The non-mystery of the vanishing ‘Fiscal Space’

We don’t like to idolise anyone, least of all those in government at the levers of economic policy.  Trevor Manuel is not the god many in the investment community make out, but the guy did run a pretty tight ship in the Treasury from 1996-2009.  But he was also lucky.  SARS was busy widening the tax net and tax revenue was also ballooning because of soaring asset wealth, credit spending, and a commodities boom.  This was put down to SA’s excellent growth fundamentals, but many are starting to realise that it was a honeymoon period of global financial and economic excess. 

Manuel was in fiscal bliss.  He paid down national debt, freed up more cash than ever for social programmes, announced hefty real increases in public spending every year, and chucked a lot more money at public sector fixed investment projects, all the while running primary budget surpluses for most of his tenure.

Manuel got into that very rarest of fiscal positions as a Treasurer: make both the lefties and conservatives happy.

Those days are over.  The fiscal space Manuel was lucky and prudent enough to create is vanishing quicker than you can say “tax return”.  Pravin Gordhan is taking Manuel’s record and trashing it at the speed of your electronic backtax transfer to SARS.  SA will run something close to a 7% budget deficit in 2009/10 fiscal year.  Even by the most audacious of fallicious Keynesian ’stimulus’ doctrines this is a shockingly large defcit.  Don’t expect the 2010/11 fiscal year to get much better either.  If Gordhan manages to get the deficit under 4% next year we’ll be pleasantly surprised.

HumanAction hates the term fiscal space.  It is a statist euphamism for, “right boys, let’s get a-spendin”.  The reality is that unless someone in policy circles catches a serious wake up, in 2-3 years SA is going to wipe out more than a decade of good fiscal work.  This will not only be a shame, but will make SA that much more vulnerable to external shocks and jittery investor sentiment.

If there was any real sense in current policy circles Treasury would be reigning in spending as tax receipts fall, not spending you and I (and our kids) into more debt and calling it ’stimulus’ or ‘expansonary fiscal policy’.

This week we will see the latest medium term budget estimates of Treasury as Gordhan gives parliament and the markets some insight into the fiscal situation and outlook.  Bond desks in particular will be keen to see his estimate on public sector borrowing over the next year or two (public sector borrowing includes parastatals).  The estimated borrowing will almost certainly exceed 10% of GDP for this fiscal year (>R240billion) so it is hard to believe there is going to much prospect for sinking bond yields.  Hopefully there is going to be some good news on deficit spending further out (2011-2014), but I would’nt hold my breath.