Treasury on mini budget: The low hanging fruit has been picked

Cape Town – South Africa is not considering any bailout from the International Monetary Fund (IMF) currently, said Michael Sachs, deputy director general at National Treasury’s budget office on Friday.

Speaking to journalists on the sidelines of a Parliamentary briefing, Sachs said South Africa is still able to sustain its foreign requirements through access to markets.

“And it’s one of the great advantages that we have. We have deep and liquid domestic markets. Most of our debt is in rand and we don’t foresee a situation where the country is unable to access markets over the medium term.”

Sachs, however, acknowledged that the situation is “dynamic”.

“If we’re unable to restore the momentum of growth and stabilising debt to GDP into the future, financial markets can behave in unpredictable ways.”

Sachs was giving feedback to members of Parliament on the back of public stakeholder input earlier in the week following the medium term budget policy statement (MTBPS) tabled by Finance Minister Malusi Gigaba on October 25.

READ: Budget in a nutshell 

Gigaba delivered a stern message to South Africans: the budget deficit currently stands at 4.3% of GDP, gross national debt is predicted to reach over 60% by 2022 and economic growth forecasts have been lowered to 0.7% for this year. 

Sachs on Friday pointed out that fiscal consolidation – a policy aimed at reducing government debt and budget deficits – is facing a headwind, due to the dampened rate of economic growth.

“We’ve experienced decelerated growth for a number of years now. Although government introduced a fiscal stimulus after the global financial crisis, growth decelerated despite this.”

Sachs said it is unlikely that South Africa could “consolidate itself” into a sustainable fiscal position.

READ: Moody's slams Gigaba's mini budget as 'marked credit negative departure'

“Without measures to enhance growth, fiscal consolidation is unlikely to solve the problem. The only way to go forward is to grow.

Unless decisive action is taken, the country could remain in a cycle of weak growth, mounting debt and rising unemployment.”

Borrowing to grow?

Some economists hinted that increased borrowings could stimulate the economy, but Sachs pointed out that South Africa’s circumstances differ significantly from other global economies, such as Japan, the US and Europe for example.

“We’ve done the modelling. We can’t try to lift ourselves by the bootstraps by borrowing. It would not achieve the desired objective.”

No more low-hanging fruit

Sachs emphasised that the size of the challenge government is facing is “unprecedented”.

“Over the last five years we’ve had slippages on deficit targets - between 0.1% and 0.3% of GDP. Growth has disappointed, and therefore the slippage and deficit widened. We responded through moderate revenue raising measures and expenditure reduction. But doing these things over and over won’t work," he said.

“The low-hanging fruit has been picked. Repeated expenditure reduction has a negative impact on the state’s finances. And repeated rounds of revenue raises have led to diminishing returns.

“The size of the gap is now in a different league from previous rounds,” Sachs said in reference to South Africa’s revenue shortfalls, budget deficits and debt to GDP ratio.

“Whatever your view of the MTBPS, the challenge we had in this one has been the greatest since 2009 – even greater perhaps,” Sachs said. 

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