Is Godongwana’s 2023 budget credible? Here are 6 ways to tell

POSTED ON: February 24, 2023 IN Blog

Finance Minister Enoch Godongwana faces the annual South African conundrum in his 2023 Budget: can he reveal a credible path to stabilising public finances, while also enabling activities that promote progression to a decent life?

The answer requires attention to the credibility of the fiscal story and also to the performance of public investment. And mostly these answers fall outside of Treasury’s direct control.

Fostering growth and employment over many decades will require sustainable state finances and consistent investment in human and physical capital. Our world will not stop without this, but there would be little possibility of making meaningful progress towards the apex objectives of full employment, poverty eradication and equity. We would simply sink deeper into a zero-sum game with everyone fighting for themselves.

The 2017 Budget raised a red alarm on fiscal resources spinning out of control due to domestic risks. These risks mainly relate to state capability and governance in six areas: revenue collection, municipal management, state-owned enterprises, and public sector remuneration. Added to this is pressure on poverty alleviation in a context of a slow economy. The sixth challenge is that of a recent tendency to make significant financial announcements mid-year, outside of the budget process. The National Planning Commission addresses these, identifying steps to achieving policy balance and fiscal certainty. Hard to do, but certainly within our power.

All of these risks have turned into real events, leading the forecasts for the debt-to-GDP ratio to resemble a tsunami wave that ratchets up every year seemingly with little success in gaining control, with interest payments now taking a 15% slice out of the public expenditure kitty. The 2023 Budget (for the first time since 2017) is organised so that the debt-to-GDP ratio is forecast to fall from 2023/4.

Will the tide turn? Here is what to watch for.

Has there been a recommitment to the budget process?

There have been too many instances of breaking open the kitty. Godongwana was widely chastised for not throwing cash over to Eskom for insane amounts of diesel late last year – and while we are all frustrated with load shedding – wasn’t he simply indicating that, barring some exogenous crisis, the budget should not be broken into mid-year?

Is revenue collection being attended to?

Let’s give more credit where it is due: the success is not simply the “luck” of a commodity cycle but more importantly Commissioner Edward Kieswetter and his team showing the benefits of strong consistent leadership in a state institution. Revenue collection in 2022/3 once again saved the day, exceeding expectations from the 2021 MTBPS by 10.7% (R164.8 billion) and rising by around 8.2% (R124.8 billion) year-on-year.

The remaining four challenges persist and pose significant risk. Thus far, Treasury efforts to contain non-interest expenditure have been mixed with it being 6.5% (R101.2 billion) higher in 2022/23 than originally planned in the 2021 MTBPS and rising by 5.6% (R87 billion) year-on-year. The root cause is not financial even if the effect is. The 2023 Budget credibility will rely substantially on government showing it can commit to getting a grip on institutions that are within our national power to fix but need considerably more determined attention.

So the next four tests for budget credibility include the following.

Will public sector bargaining be charted to a sustainable result?

The MTBPS allows for a 3.3% annual average increase in compensation between 2022/23 and 2025/26, while in 2022/23 to 2023/24 it assumes this figure to be 1.6%. But this still needs to be negotiated. There is no new multiyear agreement yet in place. Say government raises compensation annually by 5% – Treasury would need to find about R40 billion annually to pay this. And the unions are mad after a pay freeze then a unilateral 3% increase, and are now looking for 10% increases.

Godongwana and Minister of Employment and Labour Thulas Nxesi’s combined union and government experience should be used to craft a long term strategy and multiyear agreements that align Treasury with the Department of Public Service and Administration and organised labour, balancing remuneration, performance, the right skill is matched into the job, and recalibrating staffing towards service delivery functions.

Will credible capacity be built in municipalities?

Municipalities play a central role in service delivery, but the system of local government has eroded. Local government is meant to cover a large portion of its costs with revenue collected from services to households. In some cases this is not possible and almost R30 billion was added to the MTEF in 2021 for free basic services to poor households. But many municipalities face significant financial challenges due to poor governance and financial management and revenue collection.

According to Treasury, the number of municipalities in financial distress rose from 66 in 2010/11 to 169 in 2021/22 (out of 257 in total), with revenue management being the biggest cause. By June 2022, almost two-thirds of the R90 billion owed by municipalities to creditors consisted of debts older than 90 days. Outstanding payments to Eskom, the Department of Water and Sanitation and the water boards increased by 24% over the past year to R63.5 billion. Uncollected municipal revenue increased by 9.7% between mid-2021 and mid-2022 to R255.4 billion, almost all owed by households.

