On track
It is always good to have an example of how not to do something. After five frustrating weeks, the US government shutdown has finally ended.
For now, it should be added. The agreement between Republican senators and a handful of Democrat defectors will only fund the Federal government until end January. The economic damage of the shutdown is limited, though it started causing widespread disruption to air travel, meaning things would have been different if it dragged on. Markets breathed a small sigh of relief on the news, though it will take some time before the regular publication of economic data resumes, hopefully providing more clarity on the state of the US economy.
Instead, the greater damage is to the credibility of US fiscal policymaking. No one should believe this is the last shutdown and there are likely to be future standoffs over raising the debt ceiling too. Political divisions now run so deep that future episodes could be even more intense. All this while US federal debt levels keep rising. The one thing both parties seem to implicitly agree on is that there is no urgency in stabilising these debt levels. It should be noted, however, that America has a vast reserve of credibility to squander. US government bonds are still considered the global ‘risk-free’ asset, and the dollar is still the reserve currency. In contrast, South Africa lost credibility on fiscal matters and has been fighting to regain it.
The good news is that there has been tangible progress but at some cost. “Fiscal consolidation”, as it is euphemistically called, is a painful process of constraining government spending and raising tax revenues, with taxpayers essentially paying more and getting less in return. However, it has been necessary since South Africa followed the alternative approach of funding spending with debt for too long. The government now spends a fifth of tax revenues on interest payments, diverting funds away from other important social objectives.
The 2025 Medium Term Budget Policy Statement (MTBPS) is not a turning point in fiscal policy, since it is the culmination of years of effort. But it represents a turning point of sorts in investor perceptions. One can easily get lost in the detail. After all, the MTBPS represents the government’s plan to raise R1.9 trillion in tax revenue in the current fiscal year, and spend R2.3 trillion, including R421 billion on debt service costs. So, let’s just focus on three key areas.
Growth outlook still better
The first is the economic assumptions that underpin this budgeting process. Real (excluding inflation) and nominal (including inflation) economic growth rates were revised lower, given global headwinds and the failure of fixed investment spending to grow as expected. Instead, fixed investment spending will decline this year, before starting recovery next year. Real gross domestic product (GDP) growth of only 1.2% is expected in 2025, though this still represents double the rate achieved in 2024. It is projected to rise to 2% in 2028. These forecasts are broadly in line with the consensus of private sector economists. In other words, while 2025 is disappointing relative to earlier expectations, it already marks an improvement from previous years, and it should continue rising over the medium term.
Sustained higher economic growth rates are crucial to making the budget maths work over the long term. A bigger economy organically generates more tax revenues and increases the government’s capacity to service existing debt. The MTBPS therefore maintains a four-pronged approach to raising economic growth: Macroeconomic stability (including low inflation and debt stabilisation); structural economic reforms, including the work of Operation Vulindlela; increasing state capacity so that the government, particularly local government, can be an accelerant rather than a hinderance to economic activity; and ramping up public spending on infrastructure, and crowding in private investment.
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