‘Grim’ MTBPS is a new budget, not an adjustment, says Michael Sachs
- Michael Sachs
Former Treasury official lays into unprecedented cost cuts
The unprecedentedly large spending reallocations outlined by the National Treasury in the “grim” medium-term budget policy statement (MTBPS) are so far-reaching that they constitute a new budget rather than an in-year adjustment to the February budget, economist Michael Sachs said in parliament on Wednesday
The reallocations are so large they represent a material change in resource allocation and policy priorities and this could be a contravention of the constitution and the Public Finance Management Act, Sachs told MPs.
“Rather than an in-year adjustment to the budget we have, in effect, an entirely new budget,” he said.
Sachs, an adjunct professor and head of the Public Economy Project at the University of Witwatersrand’s Southern Centre for Inequality Studies, was previously head of the Treasury’s budget office.
He made a presentation on the medium-term budget during public hearings held by parliament’s two finance committees. Civil society organisations also made presentations that were critical of the Treasury’s “austerity” budget and were unanimous that SA’s problem is one of sustainable economic growth, which was not addressed by the fiscal consolidation proposed in the medium-term budget.
Sachs’ comments follow concerns over the credibility of the Treasury’s fiscal consolidation plans expressed by the Financial and Fiscal Commission earlier this week, as well as comments made by Stanlib last week that there are risks to the budget because the Treasury has not made additional provisions for the country’s ailing state-owned entities.
“SA’s economic growth crisis is manifesting as a fiscal crisis, and austerity measures, which have been ineffective in stabilising debt over the last 10 years, contribute towards lower aggregate demand, lower growth and a weakened state. It is unlikely that debt can be stabilised while GDP per capita continues to fall,” Sachs said.
Unsustainable
The fiscal crisis is deepening amid continued economic stagnation and high interest rates. This situation is likely to worsen, crowding out expenditure on core government services. It is “not socially sustainable”.
He noted the substantially reduced core spending on government services over the medium term to accommodate rising debt service costs, which Sachs said would lead to a deterioration in services and a weakening of the state.
He proposed that consideration be given to using the broader public sector balance sheet on a one-off basis to soften the blow of the drastic expenditure cuts.
The proposed path of austerity, he said, is deeper and more sustained than anything attempted in the past. Over the medium term, the government proposes to decrease real spending on basic education and healthcare by R16bn and R14bn, respectively, while baseline budgets for health, basic education, social development (excluding allocations to grants) and the police grow at below inflation over the 2024 medium-term expenditure framework period.
The main burden of the consolidation continues to be on government consumption, which falls by 3.2% in 2024 and 0.5% in 2025 in real terms. Real consolidated compensation spending falls by 3% over the medium term and real consolidated goods and services spending falls by 6%. Infrastructure and capital budgets for provincial and local government have been slashed.
Sachs said that if the compensation budget for 2024 materialises (a 2% real cut in public sector wages is proposed in the medium-term budget), it would imply large reductions to headcounts. “Our back-of-envelope calculation indicates that the government will have to reduce its employees by 40,000 people over the next two years,” probably nurses, doctors, teachers and police officers.
“The large size of expenditure reallocation is unprecedented,” Sachs said. “At the sub-programme level, the proposed adjustments amount to R72bn.
Spending freeze
“Achieving the spending targets for 2023 is likely to require an effective freeze on spending for the rest of the year.
“At the national level, capital, goods and services, and transfers have all been cut substantially in order to finance the wage agreement. At the provincial level, conditional grants that support capital spending face huge cuts in order to finance wage pressures through the equitable share.”
Sachs questioned whether the budget cuts were “unforeseeable” by the Treasury given that the main element behind them was the 7.5% wage increase for 2023, which could have been anticipated at the time of the budget.
He recommended a reform of the legislative framework for the gold and foreign exchange contingency reserve account with a view to creating a more predictable approach that balances cash, reserve management and other objectives.
He suggested the creation of an independent debt management office, financed from potential savings on debt services costs, to ensure better management of the government’s debt portfolio.
“There are rising concerns about the capacity of Treasury to manage this debt portfolio of several trillion rand,” Sachs said.
Michael Sachs is Wits University Adjunct Professor and Public Economy Project Lead at the Southern Centre for Inequality Studies
This article first appeared in the Business Day