CoGTA’s Back to Basics programme requires that the top six executives in municipalities such as city manager and CFO have certain capabilities. It appears that this has not yet taken hold but must do so to ensure there is sufficient leadership to chart to financial health and succeed in critical service delivery functions. There are a number of important programmes to strengthen capacity and accountability driven by Treasury and CoGTA, but they will depend on executive leadership being in place.

Will leadership, governance and executive capacity in critical infrastructure SOEs be installed? Will those sectors be reformed to enable better service?

The state-owned enterprises are meant to offer government a vehicle for delivery of big infrastructure and off-balance sheet finance. Instead they have weighed heavily on the fiscus and have fallen short on delivery.

Performance of public investment in SA has fallen dramatically according to the SARB: GDP growth between 2010 and 2017 could have been 1.8% higher annually had historical returns on public investment been achieved, which by my calculation would have added one million jobs over this period. This poor performance has now translated into load shedding and logistics constraints, which has led the SARB to lower its growth forecast from 1.1% to 0.3% in 2023: these effects have become so large that they could rob the economy of up to 2% of GDP in 2023, which by my calculation translate into 180 000 new jobs foregone.

The NPC’s report on SOE Performance highlights the need for better and stable appointments on SOE boards and executive management, transparent procurement, and the introduction of deeper public-private cooperation, most notably in energy procurement and port and rail lines.

In 2023/24, progress will be marked by success in securing strong executive management in Eskom, the creation of an independent transmission company and fast-tracking build of transmission infrastructure, progress in energy (and the right quality of coal) procurement, re-considering wind projects from bid window 6, and progress in embedded generation. Some heart can be taken in the lifting of embedded generation caps that have seen 100 projects potentially adding 9GW capacity.

Godongwana offered up a surprise: the commitment to take on a portion of Eskom debt was expected but the conditions fired up interest and should hopefully focus Eskom’s attention on much-needed strengthening of transmission (with a call for greater private participation) and distribution, with capital investment limited to reducing emissions, flue-gas desulpherisation and maintenance and some pre-existing just transition projects.

The coming year must also see the concessioning of rail and port facilities by Transnet. The installation of a quality board and management in the Passenger Rail Agency of South Africa (Prasa) should be monitored to effectively oversee the planned R47 billion rehabilitation of 10 passenger rail corridors over the MTEF and ensure this investment does not resemble the deadweight loss of over R100 billion that was invested in Prasa over the previous decade.

Will a financially sustainable approach be clarified to attending to the immediate needs of very-low-income households?

The sheer scale of unemployment and poverty says that there are many people that will simply not find or create work through market mechanisms in the next decade: my calculations show that strict unemployment is likely to exceed 30% for many years to come. There are therefore understandable demands for poverty alleviation measures.

The main option is to enhance the social wage in a way that reduces the cost of living, as indicated in an NPC report and which the 2023 budget does extensively. Creating public employment opportunities has become a bigger focus such as through the Presidential Employment Initiative , the Expanded Public Employment Programmes, the Community Works Programme, the Jobs Fund and similar that in aggregate receive around R23 billion each year and create well over one million work opportunities. Then there is the much-debated Covid-19 Social Relief of Distress Grant of R350 per month to about 7.4 million adults: the 2023 Budget earmarks R36 billion in 2023/24 but has not pencilled in any subsequent amounts with it still requiring a decision.

Choices will have to be made – and no matter what is decided, it will never feel like it is enough.

SA is a little ship on a global ocean rocked up and down by external factors. Even so, it is still well within our power to kickstart economic momentum through convincing commitment to strong institutional leadership that enables investments that drive growth and jobs. No horse trading of budget figures can make up for the underlying need to do this.

Dr Miriam Altman is director of Altman Advisory and is currently lead drafter of Government’s National Infrastructure Plan 2050. She is a former National Planning Commissioner and was Chief of Strategy at Telkom. News24 encourages freedom of speech and the expression of diverse views. The views of columnists published on News24 are therefore their own and do not necessarily represent the views of News24. 

Article Credit: News24