What Enoch Godongwana should announce in the MTBPS

Business Unity South Africa (Busa) has recommended that National Treasury focus on shortening its expenditure bill, resist the urge to implement tax increases, and exercise caution when raising debt ahead of the medium-term budget policy statement (MTBPS) on Wednesday.

The business body issued a statement on Tuesday highlighting the fiscal positions it expects Minister of Finance Enoch Godongwana to take to protect the country’s frail economy in the face of unsustainable debt levels and poor economic growth.

Read: No ordinary mid-term budget this year; the pressure is on

“South Africa also has a growing tax revenue shortfall, in part because of weak household finances, low business confidence, low investment, lower global commodity prices, and a weak rand,” Busa said, justifying its stance.

Grip on debt

The group said the minister and his fellow cabinet members need to be on the same page when it comes to reducing the state’s expenditure bill. To help achieve this, Busa said the finance ministry would have to cut spending on non-essential and non-productive programmes, shelf unfunded prestige projects, and link future public sector wage increases to inflation.

“These measures must have the support of the rest of the Cabinet, which must speak with one voice to boost public confidence in the government’s commitment to responsible management of the economy,” Busa CEO Cas Coovadia said.

With regards to its position on debt, Busa acknowledged that although Godongwana won’t have much choice but to raise debt, increases should be kept to a minimum and should be complemented by critical economic reforms that will encourage greater private sector investment.

Read:
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According to Allan Gray portfolio manager Thalia Petousis, fiscal consolidation will be key for the finance department, and one way to get there is to target achieving a primary surplus.

“With a cost of debt at 11%-13%, the only way to prevent severe fiscal deterioration in the absence of robust economic growth and stabilise our debt is to run a continual primary surplus of 1.5% to 3% GDP. Put simply, to save money to pay down the interest bill with cash each year,” Petousis wrote in an analyst note.

“To maintain a strong primary surplus would require austerity, which is a thorny issue in a country with such high levels of social poverty. In a capital-constrained world, both for local and international savers, this will be a difficult budget to fund,” Petousis added.

No tax hikes

Tax increases are out of the question for Busa; it said this would further burden already-under-pressure households and cripple economic growth.

“The most effective way to generate fiscal resources is to support economic growth. South African businesses are working with the government to resolve the crisis in energy, ease the bottlenecks in logistics, and fight crime and corruption. Businesses’ commitment to the country is clear.”

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“However, South Africa needs leadership with the political will to provide a clear policy environment, a commitment to removing barriers to investment, and to building business, investor, and consumer confidence,” said Coovadia.

“Economic growth is the national imperative if South Africa is to avoid a fiscal crisis, create jobs, deepen the tax base, and provide sustainable support to its most vulnerable.”

Listen to this Moneyweb@Midday podcast in which Jeremy Maggs asks economist Dr Lumkile Mondi about the possibility of a Vat increase and other budget issues (or read the transcript here):

You can also listen to this podcast on iono.fm here.

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