How do you know when a Finance Minister is lying? When he makes a prediction.
There is a fine tradition of Finance Ministers telling whoppers in their budget speeches. Granted, it’s never easy to make accurate predictions on anything fiscal, but the track record of our ministers in calling GDP growth rates is abysmal. They’ve over-stated GDP in eight out of the last 10 years, sometimes by inexcusably large margins.
Read the MTBPS here.
Given this track record, we should treat budget estimates as PR gibberish intended to mollify the restless limbs of the ruling coalition.
This is not a slight matter. The country’s tax receipts and borrowing requirements are tied to the accuracy of economic forecasts. Every time Treasury over-estimates economic growth, the shortfall has to be made up in borrowings, and you can see the result of that in the public debt-to-GDP table below.
Public debt to GDP
Virtually every year in the last decade, tax receipts were lower than expected. Just two months ago Mboweni released a growth plan for the country entitled ‘Towards an Economic Strategy for South Africa’ which aims to kick the economy into high gear and wrestle down unemployment.
There were some references to this plan in yesterday’s Medium-Term Budget Policy Statement (MTBPS), delivered to Parliament by Mboweni. The Integrated Resources Plan, outlining the country’s energy future, has been gazetted; Home Affairs has simplified the visa regime (but the implementation is way behind schedule, according to tourism experts); and plans are afoot to accelerate the licensing of the broadband spectrum.
These on their own will not shift the economic needle anywhere near what is needed to get the economy moving again.
Mboweni doused growth expectations for the current year, reducing the GDP forecast to a miserable 0.5% from the 1.5% forecast made in his budget speech in February. The budget deficit is expected to reach 5.9% of GDP in the current year, which takes us back to the levels last seen at the time of the 2009 financial crisis. He expects growth to reach 1.7% by 2022. In other words, we will remain trapped in a low-growth cycle for the foreseeable future.
Year Forecast Actual Minister of Finance
2019 1.5% 0.5% (Est.) Tito Mboweni
2018 1.5% 0.7% Malusi Gigaba
2017 1.3% 1.3% Pravin Gordhan
2016 0.9% 0.5% Pravin Gordhan
2015 2.0% 1.5% Nhlanhla Nene
2014 2.7% 1.5% Pravin Gordhan
2013 2.7% 2.2% Pravin Gordhan
2012 2.7% 2.5% Pravin Gordhan
2011 3.4% 3.3% Pravin Gordhan
2010 2.3% 2.8% Pravin Gordhan
Perhaps there is some truth in the claim that Mboweni’s sobering assessment of our current economic malaise is intended to shock his ANC colleagues into more radical reform.
If so, this kind of truth-telling would be a welcome change of form.
Revisiting some of the fanciful predictions made by finance ministers over the last decade is sobering.
In his 2017 budget speech, then finance minister Pravin Gordhan declared: “Government debt will stabilise at about 48% of GDP over the next three years. The budget deficit for 2017/18 will be 3.1% of GDP.” The actual figures for government debt in 2017 were 53% and the actual budget deficit for 2018 was 4.4%.
Budget deficit 2009-2018
In his 2016 budget speech, Gordhan said the budget deficit would be reduced to 2.4% by 2018/19. It actually came in at 4.4% in 2018.
In 2014, the budget deficit was projected to be 4%, but came in at 4.3%. In the same year GDP growth was projected at 2.7%, rising to 3.5% by 2016. The actual figures were 1.5% and 0.5%. It’s clear the longer the time horizons, the more divorced from reality are the projections.
In 2013 the budget deficit was expected to fall from 5.2% of GDP to 3.1% in 2015/16. The deficit came in at 4.1% in 2015 and 3.8% in 2016.
And so it goes on.
In 2012 the budget deficit was projected at 4.6% of GDP (not bad, it came in at 4.4%), with a plan to reduce it to 3% in 2014/15 (way off the mark, it came in at 4.1%). That same year public debt was expected to stabilise at about 38% of GDP (this was way out: public debt to GDP was nearly 50% in 2015).
Back in 2011 Gordhan bemoaned the youth unemployment rate of 42% (for people between 18 and 29). Youth unemployment (ages 15-24) is today sitting at 55%.
Growth expectations for 2010 were 2.3%, rising to 3.6% by 2012. Actually, growth exceeded Gordhan’s 2010 forecast, but he was way off the mark with his 2012 forecast of 3.6% (the actual growth for 2012 was 2.5%).
The cumulative effect of these over-estimates is a rising debt burden which Mboweni believes will exceed 70% of GDP by 2022/3. “This is a serious position to be in,” said Mboweni. In fact, debt to GDP could hit 80% in the next 10 years. The status quo is not an option and everyone – parliamentarians included – would have to tighten their belts. The country may enter a debt trap, and ratings agencies are ready to pounce unless more radical action is taken. The public sector wage bill must come down.
Says Maarten Ackerman, chief economist at Citadel: “The elephant in the room is quite obviously the public sector wage bill, which is currently the largest of all the OECD countries relative to GDP, accounting for 46% of all tax revenue in 2019/20 as a result of years of an increasing public sector headcount and above-inflation wage increases. Mboweni pointed out that adjusting for inflation, the average government wage has risen by a shocking 66% over the past 10 years – completely disproportionate to increases in the private sector, and without achieving a commensurate rise in productivity.”