Finance 101: The medium term budget framework (MTBF): What does it tell us?

Against a backdrop of global uncertainty and troubled times in South Africa, the Minister of Finance, Pravin Gordhan, presented the MTBF to Parliament on 25th October.

The MTBF was introduced to provide more transparency on Government’s budgeting process.

It looks three years ahead whilst the budget presented every February looks at the next twelve months. It gives citizens an invaluable insight into how the Government goes about budgeting.

This was a particularly important statement as it came just after a rating downgrade for the country, negative international perceptions of South Africa and the ongoing aftermath of the Marikana shooting.

The first priority for the Minister was thus to calm the markets. This he was able to do by demonstrating that Government is committed to fiscal discipline:

Government expenditure will only grow in real terms by 2.9% for the next three years. To underpin this, Government has reached a three year wage agreement with public service unions.
The budget deficit to GDP (Gross Domestic Product) will be 4.8% in 2013 and will drop to 3.1% in 2015.
Budgets for Government departments can only grow by 2.9%. Should budget line items grow by more then offsets would have to be found in other areas.
Total Government debt to GDP will peak at 39% in 2015. This compares to 46% when Trevor Manuel became Finance Minister in 1996. This compares very favourably to developed economies around the world and shows how well South Africa has adjusted to the global turmoil of the past several years.
That the bond market remained stable indicates the global investment community saw this as a credible budget.

Minister Gordhan went further by steering a course between stimulating the economy without significantly increasing debt. This is in contrast to Europe where strict spending cuts have curbed growth or the US where economic stimulus has bought economic growth but also a mountain of debt that now threatens this growth.

Further, he shifted the focus of the budget from consumption (salary and wage spend on civil servants) to increasing infrastructure investment (this year capital spend will be 8% of GDP versus 6.5% in 2010), continuing to invest in the “social wage” (housing, social grants and local communities) and introducing new mechanisms to ensure procurement reaches its targeted goals with substantially reduced corruption.

Will all this be achieved? There are risks such as:

Will the wage agreements hold?
Will the economic growth predicted be achieved (4% in 2015)?
Obviously, we all have our own opinions and beliefs, but the fact that global markets were calmed tells us they will give the Minister latitude to see if he can deliver on the three year outlook.

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