to get the ruling party over the 50% threshold in the national assembly.

Like the ANC secretary-general, Fikile Mbalula, Ramaphosa is wary of the anger of the trade unions, the Communist Party, and more specifically of the ANC's traditional support base. The results of the 2021 local elections, when the ANC could get only 46% of the national vote, left the president and Luthuli House in a state of post-traumatic stress, especially as Mzansi's political as well as economic situation is currently even worse than two years ago.

Godongwana is convinced the ANC's planned increased social grant comes with the unsustainable fiscal risk of rising public debt. Currently, the Treasury foresees that public debt will stabilise at 73.6% of gross national product in 2025-26, but the 2023 salary increases and diminishing revenue make this expectation unlikely to be realised.

Godongwana has already informed provincial departments in his (“illegal") memorandum that they must somehow find room in their spending for the 7.5% salary increase — an additional R37 billion — that public service unions negotiated in March. The Treasury has meanwhile provided for an inflation-targeted 3.3% salary adjustment for civil servants in 2025-26, which will be difficult to implement given the 7.5% negotiated for 2023-24. The estimated budget deficit of 4% for the current financial year has already been adjusted by the treasury to 5.1%, but Moody's calculates the likely under-recovery to be at least 5.6%.

Ultimately, the minister will have no alternative but to look for new taxes. Almost every year, in the run-up to the February budget speech or the medium-term budget in October, analysts and the media speculate that higher VAT is one of the minister's options. But while a two percentage point increase in VAT will make a significant difference to the fiscus, it will also affect South Africans who depend on a government grant significantly more than the rest of us.

Higher VAT therefore makes absolutely no sense, not politically and not economically, especially not in the run-up to an election. State entities such as Eskom, Transnet, SAA and the SANDF are all already well on their way to exceeding their 2023 budgets and are begging the Treasury for further financial assistance. The planned National Health Insurance of minister Joe Phaahla has absolutely no chance of getting even the most basic funding.

So, if you pray regularly and it works for you, now is your chance to do something for Enoch Godongwana and South Africa. The minister will appreciate it, because the preponderance of power in the cabinet is great, and Ramaphosa clearly does not want to run the political risk of being the first ANC leader to lose a national election, even if it also means he has to throw his finance minister under the bus and sacrifice South Africa's sound financial management practices of the past.

♦ VWB ♦

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