MTBPS: the deficit is deafening

Medium-Term Budget Policy Statement (MTBPS) – just reading it out loud is more of a mouthful than Finance Minister Tito Mboweni’s finest roast chickens on Twitter.

This is different to the annual budget speech which presents the country’s finances for the next financial year. The MTBPS gives context to the budget speech for the forthcoming year, giving the market details on the broader strategy being followed by government in managing South Africa Inc.

Mboweni started his speech with a nod to Madiba and the magic of 1994. It’s never a good sign when any CEO or financial leader kicks off a speech by tugging at the heartstrings.

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Ignoring the feel-good stuff designed to butter us up, here are my two favourite statements in the MTBPS speech:

“The ongoing implementation of the Eskom Roadmap and unbundling continues.”

“It is not true that the R500 billion relief package has been entirely lost to corruption”

Good news on Eskom, with a casual comment that not all the relief was stolen. But some definitely was, we just don’t know how much.


High as a kite

Here’s a big ugly pimple: government is going to bail out SAA. It’s R10.5bn of our finest Randelas that quite frankly could’ve gone anywhere else and been more useful. I’m not against the concept of a national airline at all, but SAA in current form is a financial catastrophe that isn’t going to get better.

I feel desperately sorry for the staff of SAA, but I suspect taxpayers would’ve rather crowdfunded their severance packages than watched another R10.5bn dropped into the SAA cash-eating machine. We are crowdfunding everything anyway, just via our government.

12 steps backward, 1 step forward

The economy will shrink 7.8% this year. Forecast growth for the next 3 years is as follows: 3.3%, 1.7% and 1.5%. You don’t even need to be good at maths to realise that lockdown has set us back several years.

The International Monetary Fund expects a global contraction of 4.4% in 2020 before bouncing back with 5.2% growth in 2021. Unfortunately, the world is a bouncing ball and South Africa is a lame duck.

The deficit is deafening

South Africa has run a budget deficit every year since the Global Financial Crisis of 2008 / 2009.

A budget deficit means the country is spending more every year than it earns. If overall debt is at a manageable level, this isn’t necessarily a bad thing. In fact, a country with too little debt arguably should be running a deficit to drive investment and growth.

There’s always a fine line between being too conservative and too aggressive.

From 2012 to 2017, the deficit was fairly consistent, hovering around R150bn a year. Then things started to go wrong, as the deficit ballooned to R330bn by the 2020 fiscal year (pre-Covid). This year, the deficit is expected to be over R700bn.

The mouth of the hippopotamus: say aaaaaaah

We have two major problems:

  1. Tax revenue has collapsed thanks to lockdown because unemployed people don’t pay tax and neither do corporates making losses
  2. Growth in government spending has continued unabated, flying in the face of the private sector that has had to make terribly painful decisions to contend with the horrors of lockdown (which, by the way, was put in place by government)

Ok we have more than two, but let’s focus on those.

It’s an assault on our public finances from both sides. Imagine your household expenses were growing out of control but your income had dropped by 20%. Would you be sleeping well at night?


Yet, that’s a similar situation to what is facing us as a country.

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Managing the tax revenue problem

How much more can government squeeze from a stone?

The tax shortfall this year is over R300bn. Tax increases of R40bn are planned over the next four years. It’s practically guaranteed that the focus will be on taxing higher earners. Government isn’t going to the fight unions on both ends i.e. across wage disputes and tax policy.

Speaking of wage disputes…

Managing the costs problem

Back in June, government promised cuts to expenditure of R390bn over the next three years. It’s already been trimmed: the promise is now down to R307bn.

Frankly, even achieving half this number would at least start to change our trajectory as a country.

First port of call will be a wage freeze, something that private sector workers have already become familiar with this year.

Unions, obviously, will fight this with everything they have. Such is their mandate. There’s a legal fight under way between the unions and government regarding the 2018 wage agreement that government is not honouring. The outcome of this case could quite literally determine our future as a country.

You’ll no doubt be thrilled to learn that R1bn from higher education and training as well as R1.2bn from the police will be redirected towards the amount needed to implement SAA’s business rescue plan.


Where to from here?

Everyone always talks about Debt:GDP and I understand why, but there’s a measure that brings the message even closer to home: the primary surplus. It is calculated as budgeted tax revenue less costs other than debt service (i.e. interest). In other words, it measures your “profit” before you start paying your debts.

If you run a primary surplus, you at least aren’t borrowing more money just to pay your interest costs. Unfortunately, the achievement of such a surplus has been pushed out to 2025 / 2026 vs. 2023 / 2024 as predicted back in June.

Debt service costs are expected to grow at 16% per year, because we are continuously borrowing money just to service our debt.

You’ve heard of borrowing from Peter to pay Paul? We are borrowing R2.1bn every day. There are many Peters and many Pauls.

The Debt:GDP measure shows just how badly it’s gone since June. Mboweni originally promised to cap debt at 87% of GDP within three years. That’s now moved to 95% of GDP and is expected within five years.

The reality is that we are already at more than 100% of GDP if you consider the SOE debt that is guaranteed by government (e.g. SAA and Eskom).

Every now and again, I see another eternal optimist in the market predicting that the Rand will get back below R15.50 to the USD and stay there.

It’s comforting to believe in miracles, but I find it more comfortable to invest on the assumption that they don’t happen.

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